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can't keep spending without and bring down inflation so here's what I think R alio is one of the greatest economic minds of all time he is the founder of Bridgewater the largest and arguably most prestigious hedge fund in the world this spot at the Pinnacle of Finance gives Doo an unparalleled view into the inner workings of the economy and the stock market which is why I got my attention when recently he began talking about what he is calling the great wealth transfer he describes the so-called great wealth transfer as a once in a century shift that will almost certainly have impacts for generations to come Ray doio recently released an essay titled What's happening with the economy the great wealth transfer and here's what he had to say the economy clearly isn't reacting in the usual way to the fed's tightening it is much stronger than normal and stronger than expected why is that there was a big government engineered shift in wealth from one the public sector the central government and Central Bank and two holders of government bonds to three the private sector IE households and businesses this made the private sector relatively insensitive to the fed's very rapid tightening to a more normal monetary policy as a result of this coordinated government maneuver the household sector's balance sheets and income statements are in good shape while the governments are in bad shape in the US and globally the central government's balance sheets and income statements are bad and getting worse because the governments ran and are still running large deficits said more simply Central governments took on a lot more debt so their balance sheets deteriorated and central banks printed a lot more money which caused inflation to rise and bought a lot of the debt to get money into the hands of the private sector which as a result is now in relatively good shape financially in order to avoid a complete economic collapse the US government and Federal Reserve took truly unprecedented actions to support the economy which included the FED cutting interest rates to zero and the US government stepping in to support businesses and households these government programs took the form of direct cash payments to Citizens AKA stimulus checks as well as enhanced unemployment benefits and pausing certain debt payments these programs ultimately accomplished the goal of supporting the economy during a difficult time but definitely were not cheap so here's an analogy to explain all of that when investors are analyzing a stock one of the first things they do is take a look at this thing called an income statement an income statement shows a company's Revenue think of this as the total dollar amount of sales that company made during a given period the income statement then shows the expenses the business business incur during that same time period the difference between the company's revenue and expenses is its profit and just like businesses governments also have income statements alette with a few important differences for a government the revenue line doesn't come from sales of products instead it comes in the form of taxes paid by businesses and citizens the higher the taxes the more revenue for the government moving down to the expenses section of the income statement think of a government's expenses as anything it spends money on the main expense categories for the US Government consists of Pensions Social Security Health Care defense welfare and a catch-all category called other for a business if revenue is higher than expenses that difference is called a profit but for a government it's called a surplus on the other hand however when a business has more expenses than Revenue it's called a loss governments call that a deficit during 2020 government revenue remained relatively flat as the economy slowed and and people and businesses earned less money while at the same time government expenses increased dramatically as a result of all the actions the government took to support the economy these higher expenses far exceeded Revenue leaving the US government with a large deficit as we can see here the US government deficit surged to a staggering $3.1 trillion in 2020 and 2.8 trillion in 2021 when a government doesn't have enough tax revenue to cover its expenses it has to make up for that deficit by using debt and this is exactly what happened in the United States here we have two balance sheets one for the US government and one for us households on the left of each balance sheet is the assets think of this as things that people own for households that takes the form of cash sitting in a bank account stocks real estate and anything else that can be sold for cash on the right side of the balance sheet are liabilities which is just a fancy way of essentially saying debt the more assets there are relative to liabilities the so-called stronger the balance sheet is in order to fund the large deficit the US government had to issue trillions of dollars of debt this increased the liability side of the US government's balance sheet and this concept is visualized here in this chart of the total US national debt the US national debt is 32 trillion do nearly 40% higher than where it ended 2020 at the same time the cash that the government generated from issuing that debt was sent out to households to stimulate the economy these payments increased the assets on us households balance sheet as we can see here both household assets and wealth are at an all-time high which is exactly the wealth transfer doio is talking about the US government essentially transferred wealth from itself to the private sector by issuing trillions of dollars of debt and sending the proceeds to households and businesses put another way the US government weakened its own balance sheet in order to strengthen the balance sheet of households at first this sounds very much like a good thing the average American household net worth has never been higher the economy is growing wages are up and unemployment is low however Dalia is warning that this wealth transfer will likely have serious long-term consequences we are going to get into what he had to say in just a second but first some quick background on doio and alternative asset classes Ray Doo's firm Bridgewater is the largest hedge fund in the entire world and hedge funds are just one type of a category of asset classes known as alternative Investments billionaire hedge fund managers and many other successful investors have been piling into alternative asset classes in recent years to diversify their portfolios and generate attractive risk adjusted returns one asset class in particular that had until recently been reserved for for the ultra rich is art that brings us to the sponsor of our video Masterworks Masterworks has an established track record having exited its 16th painting with investors seeing a net return of 13.4% here's how it works Masterworks makes multi-million doll works of art investable without needing millions and when a painting sells you see any potential net returns Masterworks collection is constantly growing because the billionaires haven't bought it all up yet now each of Masterwork 16 exits so far have returned a profit to investors with several sales already this year of course as with any investment this doesn't automatically guarantee future performance for works not sold but new offerings on the site can still sell out in hours which is