The founder of one of the world’s largest hedge funds has slammed capitalism as “broken” in a post published on LinkedIn yesterday.
In the post titled The World Has Gone Mad and the System Is Broken, Bridgewater Associates founder Raymond Dalio explained that current economic and market forces are driving the growing gap between the rich and the poor.
Capitalism and ‘trickle-down economics’ isn’t working anymore, he argued: those with money will acquire more money, while those without will struggle to better their situation.
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Investors flush with cash with nowhere to go
The world is split into two: those who are credit-worthy and those who aren’t, Dalio indicated.
For those who are, “money is free” – thanks to central banks which are “pushing money on investors”. However, this isn’t driving up inflation or growth because investors are investing the money rather than spending it.
“As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish,” he said.
It’s getting to the point where start-ups don’t want more investor money because they don’t need any more.
Government debt is only going to grow
Meanwhile, large government deficits will only get bigger, which means governments will sell more of their debt that will ultimately be bought by central banks. And how will they afford it? By printing fresh money.
“This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen,” Dalio said.
Lack of money for pension, healthcare costs will widen the gap
At the same time, pension and healthcare obligations aren’t being funded – and it will make wealth inequality worse.
“Since there isn’t enough money to fund these pension and healthcare obligations, there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it).
“This will exacerbate the wealth gap battle,” he said. “While none of these three paths are good, printing money is the easiest path because it is the most hidden way of creating a wealth transfer and it tends to make asset prices rise.”
But printing fresh money risks the viability of the three major world reserve currencies as storeholds of wealth.
“At the same time, if policy makers can’t monetise these obligations, then the rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse.”
‘Trickle-down’ economics doesn’t work
At the end of the day, the haves will have more and the have-nots will continue to have less, said the hedge fund founder.
“At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps,” Dalio said.
Making things worse is the fact that workers will become displaced by robots, AI and automation, he added.
“Because the ‘trickle-down’ process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken,” Dalio concluded.
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