Why Ray Dalio Thinks We're in the 1930s

The guru believes we may face another Great Depression

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Ryan Vanzo
Sep 11, 2019
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Ray Dalio (Trades, Portfolio), founder of Bridgewater Associates, thinks were back to the late 1930s. In an Aug. 28LinkedIn post, as well as recent television interviews, he described three similarities between today and the decade that brought us the Great Depression. According to Dalio, if the economy begins to slow, these similarities may produce serious problems.

If youre worried about the value of your portfolio, youll want to hear him out.

Monetary policy

This first similarity Dalio identified deals with is monetary policy. He argued that central banks cant rely on monetary policy forever. Eventually, the benefits of monetary policy diminish. Cutting rates or expanding the Federal Reserves portfolio, for example, wont boost the economy if debt levels are too high. Dalio thinks we may have reached that point. And while many politicians, economists and investors are banking on more stimulus, the effects shouldnt be counted on.


"As for monetary policy and fiscal policy responses, it seems to me that we are classically in the late stages of the long-term debt cycle, when central banks power to ease in order to reverse an economic downturn is coming to an end," Dalio said.

He also listed three causes:

  • "Monetary Policy 1 (i.e., the ability to lower interest rates) doesnt work effectively because interest rates get so low that lowering them enough to stimulate growth doesnt work well.
  • Monetary Policy 2 (i.e., printing money and buying financial assets) doesnt work well because that doesnt produce adequate credit in the real economy (as distinct from credit growth to leverage up investment assets), so there is 'pushing on a string.' That creates the need for
  • Monetary Policy 3 (large budget deficits and monetizing of them), which is problematic, especially in this highly politicized and undisciplined environment."

Concerns over monetary policy are also making other gurus cautious.

Seth Klarman (Trades, Portfolio) highlighted in his annual letter to investors the upcoming troubles with government intervention, rising deficits and sovereign debt levels.

He also thinks poor fiscal and monetary policy could eventually spell the end for the U.S. dollar as the worlds reserve currency.

Wealth inequality

Dalio also pointed to increasing wealth inequality as a danger to the status quo. He argued the polarization of politics is particularly concerning.

If I was the president of the United States, what I would do is recognize that this is a national emergency, he said. If you look at history, if you have a group of people who have very different economic conditions, and you have an economic downturn, you have conflict.

He went on to say:

Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another. The American dream is lost. For the most part we dont even talk about what is the American dream. And its very different from when I was growing up.

Dalio is right to compare this issue with the 1930s. According to most research, income inequality has reached levels last seen in the years before the Great Depression hit.

Wealth inequality has increased dramatically since the 1980s, with a top 1% wealth share around 40% in 2016 versus 25% to 30% in the 1980s, UC Berkeley economics professor Gabriel Zucman said. The share of wealth owned by the bottom 90% has collapsed in similar proportions.

Yet again, Dalio finds a like-minded friend in Klarman, who said, It is not hard to imagine worsening social unrest among a generation that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.

That could spell trouble for investors. It cant be business as usual amid constant protests, riots, shutdowns and escalating social tensions," Klarman added."Social cohesion is essential for those who have capital to invest.


Finally, Dalio sees a political power shift occurring, not unlike what happened in the 1930s. Put simply, the guru sees a rising world power challenging an existing world power. This dynamic has widespread impacts.

External politics is driven by the rising of an emerging power (China) to challenge the existing world power (the U.S.), which is leading to a more extreme external conflict and will eventually lead to a change in the world order, Dalio wrote. If/when there is an economic downturn, that will produce serious problems in ways that are analogous to theserious problems in the late 1930s.

Given recent escalations in the trade war between the U.S. and China, Dalio is growing increasingly nervous.

Unfortunately, the war with China is spreading, he wrote. Yesterday it spread to a currency war that will affect all currencies. It could spread to a capital war and/or an embargo war (shutting off needed items). In a worst case, it could go beyond that. We need to watch it closely, he said.

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Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.