Risk on the rise as political leaders give in to mob rule
Risk on the rise as political leaders give in to mob rule
Ray Dalio
FT, October 25, 2011
~~~
We are in the midst of a deleveraging, we are nearly out of ammunition and we are at each other’s throats. Being in a deleveraging and nearly out of ammunition is a very difficult position to be in. But, being at each other’s throats is our biggest problem.
Our character and our political and social systems are now being tested in ways that have typically been tested in past deleveragings. In deleveragings bad economic conditions typically lead to emotional reactions, social and political fragmentation, poor decision-making and increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtful leadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcing downward spiral.
Frustrations increase, the established ways of doing things come under attack and frustrations over the ineffectiveness of government creates the perceived need for someone to gain control of the mess. Plato spoke of this dynamic. It was the reason Hitler was elected in 1933.
In our opinion these types of risks are now emerging and should be taken into consideration when trying to figure out what may lie ahead. Rather than trying to resolve disagreements through thoughtful discourse, people are now trying to grab power to beat and suppress their opponents. Tensions between the rich and the poor, capitalists and socialists, those in and out of power and different factions in each group are now intensifying in a manner that is classic in deleveragings. Politicians who are fighting for power in a political year are fanning the flames and are increasingly willing to do risky things (like shutting down the government) in pursuit of their missions and popular support.
This growing populism will have important implications for monetary, fiscal and trade policies and will significantly increase risks of a markets downturn and a global depression.
Regarding monetary policy, the mob is at the gates of the Federal Reserve and wants to grab control while those on the inside are in disagreement about what should be done. Fed chairman Ben Bernanke and those who helped him save the country from depression are now under siege. These challenges are being faced in different forms by most central banks at the same time as they are nearly out of ammunition – i.e., their capacities to ease are very limited because they cannot stimulate private credit creation and because they cannot get money in the hands of people who will spend it. For these reasons there is greater risk that central banks cannot save us as they have always saved us in the past.
The battle between the left that wants to tax the rich more and the right that wants to cut entitlement spending is at a fierce stalemate that is likely to intensify in more scary ways. As a result, fiscal policy is unlikely to be supportive to economic growth.
With high unemployment and growing anger, the “mob” is blaming the foreigners who “took their jobs,” especially the Chinese who they say are “manipulating” their currency to “compete unfairly”. And since politicians want popular support, they are navigating this issue to gain political benefit (e.g., to put the US President in the position of having to choose between the political suicide of vetoing Senator Charles Schumer’s currency bill and clashing with China) rather than to approach this difficult issue calmly and analytically. Trade flows and capital flows are increasingly being looked at by all sides as possible weapons in an economic war. As a result, the risks of bad surprises in trade and capital flows are heightened.
Mobs are at the doors of bankers and others in the financial system, screaming to politicians to put these people in jail while the vote-seeking politicians are fanning the flames rather than reminding people that the legal system is the way these people should be judged. Since banks are levered about 15 to 1, it doesn’t take much of a debt problem to cause them solvency problems, and since in deleveragings debt problems are big, there is significant risk banks will run out of equity again and the fury against them will intensify. For these reasons risks to the global banking system are much greater than normal.
While we hope that most people and their leaders will approach these difficult challenges calmly and collectively, we would not be meeting our fiduciary responsibilities if we bet on this happening without clear evidence of it. We are not alone in having and expressing our concerns in what has come to be known as “risk-on” and “risk-off” market movements.
If we calm down and work together to properly manage this difficult situation – for example, if we can properly distribute both the austerity and the increased efforts that are required to manage our debt burdens – we can get through this deleveraging without great pain. If we can’t, we may experience an economic, social and political collapse.
Ray Dalio is founder of Bridgewater Associates
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October 26th, 2011 at 8:34 am
Very helpful Ray, referring to people as “mobs”. Fuck you.
October 26th, 2011 at 8:37 am
Ray misses the point – “vote-seeking politicians are fanning the flames rather than reminding people that the legal system is the way these people should be judged”
No, we are reminding the politicians that they must see that the legal system is actually exercised in this case. it’s not about money, it’s about justice
October 26th, 2011 at 9:09 am
Ray has failed to mention the cause of the so called ‘mob’ rise.
It is called Corporatism, Corporatocracy, Corporate Welfare, Crony Capitalism ….
The utter disgust with the ‘system’, being expressed by the ‘mobs’ and defined as ‘populism’ by some, is a direct result of the abdication of justice by those seeking to keep the status quo intact.
October 26th, 2011 at 10:10 am
Reading between the lines: “Occupy Wall Street is a populist mob that favors socialism and putting bankers into jail without due process. Also, Hitler!”
