EC Ray Dalio Is Kinda, Sorta, Really Wrong

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”—John Maynard Keynes

“Nothing is more dangerous than a dogmatic worldview—nothing more constraining, more blinding to innovation, more destructive of openness to novelty.”
Stephen Jay Gould

“Inequality has emerged as a major issue in the US and beyond. A generation ago it could reasonably have been asserted that the overall growth rate of the economy was the main influence on the growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim.

The share of income going to the top 1 percent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalized and budget deficits have at last been addressed.”—Lawrence Summers (in the Financial Times, February 2014)

Ray Dalio is the thoughtful, somewhat controversial founder of the world’s largest hedge fund, Bridgewater Associates, which he started in 1975. While much of his writing is private, I (and many others) peruse every word we can of his and the Bridgewater team’s thinking. I find it to be some of the most interesting market commentary I read.

Lately Ray (read his bio here) has been far more open with his thinking, posting books and essays. This letter is the beginning of a response to his articles, Why and How Capitalism Needs To Be Reformed, Parts 1 and 2 and a follow-up piece titled It’s Time to Look More Carefully at ‘Monetary Policy 3 (MP3)’ and ‘Modern Monetary Theory’. He posted both publicly on LinkedIn.

On first reading those, I will admit to thinking, “Ray Dalio is kinda, sorta wrong.” I agreed with much of Part 1, with a few quibbles. Ditto for Part 2. But when I read the third piece I found myself thinking, “Ray Dalio is really, really wrong.” In that essay he basically endorses Modern Monetary Theory (MMT).

Coming from someone of Ray’s stature, and knowing that others like Bill Gross are beginning to endorse MMT either obliquely or directly, I found myself wanting to shout, “Stop! This is dangerous!”

As it turns out, Ray and I have mutual friends, and none describe him as particularly dangerous. They have nothing but good things to say about him, both businesswise and personally. He is clearly a generous man. And watching him in interviews and on stage, he is both disarming and comes across rather warmly. Definitely not dangerous. But ideas have consequences…

Ray’s essays are in his typical conversational style. There are plenty of footnotes and explanations in the combined 12,348 words (which fill 42 pages, not counting footnotes and appendixes). Almost any reader would agree with much of the first two-part essay.

Ray has done us all a service by pointing out the elephants in the room (some tinged with pink), which are rarely mentioned in public discourse. We discuss various parts of the elephant, but seldom the entire creature. By that, I mean the rapidly growing potential for left-of-center “progressive” control of both Congress and the White House. Part of that growth stems from an increasing frustration over the perceived differences between haves and have nots, between the protected and unprotected, combined with fascination for government solutions to our society’s perceived ills.

As The Economist reported recently, 51% of those polled between ages 18-29 have a positive view of socialism. That should scare you.

Source: The Economist

A growing number of that generation are taking that view into the voting booth. Democratic presidential candidates are all burnishing their “progressive” credentials. I have zero insight into who might win that nomination fight, but there is a more than reasonable chance it will be the most left-leaning presidential nominee in a very long time, since at least George McGovern (for whom I voted). And given the potential for recession between now and the election, they have a reasonable chance of winning.

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Moon Kil Woong 6 days ago Contributor's comment

The issue with capitalism is not capitalism, people are more upset as they see opportunities lost as large companies seem to get tax breaks and government seems to bend over backwards helping them and not small and medium businesses. The sense that the table is not set fair in business is hurting the capitalist ideal. Also the sense that things are increasingly falling out of people's own hands and control makes people angry at the government and socialism. Adding cronyism and perceived unfair play in government only adds to the problem.

The issue is corruption and undue influence in government more than either capitalism and socialism. The simple fact is the middle class is getting run over and people are upset. Can you blame them? Both the Republican and the Democrats have a piece of the solution. Without the middle ground we will keep dropping into one bad solution after the other as the middle class fares worse with both sides at the helm. The reason being, they don't understand the real problem because they are a large part of it.

Without fair play everyone eventually loses.

Dick Kaplan 6 days ago Member's comment

This is simply the "Trickle Down" theory as opposed to the "Trickle Up" theory. However, I agree that the Trickle Down theory is wrong. It's been shown time and time again that when individuals are given a tax refund, they will quickly go out and spend it, which helps to give the economy a boost. But when company are given a tax break, more time than not they'll simply horde the money or executives get large bonuses in the million. It is rarely used to hire more people, or give raises.

Yes when the economy takes a downturn, they are quick to give pay cuts, reduce benefits, cut hours or fire employees all together. This leaves the remaining employees to pick up the slack with no salary increase. Americans are horribly overworked and underpaid.

Gary Anderson 6 days ago Contributor's comment

I think productivity is too weak for trickle down to work in this environment. It usually simply doesn't work. But Mr Mauldin, I believe Dalio would rather see helicopter money than MMT. I don't know that he has endorsed #MMT except for the fact that it is what is catching on and austerity is not working. Capitalism has become too austere for the masses while the wealthiest play like never before. Helicopter money is much safer, and would work if properly dispensed. It is a monetary issue according the Friedman and the monetarists at the Fed can execute it without the fiscal budget exploding.