Ray Dalio and Lawrence Summers Keep Sounding the Inflation Alarm

always attract a lot of attention. Ray Dalio is the co chief investment officer of Bridgewater Associates, the world's biggest hedge fund, which he founded in He's a multi billionaire who also became a best selling author recently when he put his philosophy for life and Work into a book. Larry Summers is well known to listeners of Stephanomics. His Harvard economics professor who has also been U S Treasury Secretary under President Bill Clinton and head of President Obama's

National Economic Council. Larry has been allowed critic of President biden stimulus programs. Overall, He says the US is now following the most irresponsible fiscal policies in forty years. Both he and Ray Daniel have been sending the alarm on inflation too, So I started by asking about that, Larry.

I mean, we have a former FED chair sitting as Treasury Sectory Janet Yellen, but that doesn't seem to have made her more concerned about the inflation that we have coming down the track, and indeed can already see in the US and despite that massive fiscal stimulus that's also here and going to continue. Is there something that policymakers in Washington are missing that you're seeing when you say we should be worried more about inflation? Arithmetic? I don't

think the arithmetic is terribly difficult. We're looking at an average GDP GAPP relative to potential GDP of two percent this year, and we're looking at a fourteen percent of g d P fiscal stimulus along with massive growth in the FEDS bound sheet and very low real interest rates. Arithmetic. We're looking at UH labor shortages as measured by job openings or is measured by workers comfort and quitting at

record UH levels. Arithmetic, We're looking at a current rate of inflation that, if you look at the last two or three months, is running close to eight percent. Now, no one thinks that that's the new guilty and rate of inflation, So of course there's transient inflation. The important question is whether that is six percentage points of transcence inflation or four percentage points of trans scient inflation, and I don't see the basis for policy makers serenity that

it's a full six percent of transient inflation. I welcomed the feds limited efforts to markets used towards UH reality and growing awareness that this overheating is likely to necessitate a monetary policy response. But I still think the reality of overheating, just if you look at the most basic UH numbers, is UH being overestimated. The prevailing forecasts that the FED in the Lighthouse, indeed, in much of the consensus of professional economic forecasters in February, was that we

would have inflation just above two percent this year. We've already had more inflation than that in the first five months of the year. That would suggest to me that people should not just modify their forecasts, but should think about what their errors are thinking were that led them to be so far off in their forecasts. Ray we had therefore from Larry the economists, indeed, that the mathematicians

response to the situation. I mean, as an investor, we've seen that pivot of some of some kind by the FED last week, quite calm market reaction but should market should investors generally be taking this threat a lot more seriously?

There are different kinds of inflation. UM. I'm not particularly worried about the classic supply uh, you know, demand pressing up against supply, although we'll find out soon because there's something like ten pc of g d P s stored in financial assets that's going to be coming out, and so it's likely that there's going to be a big pickup in demand and that will probably raise prices uh significantly.

And it also depends how you count for inflation, because like housing prices, housing prices themselves are going up a lot, that rental prices to going down a lot, And if you went to a three percent inflation rate or some bounds, you know that that's not one of those things that

gets me very nervous or very excited. The real issue is that we have a supply demand issue of bonds, because we're going to have to sell a lot of bonds to those um in the world who own bond inventories and they have very low interest rates, negative real interest rates, and they're overweighted in US bonds and they're gonna have to buy a lot more. And that is also coming at a time when Chinese capital markets are

the capital markets of kindy more attractive. That creates a supplied demand issue that can create a monetary inflation, because um, there will not be enough demand to buy those bonds, and that means that it's likely that the Federal Reserve will not be able to taper or cut back and might actually have to increase to prevent interest rates from

going up. And that's a classic monetary inflation. So that's my bigger concern, um than just the spirit all right, how much would you say this is a global issue, not just something that's related to US fiscal policy. For example, Look, I would say we're driving our car at a hundred miles an hour on a road that is empty right

now but will always be empty. And I don't know what form the accident will come, but when you're driving a hundred miles an hour, it's probably not actually the fastest way to get where you're going, because you're likely to have some kind of dislocation, whether that comes in product and labor markets, whether that comes in spiking of interest rates, whether that comes first in a decline in uh,

