Billionaire hedge fund founder Ray Dalio has warned that the US economy is heading for “stagflation” similar to the 1970s.
I think what we will likely see is a period of stagflation. And then you have to understand how to build a portfolio that’s balanced for this kind of environment,” Dalio said Yahoo Finance In an interview published on Monday.
Stagflation is defined as a period of high inflation combined with an economic slowdown and high unemployment—an unusual combination the United States faced in the 1970s, when oil crises and failed monetary policy devastated the economy.
“The past is a guide to what is happening now,” said Dalio, founder of Bridgewater Associates. “The environment we’re in is starting to look a lot like the ’70s.”
Billionaire hedge fund founder Ray Dalio has warned that the US economy is headed for ‘stagflation’ similar to the 1970s.
Inflation is currently at its highest level in 40 years, with the consumer price index reaching an annual rate of 7.9 percent in February.
Inflation is currently at its highest level in 40 years, with the consumer price index reaching an annual rate of 7.9 percent in February, the latest data available.
Shocks to global oil supplies in the aftermath of Russia’s invasion of Ukraine have sent energy prices soaring, with gasoline hitting an all-time high last month.
The Fed, which had long delayed action insisting inflation was “temporary,” finally responded at its March meeting by raising its benchmark interest rate by 25 basis points, with further rounds of hikes expected.
But Dalio argues that the Fed now faces a dilemma in which it will either raise interest rates too low to reduce inflation, or too high for the economy to sustain.
“So what you have is enough tightening by the Federal Reserve to deal with inflation appropriately, and that’s very stressful for the markets and the economy,” he said.
“The Fed is going to be in a very difficult place a year from now as inflation is still high and it starts to put pressure on both the markets and the economy,” Dalio explained.
Dalio expected the inflation rate to stabilize at around 5 percent, well above the Fed’s flexible target of 2 percent.
“We are beginning a paradigm shift,” he said, explaining that inflationary expectations will only lead to higher prices, as money flees from bonds and workers insist on higher salaries.
“A paradigm shift is starting to happen, and that will also be self-supporting,” he said. “This has all happened before, all of this has happened many times before.”
Dalio said the explosion in the money supply was the cause of the currency’s depreciation even as it boosted stock markets.
He said, “When you spend more money than you earn, you have to print money to make up the difference.”
A cyclist rides in front of a price board at a gas station in San Francisco, Monday, April 4, 2022. (AP Photo/Jeff Chiu)
Dalio’s warning comes days after a phenomenon known as a “yield curve inversion” in bond markets triggered warning signs of a recession.
However, at the moment the economy appears to be moving aggressively through some major measures.
US data released on Friday showed employers added 431,000 jobs in March and the unemployment rate fell to 3.6 percent, continuing a strong employment streak that has left key aspects of the US labor market ‘a little different’ than it was before COVID-19. pandemic.
Air travel is close to 90% of pre-pandemic levels. Data from restaurant reservation site OpenTable shows in-person dining was at 95 percent of pre-pandemic levels in 15 of the last 18 days through March 30.
How stagflation caused economic misery in the 1970s
The “Great Inflation” period from 1965 to 1982 was marked by a high inflation rate that exceeded 14 percent by 1980
US inflation is running at its highest level since 1982, when the period known as the “Great Inflation” was coming to an end.
Spurred on by the failure of monetary policy and two oil crises in 1973 and 1979, the period from 1965 to 1982 was marked by high inflation, which reached 14 percent by 1980.
Rising inflation was accompanied by a stagnant economy and high unemployment, which led to the term “stagflation”.
Consumers suffered greatly from rising prices, and anger over the inflation crisis contributed to Ronald Reagan’s victory over incumbent President Jimmy Carter in 1980.
“Inflation is as violent as a thief, as terrifying as an armed robber, and as murderous as a murderer,” Reagan said during the campaign, dedicating the early years of his presidency to addressing the issue.
Reagan’s controversial economic policy had four main pillars: cutting government spending, lowering taxes, lowering regulations, and tightening the money supply by raising interest rates.
naysayers claimed at the time that Reagan’s policies would push prices higher, but history proved them wrong and inflation soon returned to sustainable levels.
