An historic monetary event has occurred that marks the last phase of the fiat system with a return to hard money to be expected according to an analysis by Raymond Thomas Dalio, an American billionaire hedge fund manager serving as the co-chief investment officer of Bridgewater Associates since 1985.
In a preview of his latest book, The Changing World Order, Dalio goes into some detail into describing the long term cycle of money.
We’re all familiar with the short term cycle of boom and bust, circa every decade, but what makes this prognosis very interesting is it’s description of the semi long term cycle and then the very long term one.
It all starts with gold, of course, the hard money with intrinsic value described as “the only financial asset that isn’t someone else’s liability,” besides bitcoin presumably.
Meaning you don’t have to trust the other party, with even enemies able to exchange gold between each other in payment. A function currently served by the Bank for International Settlement which arranges the transfer of gold between central banks.
This gold system lasted until around the 1500s when Marco Polo came from China with paper money.
This paper money initially was a claim on gold with the paper fully backed and a full representation of the metal.
“Because carrying a lot of metal money around was risky and inconvenient, credible parties (which came to be known as banks, though they initially included all sorts of institutions that people trusted, such as temples in China) arose that would put the money in a safe place and issue paper claims on it. Soon people treated these paper ‘claims on money’ as if they were money themselves,” Dalio says, further adding:
“However, the holders of the paper claims and the banks discover the wonders of credit and debt. They can lend these paper claims to the bank in exchange for an interest payment so they get interest.
The banks that borrow it from them like it because they lend the money to others who pay a higher interest rate so the banks make a profit. And those who borrow the money from the bank like it because it gives them buying power that they didn’t have.
And the whole society likes it because it leads asset prices and production to rise. Since everyone is happy with how things are going they do a lot of it.
More lending and borrowing happens over and over again many times, there is a boom, and the quantity of the claims on the money (i.e., debt assets) rises relative to the amount of actual goods and services there are to buy.
Trouble approaches when either there isn’t enough income to survive one’s debts or the amount of the claims (i.e., debt assets) that people are holding in the expectation that they can sell them to get money to buy goods and services increases faster than the amount of goods and services by an amount that makes the conversion from that debt asset (e.g., that bond) implausible. These two problems tend to come together.”
These two problems tend to also come around 50 to 75 years, he says, when a somewhat fundamental change to the nature of money is required because:
“When credit cycles reach their limit it is both the logical and the classic response for central governments and their central banks to create a lot of debt and print money that will be spent on goods, services, and investment assets to keep the economy moving.”
If we go back to gold, at first it was somewhat organic. People would measure an ounce or whatever, and exchange it for goods or services.
Gold so being an abstract unit of measurement of value with the quantity of that unit generally not changing.
Emperors or kings “standardized” that unit of account by taking for themselves the power to mint gold coins to be used as a unit of account.
This ability gave them the means of full taxation in arguably a very regressive manner where the poorest bear the highest tax burden as in addition to taking a percentage of crops or income, they would reduce the amount of gold in a gold coin, in effect increasing the quantity of the unit of account.
The measurer of value therefore became changeable, rather than roughly fixed. Changeable in a way that took wealth from the population and gave it to the central government.
The introduction of paper money, as far back as the first known banking system set up by the Knights Templars, introduced another party to the setting of the measurer of value.
This is where Dalio’s story begins, albeit a bit later when paper money became widespread as some sort of new invention brought from China by Marco Polo, the great explorer.
We all know the story here. More gold-claiming paper than there is gold in the banks, at some point the more astute observers realize too much debt has been created, and therefore there will be more claims on gold than there is gold. So they start claiming first, reducing reserves, to the point they are gradually depleted and there is nothing left.
Dalio passes quite a few steps to jump to the modern era, but in these sort of cases the government simply reduces the ounces of gold that can be claimed per paper.
In a variation, President Franklin D. Roosevelt confiscated gold by forbidding “the hoarding of gold coin, gold bullion, and gold certificates within the continental United States” on April 5th 1933.
