Bridgewater Associates founder Ray Dalio said the U.S. dollar is on the verge of devaluation on a level last seen in 1971 and that China is threatening the greenback’s role as the world’s reserve currency. In such an environment bitcoin, with its gold-like properties, looks increasingly attractive as a savings vehicle, said Dalio, whose firm started 2021 with $101.9 billion in assets under management, making it the world’s largest hedge fund.
“Personally, I’d rather have bitcoin than a bond” in an inflationary scenario, Dalio said during an hour-long conversation with CoinDesk Chief Content Officer Michael J. Casey.
Now, his interest is more than hypothetical or academic.
“I have some bitcoin,” Dalio volunteered in the middle of the interview, recorded on May 6 and to be broadcast Monday during Consensus by CoinDesk 2021.
Dalio joins fellow billionaire Stanley Druckenmiller in not only expressing pessimism about the dollar but taking a position in bitcoin. Broadly, the traditional finance world has gone from ignoring or shunning to tentatively embracing cryptocurrencies, some looking to profit from their day-to-day volatility, others seeking a haven from inflation as governments swelled money supplies during the coronavirus pandemic.
Bridgewater’s chief financial officer, John Dalby, recently left the storied firm to join NYDIG, the bitcoin custodian and prime brokerage that facilitated insurance giant MassMutual’s $100 million crypto buy.
After expressing skepticism about the cryptocurrency as recently as November, Dalio began to show a change of heart this year. “There exists the possibility that bitcoin and its competitors can fill that growing need” for an alternative store of value, he wrote in January.
Dalio’s off-the-cuff remark to CoinDesk about owning “some” BTC represents the closest thing to an endorsement from him to date. Nonetheless, in the same conversation, he reiterated his concern that governments, fearing competition from bitcoin to state monetary systems, could crack down on its owners.
“Bitcoin’s greatest risk is its success,” Dalio cautioned.
The debt cycle
More than a decade ago, on the heels of the 2008 financial crisis (and during the nascent stages of Bitcoin), Dalio began studying the rise and fall of the three most recent global reserve currencies: the Dutch guilder, the British pound, and the U.S. dollar, he recounted.
As Dalio sees it, currency supremacy moves in three “cycles” that may occur simultaneously: the creation of debt and financial assets; an “internal cohesiveness clash cycle” (“as the wealth gaps grow and the value gaps grow – and political groups grow – you have a greater amount of conflict”); and the rise of another great power to challenge the existing top currency.
Whether a currency can withstand such cycles depends on the strength of the economy behind the global reserve currency.
The U.S. dollar is currently in the midst of the first cycle, where “debt and credit create buying power,” said Dalio, who is co-chairman and co-chief investment officer at Bridgewater.
Yet, these are short-term “stimulative” and long-term “depressants” because such things as government debts will eventually have to be paid back, he warned. Nonetheless, those debts are issued, but it gets increasingly difficult.
“All of those financial assets are claims on real stuff, real goods and services,” Dalio said. “And when the pile becomes very big, and the incentives for not holding that are no longer there, you have a problem.”
That happened to the U.S. once before, Dalio noted. After the 1944 Bretton Woods agreement, global exchange rates were tied to the dollar which, in turn, was backed by gold. However, in the 1960s federal spending skyrocketed due to an expansion of entitlement programs at the same time the U.S. was boosting its defense spending to battle the Soviets in the Cold War as well as pay the escalating costs of the Vietnam War.
The higher debt eventually caused a depletion of America’s gold reserves from about 20 metric tons in the late 1950s to under 10 metric tons by 1970. Sensing the situation was no longer tenable, President Richard Nixon took the U.S. off the gold standard in 1971. The dollar has been a “fiat” currency ever since.
The current situation now resembles 1971, Dalio warned.
“As you look at the budgets, and you look ahead, we know we’re going to need a lot more money, a lot more debt,” he said.
“You need to borrow money? You have to print that. You need more money? So, taxes go up and that produces a dynamic. Now I can keep going on about what happens in that dynamic. It may be capital controls. … I painfully learned in 1971 that it causes stocks to go up. It causes… gold, bitcoin, real estate, everything to go up, because it's really going down in dollars. And that's the part of the cycle we’re in.”
A major narrative surrounding bitcoin and other cryptocurrencies is that they serve as an inflation hedge, or at least will benefit from fiscal and monetary stimulus.
