Ray Dalio: there will be a new economic downturn in two years

Pictured: Train passing near a drawn shadow of a man with "Made in crisis" written next to him

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In about two years the global economy may enter a new financial crisis, thinks Ray Dalio, founder and co-chief investment officer of the Bridgewater Associates hedge fund.

In a recent interview for the popular business and economy website Business Insider, Dalio noted that the current situation is quite similar to that preceding the 1937 recession.

Now, as it was back then, interest rates are either very low or sit at zero. At the same time, asset prices are high and banks continue to tighten the purse strings, putting an end to the favourable conditions needed for a healthy economic recovery. Simply put, banks grow increasingly restrictive, which puts a strain on many businesses worldwide.

“There are only two times in the history of this century where we had debt crises in which interest rates hit zero,” Dalio comments. “And in both of those times, the Central Bank had to print money and go to a different type of monetary policy, which we call quantitative easing, and to buy financial assets. And that drives up, in both of those cases, the value of those financial assets and produces a recovery, but it drives interest rates down to zero or near zero, where they are around the world.”

At the same time, expensive financial assets widen the gap between the rich and the poor and create conflicts that encourage the upsurge of populism.

In this respect, the current political situation is, to a certain extent, not that different from that in the 1930’s, Dalio believes. “If you look at, right now, the top 10%, the top one tenth of 1% of the population’s net worth is equal, about, to the bottom 90% combined,” he says. “That’s very similar to the late ’30s when we had that stimulation and so on.”

The similarities, however, do not end here. The growing political and economic tensions between the major players on the international scene (USA, China, Russia, the EU and Iran) also remind of the global political situation leading up to World War II.

Of course, Dalio states, this does not necessarily mean that a new world conflict is about to break out, however the current political climate would undoubtedly weaken the economy and cause a recession. But no matter how inevitable, it is still hard to predict exactly when this downturn will start. In his interview Dalio forecasts that it will likely happen in the next two years.

“So I think that, in this expansion, we’re about in the seventh inning of a nine-inning game,” he says. “We’re in the later part of the cycle, the part of cycle in which monetary policy is tightening and there’s not much capacity to squeeze out of the economy.”

In Dalio’s opinion, bank interest rates will continue to climb. But should these hikes happen too fast, they might hurt asset prices. “At some point, we’re going to have a downturn because that’s why we have recessions,” he said. “Nobody ever gets it perfectly. And my concern is what that downturn would be. I think that that’s not immediate. We don’t have the same pressures, but I think it’s maybe in two — maybe it’s in two years, I can’t say.”

So, what is the solution, then? “Well, I think one of the things is to make sure that capitalism works for the majority of people,” Dalio suggested, adding that the problem does not only extend to financial aid, but to career opportunities as well.

“We need to pay more attention to the widening wealth gap and to make sure that the poorer people have more opportunities and find jobs. I think there are a lot of things that can be done. I see it, to some extent, philanthropically, I see it in education.”

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Glasses placed on top of open bookRay Dalio is regarded as one of the most successful investors in the world and is the founder of the largest hedge fund—Bridgewater Associates. He predicted the 2008 financial crisis one year before it happened, but few were paying attention to him back then. On the eve of the tenth anniversary of the crisis, Dalio published his most recent book from the Principles series—A Template For Understanding Debt Crises. In it, he discusses the history and cycles of economic recessions, and makes some predictions regarding future downturns. His book is also available as a free PDF download.