“The main rationale behind the order was actually to remove the constraint on the Federal Reserve which prevented it from increasing the money supply during the depression; the Federal Reserve Act (1913) required 40% gold backing of Federal Reserve Notes issued.
By the late 1920s, the Federal Reserve had almost hit the limit of allowable credit (in the form of Federal Reserve demand notes) that could be backed by the gold in its possession,” says Wikipedia.
Dalio refers to this event but in a confusing manner by suggesting Rosevelt defaulted, when instead he took an extreme measure to keep the music running.
Interestingly also Dalio says “the new world order began after the end of World War II in 1945, with the Bretton Woods agreement having put the dollar in the position of being the world’s leading reserve currency in 1944…
The new monetary system was a Type 2 (i.e., claims on hard money) monetary system, in which ‘paper dollar’ claims on gold could be exchanged by other countries’ central banks for an ounce of gold at a price of $35/ounce…
At the time, gold was the money in the bank and the paper dollars were like checks in a checkbook that could be turned in for the real money.
At the time of the establishment of this new monetary system there was $50 of paper money in existence for each ounce of gold the US government owned, so there was nearly 100% gold backing.”
That claim is not credible and no sources are provided by Dalio with the then system a lot more complex.
There was a global semi gold standard where the dollar alone could be technically redeemed for gold, but not practically except for foreign governments, with all other currencies then sort of pegged to the dollar.
This is the beginning of the dollar being a reserve currency as instead of hoarding gold directly, central banks could hold paper dollars, with the price of gold fixed, through which thus there could be stealth taxation by changing the fix, but now at a global scale.
This system collapsed on August 15, 1971 when President Nixon “defaulted on the US’s promise to allow holders of paper dollars to turn them in for gold.”
So bringing us to the current fiat system where there is no longer any constrain on the ability of the central bank to print money, and this applies globally with all countries under the same fiat system.
Above we can see the effects of that Nixon decision, with inflation rising, interest rates too, gold shoots up, while cash doesn’t hold good value. Dalio says:
“The panic out of dollars and dollar-debt assets and into inflation-hedge assets, as well as the rapid borrowing of dollars and the getting into debt, accelerated.
That created the money and credit crisis of 1979-82, during which time the US dollar and dollar-denominated debt was at risk of ceasing to be an accepted storehold of wealth…
To deal with that monetary inflation crisis and break the inflation, Volcker tightened the supply of money, which drove interest rates to the highest level ‘since Jesus Christ,’ according to German Chancellor Helmut Schmidt.
Debtors had to pay much more in debt service at the same time as their incomes and assets fell in value.
That squeezed the debtors and required them to sell assets. Because of the great need for dollars, the dollar was strong. For these reasons, inflation rates fell, which allowed the Federal Reserve to lower interest rates and to ease money and credit for Americans.”
So leading to the great 90s, a time of general peace and general prosperity when boom times gave way to the 2001 dotcom crash which led central banks to print and force another boom that led to the 2008 banking crash which created more printing and the fall of central banks into irrelevance where reserve currencies, like the dollar and the euro primarily, but also to a far lesser extent where the Yuan and British Pounds are concerned.
That brings us to a fundamental change in the nature of money that has occurred this very month when Fed and ECB announced a policy of debt monetization.
Meaning the central bank is directly giving money to the government which now has no constrain on how much it can spend.
So bringing this last phase of money which according to Dalio is to last 50 to 75 years until too much is printed to the point trust in fiat collapses as it no longer holds value.
Returning it all then full cycle with the re-establishment of some hard money standard for the government to regain trust in its own money.
The entire narrative of Dalio is geared towards justifying this debt monetization, something he argued in favor of before recent circumstances implemented this new monetary policy without some grand speech or announcement.