the value of the dollar. I don't presume to be able to predict, but that we're on a problematic course where anything can happen and none of us can predict markets precisely, but where the balance of risks is very very much on the too much liquidity overheating side. Seems to me to be relatively clear. I think these tendencies are present in many places, but I think they're by far more pronounced in the United States UH than they are in UH the rest of the world. UM. It's

not that extraordinarily low interest rates are unique. It's not that extraordinarily big budget deficits are unique. It's that having them in tandem with an economy that's growing at what people think I expect will be a double digit rate this courter and UM, along with an epic degree of labor shortage, that's what he is. UH. It seems to me the extraordinary feature of UH, of this of this moment.

It would be a very different thing if we were creating liquidity in an extraordinary way to respond to a major output gap. But to be doing this kind end of thing in a labor shortage economy seems to me to be very intensely problem at you mentioned the dollar, I mean I guess one could see there are different

scenarios that come out of this. I mean, the classic scenario for the US growing faster than everybody else sucking in a lot of imports would be that actually the dollar could rise and export problems for the rest of the world that way. But I know, but Ray, you just mentioned that you potentially see the dollar heading down. So is this is there a fundamental threat to the dollar that comes out of this? Yes, the way I mean, I'm just dealing with the mechanics. You know. The way

it works is you sell a lot of bonds. So now who do you sell the bonds to? And when I look around and calculating warms the bonds and what they have to buy, and what the incentives of buying, uh, they're they're bad. And in fact, you can see dollar

selling of bonds. What that means is then the Federal Reserve is in a position of either seeing rates rise because there's not enough demand to meet that in fact, that they start selling it would be a very bad situation, and that they can't let that happen because that would be very bad for the economy and markets and all sorts of things. So we have to keep in mind.

Where we are, we're at the end of a long term debt cycle, and that means that the Federal Reserve will have to do what they did last time, which is to buy a lot more to prevent the interest rates from going up. That's very non cyclical. It's one of those cases where you know, in reserve currencies it's a it's a very dangerous thing. Now you compare that with alternatives, um first best alternatives or other asset classes,

but all so, let's say China, for example. I think the situation that we're in is quite similar to the going from the late seven late sixties into the early seventies when there was a different core inflation rate in the United States versus Germany and Japan. It's different balance of payments situation. We're in a basically a balance of payments deficit. They're in a balance of payments surf bus position. That means that they chronologically worried about important inflation and

there's favorable capital flows. So I think that that's negative for the dollar, particularly against Asian currencies. I have uh raised instincts, but considerable agnosticism on timing. There are classic periods in the early nineties is the one that comes to mind where large budget deficits, it's spurred growth, sucked in capital, and we're associated with an appreciation of UH

the dollar. So I'm not sure of timing here, but I think al and I'm not as confident as Ray as UH in the long term attractiveness of Chinese UH capital markets and indeed of foreign UH capital markets UH to the dollar, but I think the risks are substantial. And one of the things that I hear people say it seems most bizarre to me is they say, now you don't understand UM now or in an era of globalization, and so the inflation process is much stickier, or we

can't get rapid inflation because of globalization. I think the opposite. Because of globalization, we are much more like a small country than we used to be, and that means that the dollar gets into trouble, which it easily could, that the pass through the inflation is going to be more rapid than it would have been UH decades decades ago. So I basically share the kind of concern UH that uh Ray is expressing, just with a bit more uncertainty

about timing. And I guess i'd add one more thing, Uh, Stephanie, and I think it's kind of an important UH point, and it's simplicit in something that Ray said. The really hard monetary policy challenges are not actually moments like the period after leaving or the period a year ago this spray, when there's massive illiquidity and markets are breaking down and it's entirely obvious the direction that policy should move. You need to provide liquidity, and the questions have to do without.

