I just finished reading the new book by Ray Dalio about the cyclical nature of financial and debt systems, and how political events, pandemics, and natural disasters may impact these economic cycles. Ray Dalio is one of the most successful hedge fund managers turned researcher and historian, who made his name by predicting the financial crisis of 2009. His hedge fund, Bridgewater, has over $200 billion of assets under management.

In his view, our current situation can be described as a mix of high government debt, accelerating income and power gaps between rich and poor, lack of good governance in politics, which leads to inefficient resource allocation, and elevating influence of populistic leaders.

In most similar historic situations, such mix resulted in massive government defaults and debt restructurings, high inflation, and significant changes in political powers (think the early 1930s or 1970s).

Ray Dalio now predicts shrinking of the American economic dominance, the decline of the USD as the world reserve currency, exit of many financial assets and projects out of the US as a jurisdiction (and potentially into cryptocurrencies and other alternative asset classes that are not so easy to force-sell, restrict or tax for a potentially populistic governmental policy-makers).

The good news is that during most economic crisis situations most people remain employed and most companies don’t close down overnight.

The interesting aspects of the current inflation are: 

• Interest rates cannot be further reduced, since they are already negative and have been negative for years, which means there won’t be an easy solution to curtail it;
• The population does not immediately notice inflation caused by governmental money printing. “People will look at how much they’re worth in nominal dollars, not in inflation-adjusted dollars. So they’ll say, ‘I’m safe,’ as they will lose 4, 5, 7 percent per year.”
• Homeowners may see their home values increase, old fashioned debt-financed corporations see their liabilities going down.
• Commodity prices and gold typically go up.

What does it mean for FinTech and the financial industry in general?

• don’t hold too many USD-denominated financial assets;
• don’t hold government debt as assets;
• should there be a geopolitical conflict between the US and China, China is more likely to win;
• expect that US investors will keep moving their assets and projects oversees;
• expect US (and other) lawmakers to introduce new restrictions around capital controls and additional taxes;
• expect more populism in politics worldwide.

I know, this has very little to do with compliance but we are all in the FinTech business, which is a business of moving money, making financial and investment choices, considering jurisdictional and budget alternatives, and helping our customers transact worldwide. This book has been incredibly insightful for me as a business owner, and I cannot recommend it enough. 📖