The idea under the umbrella of the Modern Monetary Theory is that instead of some discipline on government borrowing and thus monetary devaluation through a separation between money and state where banks handle the supply of money without state intervention, it should instead be the government that handles the supply by bringing it into market through government spending and by taking it out of market through government taxation, fines and licenses.
This is a radical shift in governance and in western economies, amounting in effect to communism because the government is now pretty much the market in all but name.
There is of course still the commercial banking rout of money creation, but banks too are now more an extension of the state which guarantees bank deposits and bails them out in any event.
That system of banks only money reached its limit because banks failed to do their job for the past decade of passing on to borrowers supper low interest rates.
Credit Card interest rates, for example, reached 20% a year before this economic crisis while central bank interest rates were close to zero.
That 20% is of course for ordinary people, the rich have their own personal bankers who gives them the super cheap money which they throw into stocks or houses or new businesses where they suppress wages, leading to a two speed system: one for the rich, another for the rest.
To keep this game going it is not surprising a billionaire like Dalio is arguing the state should now do full on printing so he can continue to get very cheap money while not being taxed.
That’s because Dalio can easily escape the consequences of stealth taxation through money printing, or indeed even the complete collapse of fiat money, by holding stocks, labour, produce, materials, hard money, or political influence.
The last part is crucial because while naturally one might think the state is these elected politicians who rationally will decide how to distribute this printed money to the benefit of ordinary people, it has become more and more obvious that the state tends to be the very rich who usually pick these politicians.
So you get a situation where the rich – and by rich we mean very, very billionaire, instead of even hundreds millionaires – take everyone’s wealth through devaluing money with Dalio doing his best to make it all appear as inevitable.
It is not however inevitable. It is instead more a consequence of the capturing of governance by the rich which impose policies that benefit the rich and them only.
Because another way to pay for government spending is of course overt taxation, where those who benefit most from the system pay the most.
The Arrogance of the Rich
Dalio misses a lot from his narrative of the consequences of decisions on the nature of money.
What also happened in the 70s was a complete stripping of the social net for New York and other US states after bankers refused to market New York bonds.
That led to the tax rate of as much as 80% for the rich, falling to even zero now for even companies worth a trillion.
That was followed by a complete assault on labour by Regan and Thatcher which led to the beginning of a new system of rule by the rich.
A system that only for ten years, during the 90s, could be enjoyed by the rest, but with Tony Blair declaring an acceptance of this new system, and with the very fraught 2000 election in US leading to the Supreme Court declaring Bush the winner, the nature of this new system started becoming apparent.
The overt lying to the people in regards to the Iraq War to justify authoritarian measures and a system of control, distracted all from the syphoning of wealth from all to the Dalios.
Hopy changy Obama was given the banking crisis, followed by revolution in Arab lands, the euro crisis, and then the people’s revolt in Brexit and Trump.
Seeing that latter backlash the Rich preped their New Zealand hideouts, with the people advancing in all continents in a global revolt last year.
A plandemic is now served as the very rich try to maintain their stealth coup effected for the past two decades in all western countries and now it all overt with democracy itself currently suspended.
If Dalio is to be believed, their solution is to bring in the full crisis, presumably outright war, so that this system of control is perpetuated through managed fabricated crisis that keep all subservient.
All just so that the Dalios don’t have to pay a bit more taxes, while imposing taxation even on bread and even for those starving through devaluing money which affects far, far more the 90% than these New Zelanders.
Hence perhaps why this billionaire appears so busy in writing many books and articles to bring no insight whatever, but only propaganda, to tell us what the problems are, while suggesting no good solution.
That solution of course being proper representation of the people through a jury house, in addition to the rigged “elected” houses which these New Zelanders control with no self-discipline.
That solution also being proper, overt, democratic and mandated taxation so that the debates on how the pie should be split occur in the houses of parliament instead of on the streets.
We need in short a restoration of proper democracy and the empowerment of the ordinary citizens to sit alongside the aristocracy in the governance of men.