Friday, October 07, 2016

Ray Dalio* Tells Central Bankers:
"You Are Pushing On A String"
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"I believe that the most important force that is now driving what is happening and isn’t well understood is the long-term debt cycle. Long-term debt cycles are not well understood because they come along only once in a lifetime .. Debt will not be able to rise as fast and the capital markets transmission mechanism won’t work as well, as interest rates can’t be lowered and risk premiums of other investments are low and shrinking. If appropriate risk premiums don’t exist, the transmission mechanism of capital won’t work as well and the economy will grind to a halt. For these reasons major central banks are facing a 'pushing on a string' situation. The last time this happened was in the late 1930s .. The biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits. In other words, they are simultaneously approaching both their debt limits and central banks’ 'pushing on a string' limits. Central banks are approaching their 'pushing on a string' limits both because interest rates are approaching their maximum lows, and because the effectiveness of QE is approaching its limits as the risk premiums and spreads are compressing. Also, the wealth gap and numerous other factors make lending to spenders more challenging. This is a global problem. Japan is closest to its limits, Europe is a step behind it, the U.S. is a step or two behind Europe, and China is a few steps behind the United States .. We are now seeing most central bankers pushing interest rates down to make them extremely unattractive for savers and we are seeing them monetizing debt and buying riskier assets to make debt and other liabilities less burdensome and to stimulate their economies."
LINK HERE to the speech

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