Ray Dalio—founder of the world’s largest hedge fund—is sounding the alarm about the state of the global economy. In a blog post titled “The World Has Gone Mad and the System Is Broken,” he argues that zero interest rates, low returns, and growing economic inequality are setting the world up for something bad.

 

 

“Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give,” wrote Dalio.

It’s a reference to the current situation where interest rates are negative in many places around the globe. It’s an unprecedented phenomenon, where investors are willing to lose money on a bond bought instead of just putting the cash under the mattress.

Zero interest rates are creating a “pushing on a string” dynamic, according to Dalio. Each attempt by global economic authorities to stimulate a moribund economy requires more and more money to less and less effect. “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.”

Every asset class is affected by excessive credit creation: stocks, bonds, and even venture capital, he says. “There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto startups that don’t want more money because they already have more than enough,” wrote Dalio.

Government deficits are huge, and growing. As deficits grow, the specter of higher interest rates looms. As governments seek to attract buyers for the mountains of debt needed to refinance their liabilities in coming years, Dalio sees upward pressure on interest rates. 

But higher rates “would be devastating for markets and economics because the world is so leveraged long.” That is a fancy way of saying there is a lot of debt in the system. Higher rates means interest costs to finance debt go up, pressuring consumer budgets as well as governments. When government budgets get squeezed, it means public services could get cut. 

Of course, global authorities aren’t going to give up and concede they were wrong. Dalio sees more central-bank bond buying and money printing. “This will exacerbate the wealth gap battle,” wrote Dalio. “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.” 

It’s a dour assessment of the state of affairs. Dalio believes the situation is unsustainable and a “paradigm shift” is coming: “This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.”

Ray Dalio says gold will be a top investment during upcoming 'paradigm shift' for global markets.