why you'll want special access at my link in the description now back to the video here's what doio had to say on the consequences on the wealth transfer he described does it matter that the central governments and central banks have such bad balance sheets and income statements if the real economy is in pretty good shape of course it does as with people and companies governments that borrow have Debt Service payments and eventually have to pay back principal which is painful the only differences in their finances are that governments can confiscate wealth through taxes and print money via the central bank so that's what we should expect to happen when a person is in too much debt and wants to pay it off there are two main things they can do they can either increase their income which may take the form of finding a higher paying job or doing some part-time work on the side the other option to be able to pay down the debt is to cut expenses doing things like getting a cheaper place to live buying a less expensive car or going out to eat less frequently the math behind a person paying back their debt is simple they need to increase the money they have coming in and decrease increase the amount of money going out and that same exact logic applies to governments that have found themselves in too much debt and with a weak balance sheet so let's go back to our example of the government's income statement from earlier if a government wants to stop adding to its debt and clean up its balance sheet it needs to stop operating at a deficit and this can be done in one of two ways either increasing revenue or reducing expenses there's just one massive problem both of these options are extremely unpop popular with the country's citizens in order to increase government Revenue taxes on businesses and citizens have to be raised to decrease expenses government spending programs will have to be reduced while these actions are critical to the long-term success of a country these hard choices will make the politicians that decide them very unpopular and what do you call an unpopular politician you call them unemployed this Dynamic is exactly why governments are highly incentivized to to kick the proverbial can down the road instead of raising taxes or cutting spending they can simply issue more debt to fund the deficit as doio explains this two will eventually come back to haunt them here's what he had to say however over the long term from looking at history and penciling out what is likely it is virtually certain that Central government's deficits will be large and it is highly probable that they will grow at an increasing rate as the increasing debt service costs plus increasing other budget costs compound upward and as they increase governments will need to sell more debt so there will be a self- reinforcing debt spiral that will lead to Market imposed debt limits while central banks will be forced to print more money and buy more debt as they experience losses and deteriorating balance sheets the concerning scenario that could occur if deficits compound so that there is more supply of government bonds than there is demand is that either interest rates will rise or central banks will have to buy more to try to hold them down at first this explanation by Dalo may sound complicated however the point he is making is simple so let me explain using this chart here this chart represents the supply and demand of money that can be loaned to the US government on this line here we have the supply of money available to be loan to the government think of this as the amount of money investors across the world are will willing to spend to purchase government bonds this other line represents demand from the government for that money the larger the government deficit the hired the demand from the government to borrow money from investors to fill that Gap with debt the point at which these lines cross is the interest rate the US government has to pay on its debt as Government debt increases which is what happened as a result of the great wealth transfer doio described our demand line gets pushed upward notice how now the point at which our two lines cross is at a higher interest rate because of this mismatch between supply and demand the US government now has to pay a higher interest rate on its debt in order to get the money it needs this is where the concept of a debt spiral comes into play as Government debt increases the interest rate the government has to pay becomes higher and this results in larger annual interest payments which puts the government even further into debt ultimately increasing the interest rate to borrow money yet again and so the cycle continues just like a person that has fallen behind on large amounts of credit card debt the government runs the risk of stumbling into a vicious debt cycle that it can't recover from According to Doo there is only one thing a government can do when it finds itself in this situation print money in order to get the interest rate back down the concern is that the Federal Reserve will be forced to print money and use that newly printed money to buy government bonds the newly printed money will increase the supply of money available to be loaned to the government pushing our supply line out to the right as we can see this increased supply of money results in our Line's Crossing at a lower interest rate while this solves one goal for the government it opens up an entirely different can of worms listen to doio explain it himself unlike cutting spending debt reduction and wealth redistribution printing money is inflationary and stimulative inevitably the Central Bank prints new money out of thin air and uses it toy buy Financial assets and government bonds it happened in the United States during the Great Depression and again in 2008 when the United States Central Bank the Federal Reserve printed over $2 trillion other central banks around the world that could printed a lot of money too by buying Financial assets with this money it helps drive up asset prices which makes people more creditworthy however this only helps those who own Financial assets you see the central bank can print money but it can only buy Financial assets the central government on the other hand can buy goods and services and put money in the hands of the people but it can't print money so in order to stimulate the economy the two must cooperate by buying government bonds the Central Bank essentially lends money to the government allowing it to run a deficit and increase spending on goods and Services through its stimulus programs and unemployment benefits this increases people's income as well as the government's debt however it will lower the economy's total debt burden this is a very risky time policy makers need to balance the four ways that debt burdens come down the deflationary ways need to balance with the inflationary ways in order to maintain stability if balanced correctly there can be a beautiful deleveraging there's a saying in economics that there is no such thing as a free lunch what this means is that every economic decision comes with a set of tradeoffs while this great wealth transfer doio described resulted in a booming economy eventually the cost associated with those actions will have to be paid only time will tell but it's worth listening to Ray Doo because let's just say he knows a thing or two about what he's talking about soon
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