- From trade wars to capital wars
- The pivot to hard currency
During his appearance at the World Economic Forum in Davos, Switzerland, billionaire Ray Dalio opined that the current monetary order is breaking down.
“The monetary order is breaking down. What I mean by the monetary order is that fiat currencies and debt as a store hold of wealth is not being held by central banks in the same way. And that there was a change,” Dalio said.
From trade wars to capital wars
Dalio argues that the geopolitical friction seen in recent years has escalated beyond simple tariffs. He believes that we are entering a phase of “capital wars,” where the U.S. dollar’s dominance is threatened because foreign nations are becoming reluctant to hold American debt.
“Let’s just look at the fact that on the other side of trade deficits and trade wars, there are capital and capital wars. We know that both the holders of US dollar-denominated debt, which is money, and those who need it (the United States) are worried about each other. If you have other countries that are holding it and they’re worried about each other, and we’re producing a lot of it, that’s a big issue.”
He further warns that this reluctance to buy U.S. debt isn’t just a theoretical risk but a market reality that demands immediate attention.
“You can’t ignore the possibility that capital wars—in other words, maybe there’s not the same inclination to buy US debt. We at least need to talk about those possibilities and find out who is buying and selling what, and what is behind these market movements.”
The pivot to hard currency
According to Dalio, the “smart money” has already begun to front-run this pivot. He points out that gold outperformed the tech sector last year, specifically because sovereign entities are aggressively accumulating it.
“The biggest market to move last year was the gold market, far better than the tech markets and so on. The US markets underperformed foreign markets because of the factthat you could see it in the numbers of the central banks.”
Debt becomes a liability rather than an asset when there is geopolitical uncertainty. Even allied nations are waking up to the counterparty risk inherent in holding another nation’s bonds.
“When you have a certain amount of debt… and that means others are holding it as debt assets, such as bonds… and you have to sell a lot more, there’s a supply-demand issue. Also, when they’re holding that, they have to believe in that in terms of the supply and demand. And when you have conflicts, international geopolitical conflicts, even allies do not want to hold each other’s debt. They prefer to go to a hard currency. This is logical, and it’s factual, and it’s repeated throughout history.”
The ultimate consequence, according to Dalio, is the debasement of the currency.
“We’re increasingly buying our own money. That’s the lesson of all this.”