Ray Dalio, founder of the Bridgewater fund, has embraced cryptocurrencies.
The 71-year-old billionaire says the U.S. dollar is on the verge of depreciation, much like the dollar crisis circa 1971, and that China is threatening the dollar’s role as the world’s reserve currency. In such an environment, bitcoin, which has gold-like properties, is becoming increasingly attractive as a savings tool.
Dalio’s Bridgewater fund has $101.9 billion in assets under management at the beginning of 2021, making it the world’s largest hedge fund.
“With inflation, personally, I’d rather hold bitcoin than bonds,” he said publicly in an hour-long conversation with CoinDesk Chief Content Officer Michael J. Casey.
For the first time, he revealed himself, “I have some bitcoin.”
After expressing skepticism about cryptocurrencies in November of last year, Dalio’s mindset gradually shifted. He had written in January that “Bitcoin and its competitors have the potential to meet the growing demand for an alternative store of value.”
But he also reiterated his concern that governments worried about Bitcoin’s competition to national monetary systems could suppress its owners, with Dalio warning, “The biggest risk to Bitcoin is its success.”
The Debt Cycle
In the wake of the 2008 financial crisis (and in the early days of Bitcoin), Dalio began studying the rise and fall of three recent global reserve currencies: the Dutch guilder, the British pound and the U.S. dollar.
He argues that monetary hegemony shifts in three “cycles” that can occur simultaneously: the creation of debt and financial assets; a “cycle of internal cohesive conflict” (“as the wealth gap widens and the value gap grows, there will be a shift in the value of the currency. With the growth of political blocs, there will be more conflict”); and the rise of another powerful force to challenge existing currencies.
Whether a currency can withstand such a cycle depends on the economic strength behind the global reserve currency.
The dollar is currently in the middle of the first cycle, Dalio said, with “debt and credit creating purchasing power,” but these are short-term irritants and long-term disincentives because eventually government debt has to be repaid.
All of these financial assets are claims on physical goods, assets and services,” Dalio said. And when the debt gets very large, you run into problems.”
Dalio notes that this has happened before in the U.S. After the Bretton Woods agreement in 1944, global exchange rates were pegged to the U.S. dollar, which was backed by gold. But federal spending surged in the 1960s as entitlement programs expanded, while the U.S. increased its defense spending to fight the U.S.-Soviet Cold War and pay for the rising costs of the Vietnam War.
U.S. President Richard Nixon declared the dollar off the gold standard in 1971. Since then, the dollar has been a “legal” tender.
Dalio warns that the current situation is now similar to 1971: “When you look at the budget and look at the future, we know we’re going to need more money, more debt.”
“Do you need to borrow money? You have to print the money first. Need more money? Go ahead, raise taxes, and that creates a dynamic cycle. Now, I could go on and on about what happens in that cycle, probably capital controls …… I found out painfully in 1971 that this leads to higher stock prices. It caused things like gold, bitcoin, real estate, etc. to go up because the dollar was really losing value. That’s part of the cycle we’re in at the moment.”
The main narrative surrounding bitcoin and other cryptocurrencies is that they act as inflation hedges, or at least would benefit from fiscal and monetary stimulus.
Much has been made of the inflationary outlook as governments around the world continue to struggle to avert economic crises through increased spending. In the 12 months to April, annualized inflation in the U.S. was 4.2 percent, well above the Fed’s long-term target of 2 percent, although much of that was due to comparing that rate to April 2020, a month in which many economies around the world are stagnant.
There are two types of inflation, Dalio said: one is caused by supply and demand, where high demand for labor and low production capacity leads to higher prices; the other is inflation due to currency devaluation.
As money is pumped into the economy in a steady stream, it makes the two types of inflation intertwine.
“We will have a lot of demand, and while the money supply is increasing, yields have fallen to low levels as investors snap up other assets such as bonds and real estate. This will change the assets held in the hands of individuals, and so on, because cash is wasted and will continue to be. I mean – because it will bring negative real returns.”
Dalio believes that a second type of currency inflation will eventually dominate. This could be beneficial for assets such as real estate, stocks and cryptocurrencies, but only to a certain extent.
As these prices rise like bonds, their expected future returns will fall,” he says. As their returns approach interest rates, people no longer have an incentive to buy these things, which is where they could run into trouble. It becomes very difficult to tighten monetary policy because the whole plate collapses and a little bit of interest rate movement is very sensitive.”
He added that central banks would have to resort to more money printing sprees, which could eventually lead to negative asset returns in real terms, albeit increasing in nominal terms, as seen in the 1970s.
China bends the curve
Since the start of the new crown pandemic, China has resorted to some fiscal stimulus and a relatively accommodative monetary policy to bend the curve.
Dalio talks about how “in 2015, only 2% of the Chinese market was open to foreigners. Now it’s over 60 percent. [But] if you look at information like relative prices, that’s a completely different story because they haven’t done quantitative easing. They still have an attractive bond market, an even more attractive open capital market… When you buy Chinese financial assets, just like you buy U.S. financial assets, you have to buy their local currency. So it’s not only good for their currency, it’s good for their assets. When there are capital inflows, China will have the ability to issue notes and lend in its local currency. China has been very willing to do this and you will see more internationalization of the RMB, which is attractive to both borrowers and lenders, and this development dynamic does follow the same curve of the monetary system and the imperial landscape”.
With the decline of the U.S. dollar and the rise of the yuan, “neutral” cryptocurrencies like bitcoin have the potential to work like gold has in centuries past.
While Dalio suggests that a diversified portfolio might include bitcoin, he also cites a number of possible risks: “I think one of the big concerns is that governments have the ability to control almost anything, including bitcoin or digital currencies. They know where these currencies are and they know exactly what’s going on.”
Governments may start to worry about bondholders selling bonds in exchange for bitcoin: “The more value we store through bitcoin, the more we want to say, ‘I’d rather own bitcoin than bonds.’ Personally, I’d rather have bitcoin than bonds,” Dalio says with a laugh, “and then the more that happens, the more money flows into bitcoin instead of credit, and then the government loses control of it.”
This scenario could lead those governments to crack down on bitcoin holders.
Dalio sees technology as the main track for countries to compete in the future, saying, “The world is going to change at an incredible rate…whoever wins the technology race wins everything, both economically and militarily…and that’s what the next five years are going to look like “.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/ray-dalio-i-have-some-bitcoin-and-the-biggest-risk-to-bitcoin-is-its-success-or-a-government-crackdown/
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