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foreign shape is a terrible understatement the food index increased by over 10 percent over the last year an energy spiked by 17.6 percent with fuel oil registering the highest price jump at 68.5 percent why is the economy at such a stretch and what are the consequences to the global economy at large well the billionaire investor and hedge fund manager Ray dalio predicts that what we have now is a financial catastrophe that will reshape this generation how bad will things get join us as we discuss Ray dalio's expert opinions on the economy the number of unemployed persons remained 6 million people staying at 3.7 percent as you would expect since teenagers have the least working experience they are the most displaced demographic there are slightly more unemployed men than women and the number of permanent job losers Rose by 127 000 to 1.4 million in November temporarily laid off workers have been steady at 803 000 people it doesn't get better the number of people that have been jobless for 27 weeks or more is still at 1.2 million in November so far the long-term unemployed accounted for 20.6 of all unemployed persons how did we get here one thing to know is that the entire economy is impacted when prices for Commodities food energy and other goods and services increase the cost of living the cost of doing business borrowing money mortgages corporate and government bond yields and every other aspect of the economy are all impacted by inflation both positive and negative effects of inflation on economic recovery are possible the economy may suffer if inflation Rises too much but it may also benefit if it is kept under control and at moderate levels employment Rises when inflation is controlled and reduced the economy benefit it and expands as consumers have more money to spend on goods and services however it is impossible to accurately predict how inflation will affect the pace of the economic recovery so how does inflation work note that gross domestic product or GDP is the total value of all finished products and services produced in a given time period This is a key indicator of economic growth for inflation the proportion of growth or drop from the prior year is adjusted therefore if growth was reported to be 10 and GDP was seven percent that inflation would be three percent the value of the dollar decreases as prices rise because it loses purchasing power as the cost of essential goods and services Rises the increase in the cost of goods and services over a specific time period is referred to as inflation an economy usually recovers from a recession with the aid of controlled low inflation which also leads to improvements in employment a country's economy is gay aged by its gross domestic product which is the sum of the value of its finished goods and services produced but the billionaire and hedge fund manager is not optimistic about the numbers Ray dalio has warned that American households and businesses could suffer a brutal credit crunch that slashes asset prices and tanks the economy but who is Ray dalio here's a brief bio the co-chief investment officer of Bridgewater Associates the largest hedge fund in the world Raymond Thomas dalio was born in the United States on August 8 1949.
he is a billionaire investor and hedge fund manager in New York in 1975 he established Bridgewater within five years the retirement fund of the World Bank made a 5 million dollar investment he pioneered many now common procedures including risk parity currency overlay portable Alpha and the management of globally inflation index bonds and his Innovations are recognized as some of the greatest in the field Ray dalio has been quite vocal on the state of the economy for a long time the billionaire investor suggested private sector lending could dry up if the heavily indebted U.S government ramps up Bond sales to finance its spending plans the Federal Reserve might exacerbate the problem if it accelerates its Bond sales to cool the economy and curb red-hot inflation he said in a LinkedIn post on Tuesday the flood of bonds into the open market could crowd out the supply of private debt resulting in tighter credit conditions for consumers and companies he said in a LinkedIn post dalio stated that since the amount sold has to equal the amount bought it seemed most likely that will happen via a big contraction in private credit which will lead to a lot less buying of goods services and financial assets and hence price declines in financial assets and economic contraction Ray dalio warned a painful credit crunch could Hammer financial markets and Spark a recession the billionaire investor said a surge in Government Bond sales could could cost private credit to dry up in dalio's view it could soon become harder or more expensive for Americans to take out loans mortgages and other types of debt the result could be less spending and investing which would drag down the prices of stocks and other assets and plunge the economy into a recession the fact that an economy contains a lot of moving components it is not a particularly sophisticated entity but the transaction is fundamental and that transaction is when a person purchases a good either a financial asset or a service that acquisition may be made with cash or when you make a transaction you receive credit you could complete the deal with money or with credit but then you have a liability you must secure the funding because having that requires you to do something then there's the actual thing you are purchasing such as a car groceries a bond or a stock but suppose you make one hundred thousand dollars a year and have no debt in that case you are permitted to borrow ten thousand dollars annual really consequently you are allowed to spend one hundred thousand dollars a hundred and ten thousand dollars you spend results in someone else earning one hundred and ten thousand dollars so it has a positive impact you go through a cycle in which you spend one hundred and ten thousand dollars and they make one hundred and ten thousand the cycle of debt and income reinforces itself because debt can never climb faster than income indefinitely therefore if it does you have a debt cycle what stops it and why when you reach a point where you can no longer lower interest rates let's say you hit zero that part of the cycle ends so you turn to leverage this creates wealth and makes it possible to borrow more you can no longer raise debt about income because of leveraging the cycle starts to turn around when you can't increase debt about income any longer