For years, contrarians have warned about central banks’ god-like power over the economy and financial markets. Their apotheosis abilities have been on full display since the market meltdown in March. Since then, central banks have engaged in unconventional and unprecedented monetary policy, such as unlimited quantitative easing and buying corporate debt.
This will inevitably result in a moral hazard and erase the “free” from free markets.
Ray Dalio, the founder of the world’s largest hedge fund, agrees with this analysis, arguing that central bank’s recent actions mean capital markets are no longer free.
Speaking at the Bloomberg Global Asset Owners Forum, the head of Bridgewater Associates purports that today’s economy is driven entirely by central banks “and the coordination with the central government.”
As a result, “capital markets are not free markets allocating resources in traditional ways.”
He also made the obvious statement that “you’re going to see central bank balance sheets explode, they have to because the choice is the sinking ship.” Dalio added that investors should choose stocks and gold over bonds and cash since they offer a negative return of return amid central banks’ money-printing ways.
But here is where he gets it wrong. From Bloomberg:
“Over the last several months, Dalio has written a series of extensive essays that have called for reforming capitalism so that it benefits everyone.”
But it is not capitalism that needs reforming. It is the government that needs to be reformed. Nothing is wrong with free-market capitalism since it has lifted more people out of poverty than any other system in the world.
On one hand, he alludes to central banks making capital markets no longer “free.” On the other, Dalio recommends reforming capitalism. There is a lack of consistency.
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