Why Printing Money Doesn't Work Anymore
Why Printing Money Doesn't Work Anymore
Unlock the Mysteries of History's Greatest Economic Cycles with Ray Dalio
"I believe the world is changing in big ways that haven’t happened before in our lifetimes but have many times in history, so I knew I needed to study past changes to understand what is happening now and help me to anticipate what is likely to happen next. I shared what I learned in my book Principles for Dealing with the Changing World Order." - Ray Dalio
One of the investors we admire the most is Ray Dalio. Whenever someone asks us for a recommendation to dive into the macroeconomic world, we always suggest reading one of his books.
Today, we want to recommend reading the first part of the book Principles, where he revisits the major events of his life. The journey he has taken since he started in the investment world up to the present day.
Perhaps the most decisive factor that has made him one of the richest people in the world is being born in the USA during a time of capitalism and growth like never before.
Warren Buffett has said it many times:
“I was lucky enough to be born in a time and place where society values my talent, and gave me a good education to develop that talent, and set up the laws and the financial system to let me do what I love doing—and make a lot of money doing it. The least I can do is help pay for all that.”
But it wasn't always this way. There's another book that has little to do with finance, and it's about luck in life. It talks about how 90% of Canadian national hockey team players were born between January and April. This is because in the early years, they're almost a year older than the other players, seem better, and therefore, the big leagues bet on them. This makes them train more and, now, they become better. (For those of you interested, the book is called Outliers).
Ray Dalio and the Cycles
In another of Ray Dalio's great books, he also talks about the major cycles throughout history and how all major economies have fallen.
Maybe this image doesn't tell you much, but I hope the next one does:
According to him, we are at the end of the cycle where the USA is one of the world's major powers. Many people believe this will take many years to happen, and it's true, but we should position ourselves for when this macro trend occurs.
GDP Makes the Difference
When it comes to economics, all countries compete for a major title: Gross Domestic Product (GDP), and in this, the USA has been the king for the last 200 years. GDP is like the primary gauge of how much a country produces, and everyone wants their number to rise like beer foam at a party.
In this competition, the United States takes the lead with an economy that basically relies on debt to grow. The only problem is that this debt is no longer the goldmine it used to be for boosting economic growth!
Imagine this: in 1970, every dollar of new debt generated an average of five additional dollars in the US GDP. That's like a high-yield investment! But, wait a second, now, 50 years later, every dollar of new debt only adds about 1.2 dollars to the GDP. That's a 76% drop in the effectiveness of debt to fuel growth!
It's as if American debt has become a bit lazy after decades of economic partying.
This implies that we're printing money like never before, but the value we generate is very low. We're already seeing this with tech companies with a P/E ratio of 100. We'll gradually unravel this mystery, but in the meantime, every time someone tells you that the S&P 500 has given a return of X% in the last 100 years, think of it as a biased metric.