October 26th, 2011 at 10:20 am
Ray seems to be scared of something…what is that Ray? Scared that maybe, just maybe, your social class is in for a little realignment in the future? You think you people would all be embracing the idea of taxing you more, rolling in some regulations etc just to preserve yourselves instead of marching to the guillotine as in the past. But no, you’ll all be like Qaddafi trying to desperately cling on while the “mobs” are at your gate.
And remember the “mobs” are here, by definition of your party “democratic rule”. I think that’s what it’s called here too, if you want to get all technical. I don’t know about you Ray, but I’m willing to pay more in taxes just to keep the status quo…so perhaps you ought to think about the next election carefully.
October 26th, 2011 at 10:31 am
Yes, let’s “calm down” and “work together” with liars, thieves, and sociopaths.
I think woolybear said it well.
October 26th, 2011 at 10:38 am
Give the guy a break…you are proving his point…
I completely agree with Moss and Just an Australian comments on Cleptocracy and Justice…and it’s good that it’s being expressed at last in popular movements…
Problem remains that neither the Tea Party nor the OWS movement have much clue about what’s wrong and how to fix it…and if politicians start (or do already as seen on the Rep side with the TP) trying to find “solutions” where the wind blows from their supporting movements, we’re not going to solve our problems…amd that’s what he is saying…
Injustice and hardship for the masses tend to end up badly…think the “Terror” period in France during the revolution and Napoleon afterwards…think Bolsheviks in Russia…think Hitler in Germany…the lists is endless…when the social contract breaks down, temper rises, chaos ensues, and a new breed of oppression rises…real solutions will come through thoughtful analysis of our problems not through name calling and scapegoating…
I, for one, fear that the window is closing…close your eyes and find your scapegoat if you will…it will not get us anywhere good i can promise you that…
October 26th, 2011 at 10:52 am
Looks like the reviews are in and Dalio’s argument is a loser.
October 26th, 2011 at 1:10 pm
What the first commenter said.
Prosecute frauds.
Apply the bible’s prohiobitions to usury.
Proud member of the mob.
October 26th, 2011 at 2:14 pm
Paulie46 — I think you and some of the other folks here might be missing the point of Dalio’s post. I don’t see this as a political argument or call to action to round up the hippies, it looks more like a warning to investors to prepare for financial turmoil unless cooler heads prevail in the near future.
October 26th, 2011 at 2:47 pm
All that is missing is the “class warfare” meme. While I respect his investing prowess, Dalio is talking out of both sides of his mouth with his inflammatory and clueless rhetoric.
Notice not one word that blames the very banks, their lobbyists and congressional cronies that were the real blame for this crisis.
Politicians, bankers, and their media toadies are calling OWS “mobs, dirty hippies” etc., and now trying to link them to Acorn. Any and all efforts to discredit them and the cause are being trotted out because these entitled people are finally feeling fear after 30 years of indiscriminate looting of our people and the Treasury. Nothing is too base, untrue, or crazy to be used to quell these “mobs”.
The anger by the 99% is because it is now readily apparent that the ruling class has stolen everything they can and now want the 99% to pay for the rest of their lives, and their children’s lives for the massive debts created by the ruling class. The 99% are angry because so few of the criminals who caused this problem, in banking and government will ever pay for their crimes.
Obama sided with these criminals in declining to allow prosecution to the fullest extent of the law and now obviously Obama and his administration are crapping in their pants as illustrated by the student loan olive branch. One trillion dollars in student loans, other wise known as “a lifetime of debt” can make people desperate enough to do anything, coupled with high unemployment and few future prospects and things can get out of hand pretty quickly.
Who can be trusted to keep the police, their jackboots, tear gas, and vicious attacks in check? Are we going to have a Kent State type massacre before they are finished?
The 1% have zero interest in working with anyone about anything, unless it is for more tax breaks for the “job creators” and corporations. Dalio’s hollow rhetoric about calming down and working together is ludicrous. It is too late for that.
October 26th, 2011 at 2:55 pm
@FlourChild,
No, we get Dalio’s post. It is not a political argument as such, but an attempt to put the blame on the “mobs”.
Prepare for financial turmoil? Oh, please. What have we been going through since October, 2007? Yes, he is putting out a warning to the 1%, run for your lives! Given his investing record, I would assume that he is very calculatingly talking his book.
from the wiki:
According to The New Yorker he (Dalio) is the 55th richest businessman in the world, with a net worth of US$6 billion as of 2011.
October 27th, 2011 at 4:34 pm
Oh, for the days when the less than wealthy spent more time raising their lot in life and less time searching for government benefits. Therein lies a disparity of the disparity.