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Ray Dalio's "The World Has Gone Mad and the System Is Broken"


What are your thoughts on this Cullen? Is he promoting panic when there is no reason to, or is he seeing and saying something new?

Full text below:

I say these things because:

  • Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish. Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations. Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power. There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto startups that don’t want more money because they already have more than enough; but the investors are threatening to harm these companies by providing enormous support to their startup competitors if they don’t take the money. This pushing of money onto investors is understandable because these investment managers, especially venture capital and private equity investment managers, now have large piles of committed and uninvested cash that they need to invest in order to meet their promises to their clients and collect their fees.
  • At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen.
  • At the same time, pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced. As a result, many of those who have the obligations to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations. Those who are recipients of these benefits and expecting these commitments to be adhered to are typically teachers and other government employees who are also being squeezed by budget cuts. They are unlikely to quietly accept having their benefits cut. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either. Since there isn’t enough money to fund these pension and healthcare obligations, there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it). This will exacerbate the wealth gap battle. While none of these three paths are good, printing money is the easiest path because it is the most hidden way of creating a wealth transfer and it tends to make asset prices rise. After all, debt and other financial obligations that are denominated in the amount of money owed only require the debtors to deliver money; because there are no limitations made on the amounts of money that can be printed or the value of that money, it is the easiest path. The big risk of this path is that it threatens the viability of the three major world reserve currencies as viable storeholds of wealth. At the same time, if policy makers can’t monetize these obligations, then the rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse. As a result rich capitalists will increasingly move to places in which the wealth gaps and conflicts are less severe and government officials in those losing these big tax payers will increasingly try to find ways to trap them.
  • At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps. Also contributing to these gaps are the technological advances that investors and the entrepreneurs that I previously mentioned are excited by in the ways I described, and that also replace workers with machines. Because the “trickle-down” process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken.

This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.




"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

The 'system' is broken?


“The IPCC report that the Paris agreement based its projections on considered over 1,000 possible scenarios. Of those, only 116 (about 10%) limited warming below 2C. Of those, only 6 kept global warming below 2C without using negative emissions. So roughly 1% of the IPCC’s projected scenarios kept warming below 2C without using negative emissions technology like BECCS. And Kevin Anderson, former head of the Tyndall Centre for Climate Change Research, has pointed out that those 6 lone scenarios showed global carbon emissions peaking in 2010. Which obviously hasn’t happened.


So from the IPCC’s own report in 2014, we basically have a 1% chance of staying below 2C global warming if we now invent time travel and go back to 2010 to peak our global emissions. And again, you have to stop all growth and go into decline to do that. And long term feedbacks the IPCC largely blows off were ongoing back then too.”




'Limiting global warming to two degrees Celsius will not prevent destructive and deadly climate impacts, as once hoped, dozens of experts concluded in a score of scientific studies released Monday.


A world that heats up by 2C (3.6 degrees Fahrenheit)—long regarded as the temperature ceiling for a climate-safe planet—could see mass displacement due to rising seas, a drop in per capita income, regional shortages of food and fresh water, and the loss of animal and plant species at an accelerated speed.


Poor and emerging countries of Asia, Africa and Latin America will get hit hardest, according to the studies in the British Royal Society's Philosophical Transactions A.


"We are detecting large changes in climate impacts for a 2C world, and so should take steps to avoid this," said lead editor Dann Mitchell, an assistant professor at the University of Bristol.


The 197-nation Paris climate treaty, inked in 2015, vows to halt warming at "well under" 2C compared to mid-19th century levels, and "pursue efforts" to cap the rise at 1.5C.'


The new study suggests otherwise. In the Pliocene — and especially the mid-Pliocene warm period, when atmospheric carbon dioxide was at about the level where it is now, 400 parts per million, but global temperatures were 1 or 2 degrees Celsius warmer than at present —. . . .”




Will there be change?


