The prominent traditional investor, Ray Dalio, argued that cash is not a safe investment, and people short avert from it during times of uncertainty. He also warned that the upcoming financial crisis will hit the markets and regular lives harder than the Great Recession from 2008. As a result, the world will come out of the current long-term financial cycle and enter a “new world order.”
Changing Financial Cycles
Ray Dalio is amongst the most successful investors in recent history and the founder of the American investment management firm – Bridgewater Associates. Speaking in a recent interview, he explained that the global economy operates in four major financial cycles and now it’s on the verge of a significant transition:
“There’s a long-term debt cycle. It goes on for 50 to 75 years. This is when you begin a new type of money and a new type of credit. That began in 1945 – the new world order – the end of WWII, the end of the Bretton Woods monetary system, created a new monetary system in 1945.
They wiped out pretty much the old money and began a new – that’s the new world order – the American world order. And, still, 70% of the money and credit that exist in the economy is running by dollars. What you have traditionally is the breakdown.”
Cash Is Not A Safe Investment Tool
He also compared the COVID-19 effect on the world as a “tsunami that has hit” its target. Aside from the evident adverse impact on people’s health, Dalio said that the world is heading towards a massive financial crash. As such, he offered his views on what regular people can do to prepare and to feel relatively secure in an upcoming economic turmoil:
“What the individual investor needs to do is know how to diversify well and in a balanced well. The greatest mistake of all investors is to think that what has done well lately is a better investment. And what has done worse lately is the worst investment.
So one should know how to diversify in asset classes, to diversify in countries, and in currencies.”
While speaking on cash, however, he specifically outlined its flaws as an investment tool:
“Do not think that cash is a safe investment. Most people would say, “look, I just want safety, and those bonds are not going to give me an interest rate, and so on, so where do I get safe?”
Cash is a seductive investment because it doesn’t have so much volatility. But it taxes you in your buying power about 2% per year. So, cash is almost always the worst investment.”
Thus, he reaffirmed his previous stance that “cash is trash” and urged people to diversify in commodities such as gold.
This Crisis Will Be Worse Than 2008
Dalio also joined the list of financial experts who are repeatedly warning that the financial crisis coming now will have more disastrous effects on global economies than the previous one in 2008.
“This is bigger than what happened in 2008. In 2008 we had banks, and the governments made up money and made up credit and kept them alive in some way.
Now is more complex than that. There are the banks, and there are all of those beyond banks – all the little businesses in all the different places. And it is a bigger crisis, and we have a less effective monetary policy because interest rates declines have reached their limits.
Just buying financial assets by the central bank and buying the normal financial assets won’t work. They will have to buy the debt of the government. And many governments have to be effective in getting buying power and production to those who need it around the world.”
Ultimately, Dalio concluded that the world will live through this crisis. However, he noted that once it does, “things won’t go back to the way they were before all this,” referring once again to the changing financial cycles.
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