The really hard monetary policy dilemmas are when it's not clear which way to go, when on the one hand you have a falling currency and an excess supply of bonds, and on the other hand you have a weakening UH economy and rising UH inequality and the fear of procession, and you don't know whether you're um cutting rates to respond to the latter problem we're doing tightening things to

respond to the former problem. Those are the really difficult moments in monetary policy where even the direction is not entirely clear, And my fear is that we're setting ourselves

up for such a moment. I think that the fact that will you that they are actively looking to have that overshoot an inflation the change of approach in terms of the average inflation model in order to sort of reset the system and indeed get that wage growth through to parts of the economy that perhaps have not seen it over the last few years, and that that could

be more politically sustainable long term. So so rad do you see that that that is an argument that the FED could make that it's worth some short term risk to achieve that more sustainable outcome. As as I mentioned, UM, I think if you see break even inflation rates goal above three percent or something like that, and you see that spurit, then you have the dilemma of the timing

of the monetary policy. As I said, I'm not particularly worried about that particular inflation, but the other things that worry about there um the whole shift um in terms of the quantity of debt money that's being produced. It goes into great bubbles, creates an enormous amount of liquidity UM and that I think will be manifest by either

a rate rice tracing inflation or or dollar decline. And I think then we also have to deal with the changes in um uh, the political situation, the wealth gap situation. The wealth with the wealth gap is the left right question. Um, there's a lot of conflict in terms of left right politics. There's there's a big move pretty much probably two more left politics, believing that there's not enough fair share of incomes and so on, and those great structural changes that

will have um um effects. The amount of money which is has gone to profits has increased from about six percent of revenue to about of revenue, and that's decreased the share that's gone to incomes. Those things could be structural changes that shift the wealth and income. I think there we're here to those that are going to be more beneficial let's say, two workers, than to um capitalists. I think in general that's a particularly a US issue.

It is a European issue too, although it's a world issue, but it differs around the world. So um, I think those are the bigger issues. That and the rise of China and what the rise of China means, those that I think are the bigger issues. Larry, I mean the global when you say the globalization as an interesting point about with US becoming more like a single a single

country responding to things. But one could argue that the things that globalization was associated structurally with falling inflation for a long time at a period where you also have central banks focusing more on inflation, and you have this sort of shift em bargaining power away from workers. If all of those things are going into reverse, Um, that is potentially more inflationary, but also a better world for for workers, or a more inclusive world, more sustainable politically.

Let me let me take your question a moment ago and then and then come to that, stefanitiely Um. Look, I think the arguments about average inflation targeting and so forth, they kind of have their have their place. But I think we need to recognize when you declare victor when we've got a record labor shortage effect, probably shouldn't be

obsessing about making sure that their opportunities available. When we've now got average inflation over the last two or three years up to two, we don't have the problem of meeting more inflation in order to get to some kind of uh level of average. So I just think we need to recognize the new reality is very different from the secular stagnation reality of two years ago. Look, I am all for a strengthening on a variety of dimensions at the hand of workers. I think we need to

raise the wage. I think we need to re empower the ability to organize unions. I think that you can't read the stories about working conditions in Amazon and not think that something should be happening to re balance things. At the same time, I think you have to recognize that doing all of those UH things, he is going

to bear on the inflation process. It's gonna bear on what economists call the natural rate of unemployment, and you're going to have it have a set of consequences, and you need to factor those in UH in setting macro economic policy. I mean, we had a moment very much UH like the current moment, coming after a long period of no inflation. We had a government that had very expansive desires for what it was going to do. He had a progressive tide sweeping through the country, changing attitudes

on very many fronts. We had that in the nineties sixties, and what we saw was that inflation um rose more

rapidly than anybody anticipated. That a right wing tide in politics was ushers in with the success of elections lags of Richard Nixon and UH Ronald Raven and that what happened in the ultimately did not serve the interests of the progressives who supported it, and you saw a big upsurge with the way in which the United States went off gold and imposed tariffs universally fifty years ago UH this summer, so a return to UH that does not seem to me to be what we should be targeted.

