Author: Ray Dalio, Founder of Bridgewater Associates, Source: X, @RayDalio, Translated by: Shaw, Jinse Finance
The dispute between Trump and Powell is essentially a battle for control over monetary value. As previously mentioned, when debt and borrowing are excessive, the traditional solution is to lower real interest rates and devalue the currency, which is disadvantageous to creditors and beneficial to debtors. This is what Trump is pushing for, while Powell strongly opposes.
Such arguments are normal, but this time the dispute is more intense. Heads of state typically want more stimulus measures to promote spending in financial markets, goods, and services, which makes people happy until inflation becomes so severe that even they believe monetary tightening is necessary. Excellent central bank governors try to find a balance between being too loose and too tight by observing various indicators to "go against the wind". Therefore, there is a natural tension between central bank leaders and sitting heads of state who want to please the people and get re-elected. In normal times, people acknowledge and respect this separation of power, but in extreme situations, this separation can break down.
How Should Monetary Policy Be Formulated?
What measures should be taken based on various indicators? Market indicators, economic indicators, and other influencing factors need to be considered.
As for market indicators, they clearly show that the current monetary environment is loose and the economy is not in crisis, as reflected by rising stock markets, currency depreciation, narrowing credit spreads, and low real yields, indicating "loose" capital liquidity. More specifically:
Over the past year, the US stock market has risen 14%, reaching historical highs, with most valuation indicators showing the market is overpriced.
During the same period, the US dollar has fallen 5% against major currencies, 27% against gold, and 45% against Bitcoin.
Credit spreads are near historical lows, with BAA-rated corporate bond spreads only about 1% higher than US Treasury bonds.
The 10-year US real interest rate is slightly above 2%, in a neutral to low range.
From economic indicators, the economy is generally balanced but slightly slowing.
Unemployment remains low at 4.1% but is showing a slow upward trend.
The technology sector, especially AI-related investments and revenues, is showing strong growth, while market sentiment and the real estate market are relatively weak.
The global economy is generally performing poorly.
This is the current situation. Looking ahead, there are huge uncertainties and risks in debt, trade, politics, and geopolitics, which have inflationary tendencies, while technological progress is significant, having a deflationary effect and exacerbating wealth inequality.
Defending Monetary Value Is Not Easy, But Crucial
Defending monetary discipline, like fiscal discipline, is unpopular because it essentially requires people to tighten spending. However, achieving balance is crucial because one person's debt is another person's asset; for money to function successfully, it must be both effectively circulated and maintain its value.
Will monetary value be defended? Based on historical experience and current circumstances, I believe it is clear that monetary value will not be defended before the classic currency weakness/inflation problem becomes severe—and may not even be addressed even when the problem is serious, because the pain it brings is enormous. The cycle from 1970 to 1982 is a typical example. Therefore, while monetary policy may be tightened someday in the future, it can be almost certain that this will not happen in the short term.
Therefore, in my view, investors should still tend to bet on the "weak currency" trend—that is, a declining US dollar and real interest rates remaining low or even further declining.