“Today’s global consumption of fossil fuels now stands at roughly five times what it was in the 1950s, and one-and-half times that of the 1980s when the science of global warming had already been confirmed and accepted by governments with the implication that there was an urgent need to act. Tomes of scientific studies have been logged in the last several decades documenting the deteriorating biospheric health, yet nothing substantive has been done to curtail it. More CO2 has been emitted since the inception of the UN Climate Change Convention in 1992 than in all of human history. CO2 emissions are 55% higher today than in 1990. Despite 20 international conferences on fossil fuel use reduction and an international treaty that entered into force in 1994, manmade greenhouse gases have risen inexorably.”




This is what the 'Thatcherite Monetarist' has 'to say' re Q.E..


The intention of the Bank of England’s programme of quantitative easing is to increase the quantity of money by direct transactions between it and non-banks. Strange though it may sound, monetary expansion could occur even if bank lending to the private sector were contracting. In its essence the mechanism at work is very simple, that the Bank of England adds money to the bank accounts of holders of government securities to pay for these securities. (The details can be of mind-blowing complexity, but need not bother us now.) Roughly speaking, the quantity of money in the UK is about £2,000 billion. Gilt purchases of £150 billion over a six-month period would therefore lead by themselves to monetary growth of about seven-and-a-half per cent or, at an annual rate, of slightly more than 15 per cent. This is a very stimulatory rate of monetary expansion.


The objection is sometimes raised that the major holders of gilts are pension funds and insurance companies, and they will not “spend” the extra money in the shops. But the big long-term savings institutions are reluctant to hold large amounts of money in their portfolios, because in the long run it is an asset with negligible returns. At the end of 2008 UK savings institutions had total bank deposits of about £130 billion. They will be reluctant to let the number double, but — if the £150 billion were allowed to pile up uselessly — that would be the result.


What is the likely sequence of events? First, pension funds, insurance companies, hedge funds and so on try to get rid of their excess money by purchasing more securities. Let us, for the sake of argument, say that they want to acquire more equities. To a large extent they are buying from other pension funds, insurance companies and so on, and the efforts of all market participants taken together to disembarrass themselves of the excess money seem self-cancelling and unavailing. To the extent that buyers and sellers are in a closed circuit, they cannot get rid of it by transactions between themselves. However, there is a way out. They all have an excess supply of money and an excess demand for equities, which will put upward pressure on equity prices. If equity prices rise sharply, the ratio of their money holdings to total assets will drop back to the desired level. Indeed, on the face of it a doubling of the stock market would mean (more or less) that the £150 billion of extra cash could be added to portfolios and yet leave UK financial institutions’ money-to-total-assets ratio unchanged.


Secondly, once the stock market starts to rise because of the process just described, companies find it easier to raise money by issuing new shares and bonds. At first, only strong companies have the credibility to embark on large-scale fund raising, but they can use their extra money to pay bills to weaker companies threatened with bankruptcy (and also perhaps to purchase land and subsidiaries from them).


In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive. So the monetary (or monetarist) view of banking policy is in sharp contrast to the credit (or creditist) view. Contrary to much newspaper coverage, the monetary view contains a clear account of how money affects spending and jobs. The revival in spending, as agents try to rid themselves of excess money, would occur even if bank lending were static or falling.


The important variable for policy-makers is not the level of bank lending to the private sector, but the level of bank deposits. (Remember Irving Fisher’s reference to “deposit currency”.) Indeed, because companies are the principal employers and the representative type of productive unit in a modern economy, bank deposits in company hands need to be monitored very closely. If these deposits start to rise strongly as a by-product of the Bank of England’s adoption of quantitative easing, the recession will be over.


Is quantitative easing working? Lags between economic policy and its effects are unpredictable, and celebration would be premature. Nevertheless, the first two months of quantitative easing have seen startling improvements in several areas. Most obviously, the UK stock market has soared by 30 per cent and corporate fund-raising has been on a massive scale. Anecdotally companies are saying that cash pressures are less severe. Business surveys have also turned upwards, with a key survey of the services sector suggesting earlier this month that almost as many companies planned to raise output as to reduce it. If there are more output-raising than output-reducing companies, the recession will be over. "