I think Larry and I agree that this is looking more like the late sixties UM transitioning to the early seventies UM, and that has implications for the balance payments and the dollars, so we've covered that UM. I'm more worried about the inflation in UH financial assets and what that means for returns and bubbles that are developing, because there's a massive amount of liquidity around and it's being thrown around so that it's a difficult environment for those

returns to be justified. I think we're building kind of a bubble. So I think inflation in financial assets and so on is UM is an issue related to liquidity anyway you think about it. What's happened is the net worth of UM of of Americans and most people and developed countries is higher than it's ever been. I mean, all of a sudden, it was a big boost the

net income, yet production isn't. So what you've seen is a lot of people got a lot of money which they're still holding, and they put it into the stock market everything and interest rates go down and they borrow, and that is a dynamic that creates a bubble. And that's what I would say is the main the main issue.

Let me just say that there's some division of labor on this panel, and Ray has talked more about financial assets, but I share his UH concern about asset price inflation, and I would say the idea that lower returns have led to higher asset prices, and of course, while that transition is taking place, everybody's enjoying wonderful capital gains. There's been a tendency for people like me and Ray to warn for some years now that long term returns are

going to be lower on assets. And we've been saying that for some years, and people who've been in asset markets have done very very well because even lower UH, even higher capitalization ratios, price earnings ratios, asset price to

rent ratios have been taken. And I suppose some people are probably concluding that the warnings are unwarranted as a consequence of that nobody knows for sure, but my feeling would be that the warnings are now even more valid because the conditions precedent there are the basis for the warnings have become even more true with the passage of time. Both of you have you come in it from different perspectives.

You may put different shades on it, but you clearly think that there's some potential bumps coming down the road, or risks that we need to be much more concerned about. Larry, I know you wish that that stimulus in the US have been spent on different things at the beginning of the year that might actually support the supply side of

the US economy, UM and other things. You know, with the mistakes, if you like, have already been made in your view, But what's the best response, assuming that the FED and indeed other policymakers accept your analysis, what's the most constructive response? Now that wouldn't it self caused a lot of volacility and upset. The necessary responses probably will

in the short run cause some volatility and upset. But I'd like to see signals that overheating, liquidity, and bubbles are now seen as major risks facing the American economy, and I'd like to see a program of structural improvement for the supply side that is fully paid for by tax increases as the response, and a reduction in the amount of populist transferring of UH cash to large routs

UM in the economy. I think we know that I probably Larry and I agree on just saying it very simply, UM, there's a ton of money around UH, and about your money goes down and how much it goes down relative to goods and services and how much it goes down to financial assets. It's going to go down to both, and that really raises financial assets and it changes capital flows in important ways. I think that it's easy to say that the fit should tighten, and I think that

they should. They put on the brakes in a little bit. But I think you'll see a very sensitive market and a very sensitive economy because the duration of assets has gone very, very long, and just the slightest touching on those brakes has the effect of m hurrying markets because of where they're priced and also UM passing through to

the economy. We have to keep in mind since the cyclical peak in every cyclical peak in interest rates and every cyclical drought has gone steadily below the one, but for it until we've had zero, and then every quantitative easy in other words, purchasing of money, buying of money, and purchasing the bonds has been greater than the one before it. That is a debasement of the value of

the currency in one way or another. So I think that I think the challenge of the FED is going to be able to balance those in a highly political sensitive environment because of this wealth class class. So it's a difficult position for the FED. I think, well, that's um, that's that's two perspectives we've had on the what what

leadership in a post pandemic world looks like? And I know we've we've we've we've focused a lot on this financial piece, but it clearly has huge global implications as well as implications for the path for the US economy is on for the next few years. So thank you very much to both of you. Rate Value and Laurence Summers will appreciate you you're joining us. That's it for

this episode of Stephonomics. We'll be back with more reporting on as well as analyzing of the global economy next week, but you can get more in the meantime from the Bloomberg Terminal or website, and by following our Economics on Twitter. This episode was produced by Magnus Hendrickson, with thanks to Ray Dalio, Larry Summerson, and Lisa R. Shamble. Mike Sasso is executive producer of Stephonomics and the head of Bloomberg Podcast is Francesco