As governments around the world continue their attempts to stave off economic crises with more spending, much has been made about the prospects of inflation. In the 12 months ending April, the annualized inflation rate for the U.S. was 4.2%, well higher than the Federal Reserve’s 2% long-term target, though a large part of that was because the rate is being compared to April 2020, a month where many of the world’s economies ground to a halt.
There are two types of inflation, Dalio said: one caused by supply and demand, where labor demand is high and capacity is low, forcing prices up; and monetary inflation due to a devaluation of the currency.
As money gets pumped into the economy, it intertwines the two inflation types.
“We will have a hell of a lot of demand because we put all that money in cash all over the place,” said Dalio. At the same time as the money supply has increased, yields have fallen to lows as investors snap up bonds and other assets such as real estate.
“It’ll change the amount that is in the hands of individuals, and so on,” he said, “and that’ll move on because cash is trash. I mean, I’d say that because it’ll have that negative real return.”
It is that second, monetary type of inflation that will ultimately hold sway, according to Dalio. That could be good for assets such as real estate, stocks and cryptocurrencies, but only up to a point.
“As those prices rise – like a bond – their future expected returns go down,” he said. “As they come closer to the interest rate … then there’s no longer the incentive to buy those things. And you could have trouble. It becomes very difficult to tighten monetary policy, because the whole thing falls apart. Everything’s interest rate-sensitive.”
The central bank then has to resort to more money printing, he added, and that could eventually lead assets to have a negative real return despite nominal increases, as was seen in the 1970s.
China as capital competitor
Coming in to fill the vacuum of the dollar’s decline is China, which has done some fiscal stimulus and relatively muted monetary stimulus since the start of the pandemic.
The world’s most populous country is also being helped by loosening restrictions on foreign investment into the country, Dalio said.
“In 2015, only 2% of Chinese markets were open to foreigners. Now it’s over 60% [but] if you look at the relative pricing, and so on, it’s a whole different story because they’re not doing quantitative easing,” he said. “They still have an attractive bond market. They have attractive capital markets that are more open. And as they’re more open, big investors – institutional investors, central banks, and so on – view themselves as underweighted there,” meaning their holdings in China are insufficient, relative to the returns they can generate.
A capital market drawing in investments can translate into added strength to the Chinese renminbi.
“When you buy a Chinese financial asset, like buying an American financial asset, you have to buy their currency. So it’s supportive to their currency and it’s also supportive to their assets,” said Dalio. He said China gains the capacity to bill and lend in its currency when there are capital inflows. “China has been very reticent to do that [so as] not to disrupt the system. But you’re seeing more of the internationalization of the renminbi. It has appeal for borrowers and lenders. … That dynamic is really following the same arc of monetary systems and empires pattern.”
Neutral reserve currency?
With one currency (the dollar) possibly on the wane while another (the renminbi) possibly ascendant, there is the chance a neutral cryptocurrency such as bitcoin could act as gold did in previous centuries.
While he suggested a diversified portfolio could include the oldest and largest cryptocurrency by market cap, there are risks many may not be considering, according to Dalio.
“One of the great things, I think, as a worry is the government having the capacity to control almost any of them, including bitcoin, or the digital currencies,” he said. “They know where they are, and they know what’s going on.”
Governments may start to worry should bondholders sell their bonds in favor of bitcoin. “The more we create savings in [bitcoin], the more you might say, ‘I’d rather have bitcoin than the bond.’ Personally, I’d rather have bitcoin than a bond,” Dalio said, chuckling. “And then the more that happens, then it goes into bitcoin and it doesn’t go into credit, then [governments] lose control of that.”
Such a situation could lead those governments to crack down on bitcoin holders.
One indicator, Dalio said, is the relative value of bitcoin versus gold. Excluding government reserves and jewelry uses, the value of gold is roughly $5 trillion, he estimated, about five times that of bitcoin. “It’s about 80/20 right now in the world, so that’s something I’d watch, too. But I think those things probably are going to rise relative to bonds.”
There is one scenario where rising debt can be overcome, and that’s through productivity. And while that’s harder to measure than before, it will hinge on technology, he said.
“The world is going to change at an incredibly fast pace,” Dalio said. “Whoever wins the technology race, wins it all, economically, and militarily. … That’s what the next five years looks like.”