however if that growth was previously at a rate of say 10 and it was reduced to five percent instead this would be detrimental to growth a slight DVA Asian from that threshold has a detrimental impact on growth the examples from Europe are good ones one of these Spanish banking systems is an extremely classic form the rate at which the banks are leveraging up decreases as they reach a point where they are unable to leverage up at a higher rate it has the result of starting a deleveraging process leveraging results in a sort of negative Loop between income and spending that Heralds the start of a downturn that leads to depression depression is the stage of deleveraging where austerity measures are combined with debt restructuring since if you have too much debt to service you need to take action there are only a few options available to you if you have too much debt to service and try to take action either you can transfer the debt or you can socialistically redistribute wealth from the rich to the poor another option is to combine austerity measures with debt restructurings restructuring your debt is reducing it in some ways such that it is now weighed down by only that portion of your debt that you can afford to pay back restructuring can occur in one of three ways depending on the money you generate debt servicing you have two options either truly right off the debt or let's say right off half of it since you could pay the other half however since one man's obligations are another man's assets cutting your debt in half has a significant adverse impact on your wealth making it difficult for you to obtain financing restructuring then becomes a challenge it is possible to restructure it by writing it down on one manner or another you have two options either extend the payment period or reduce the interest rate forcibly but to service that kind of debt you must find a way to bring the payments into line with the cash flows that are generated another way to go around this is to print money a central bank can make this easier by slipping into the system a certain amount of money each year because central banks print money their debts are essentially promised to deliver money consider the debt note that something is us down writing it down by 50 percent is what you mean when you say I'm going to write it down to a level that could be sustainable that significantly reduces wealth big deal if it's a 10-year loan if you change it to a five-year loan it might be similar to five percent a year for 10 years and the borrower who can then pay the loan can service it the best leverages are those that have a balance of those factors in the end you must reduce your debt to income ratio there are major lovers that will be in balance for you one of which is a certain degree of austerity that entails a certain level of debt write downs and money creation deflation is caused by debt write downs and austerity measures if you can strike the correct balance for those things then you have as creating money has an inflationary effect it is interesting to know how debt to income ratios have changed over time when you look at leverage good examples are the US during the Great Depression in England after World War II money can be printed in sufficient quantities to achieve a nominal growth rate that over time exceeds the nominal interest rate but is that the best idea let us know what you think in the comments section below Ray dalio also flagged the risk posed by U.S political tensions and overseas conflict the Bridgewater Associates founder also rang the alarm on mounting civil Strife in the U.S and the surge in overseas conflict such as Russia's war with the Ukraine those two Trends combined with Rising economic pressures around the world represent an especially dangerous Confluence of events dalio has previously criticized the fed and the government for flooding the U.S economy with debt and cash which created an asset price bubble he predicted the consequence would be annual inflation of 4 to 5 well above the fed's target rate of 2 percent and interest rates above 4.5 percent for years to come theoretically an economy recovering from a depression or a recession May benefit from low or no inflation due to low inflation and interest rates it is also inexpensive to borrow money for Investments large ticket purchases like cars or to secure a mortgage on a home or apartment some analysts predict that these low rates will boost consumption however when rates of return on loans are low Banks and other lending institutions could be reluctant to lend money to Consumers because doing so reduces profit margins businesses can use this information to plan their borrowing recruiting marketing development and expansion strategies due to the fact that the majority of these instruments are linked to treasury yields investors can also roughly predict the Returns on government corporate and other debt Securities the perspectives of economists vary widely nevertheless some economists contend that a sustained inflation rate of six percent would benefit the economy by boosting wages reducing unemployment and promoting economic expansion for instance inflation would be set at three percent if the average price of all products and services in the CPI increased by three percent from the previous year's level additionally this implies that the Dollar's purchasing power would have decreased by three percent hard assets like a house or other real estate frequently increase in value as the CPI increases however fixed income security depreciate due to the lack of an increase in rates along with inflation however a significant exemption are treasury inflation-protected Securities these Securities offer protection against inflation by paying interest twice a year at a fixed rate as the principal grows in line with the CPI some economists contend that controlled inflation of no more than six percent and possibly even less would be detrimental to economic recovery as would inflation of 10 or more that leaves us with a tiny window of opportunity but the US may have to inflate its currency on on purpose in order to eventually pay off its debts if it keeps piling up debt and borrows money through treasury issues as their Holdings lose value as prices rise investors retirees or anybody with fixed income investments will in fact be paying down those commitments thanks for watching this video what do you think of Ray dalio's perspective on the economy drop your thoughts in the thoughts section below see you on the next one thank you
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