Ray Dalio, founder of Bridgewater Associates: Defending the value of currency

Author: Ray Dalio, Founder of Bridgewater Associates, Source: X, @RayDalio, Translated by: Shaw, Jinse Finance

The debate between Trump and Powell is essentially a struggle for control over the value of currency. As mentioned earlier, when there is excessive debt and borrowing, the traditional solution is to lower real interest rates and allow currency depreciation, which is unfavorable to creditors and beneficial to debtors. This is what Trump advocates for, while Powell strongly opposes it.

These debates are quite normal, but this time the debate is more intense. Heads of state usually want more stimulus measures to promote spending in financial markets, goods, and services, which makes the public happy, until inflation becomes so severe that even they believe monetary tightening is necessary, while excellent central bank governors try to find a balance between being too loose and too tight by observing various indicators to judge the direction of the situation, thus "going against the wind." Therefore, there exists a natural tension between central bank leaders and the incumbent heads of state who wish to please the public and be re-elected. In normal times, people recognize and respect this separation of powers, but in extreme situations, this separation can break down.

How should monetary policy be formulated?

What measures should be taken according to various indicators? There are market indicators, economic indicators, and other influencing factors that need to be considered.

As for market indicators, they clearly indicate that the current monetary environment is loose and the economy has not fallen into crisis, because when the stock market rises, the currency depreciates, credit spreads narrow, and real yields are low, it reflects that liquidity is "loose." More specifically:

• Over the past year, the US stock market has risen by 14%, reaching historical highs, and most valuation indicators show that the market is expensive.
• At the same time, the US dollar fell by 5% against major currencies, 27% against gold, and 45% against Bitcoin.
• The credit spread is near historical lows, for example, the BAA-rated corporate bond spread is only about 1% higher than U.S. Treasury bonds.
• The 10-year U.S. real interest rate is slightly above 2%, within a neutral to low range.

From the perspective of economic indicators, the overall economic operation is relatively balanced, but there is a slight slowdown.

• The unemployment rate remains low at 4.1%, but shows a slow upward trend.
• The technology sector, especially investments and revenues related to AI, has seen strong growth, while market sentiment and the real estate market are relatively weak.
• The overall performance of the global economy is relatively weak.

The current situation is as follows. Looking to the future, there are significant uncertainties and risks regarding debt and trade issues, politics, and geopolitical aspects, all of which have inflationary tendencies. At the same time, there are tremendous technological advancements that have deflationary effects and will exacerbate the wealth gap.

Defending the value of currency is not easy, but it is crucial

Defending monetary discipline, just like defending fiscal discipline, is unpopular because it essentially requires people to tighten their spending. However, achieving balance is crucial because one person's debt is another person's asset; for money to function successfully, it must be able to circulate effectively and retain its value.

Will the value of currency be defended? From historical experience and the current situation, I think it is clear that the value of currency will not be defended before the classic currency weakness/inflation problem becomes severe - and even when the problem becomes severe, there may not necessarily be any action taken, as the pain caused by these issues is enormous. A typical example is the cycle from 1970 to 1982. Therefore, even if monetary policy may be tightened one day in the future, it can be almost certain that it will not happen in the short term.

Therefore, in my opinion, investors should still lean towards betting on the "weak currency" trend - that is, a decline in the US dollar, with real interest rates remaining low or even decreasing further.