What does it say about an economic system when some of its wealthiest, most prominent beneficiaries are coming out and declaring that it is a failure?
Among the latest on this growing list of disillusioned capitalists is Ray Dalio, founder of Bridgewater Associates, the largest hedge fund in the world. (Hedge funds are partnerships of investors who pool their money to pursue high-risk, high-reward investments.)
“Because the ‘trickle-down’ process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken,” Dalio, whose net worth is estimated at US$18.7 billion, wrote in a LinkedIn post this week.
It began with the financial crisis a decade ago, when central banks around the world began printing money by the trillions in order to stave off financial collapse. The banks used that money to buy bonds (mostly government debt), putting huge amounts of cash into the hands of large investors, like banks and wealthy individuals.
Those investors were supposed to spend that money, which would have put it into the consumer economy and resulted in job creation and that famous “trickle-down” effect. But it hasn’t worked.
“The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it,” Dalio wrote.
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And so they have invested it ― driving up the stock market to dizzying heights even as wages stagnate in the real economy. The S&P 500 stock index hit an all-time high this week, with investors pretty much ignoring the economic slowdowns in Europe and China, and seemingly convinced that the U.S.-China trade war is about to end.
Like many other market observers, Dalio has noticed that stock prices no longer have much to do with the health of the company the stock represents ― markets move depending on whether or not investors expect central banks like the U.S. Federal Reserve to flood the market with even more money.
In the bond markets, there’s so much money floating around that investors are willing to accept less and less return on the money they lend. For many government bonds, especially in European countries, the returns are below zero ― a negative interest rate.
Dalio says investors are willing to accept negative interest rates ― getting back less than they lent ― “because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks...”
So the money rotates around the financial system, from central bank to investor and back again, without passing through the hands of “regular people” ― the wage earners who depend on that capital for their income.
This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate. Ray Dalio, Bridgewater Associates
And while those who have wealth are able to borrow virtually for free today, those without wealth can’t access the capital to improve their situation ― a situation that “contributes to rising wealth, opportunity, and political gaps,” Dalio wrote.
He says the whole situation is likely to get worse because governments around the world have been borrowing large amounts, and those amounts will get even larger in the next economic downturn.
“Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money,” Dalio wrote.
“This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate....”
In an interview with CNBC this week, Dalio said he isn’t forsaking capitalism for socialism, but the market system has to be “re-engineered.”
“We have a problem. The problem really has to do with equal opportunity. You have to create productivity to raise wealth. ... You have to increase the size of the pie and you have to divide it well.”
CEOs call for reforms
He is among a growing list of prominent capitalists who say the inequality trend has gone too far, and needs to be addressed before it tears apart the social fabric.
In a New York Times op-ed last month, Salesforce CEO Marc Benioff called for a “new capitalism” that would prioritize sustainability and equality, and called for higher taxes on the wealthy (something that has become a priority for many of the Democratic presidential candidates in the 2020 race, as well).
“Capitalism, I acknowledge, has been good to me,” Benioff writes. “But capitalism as it has been practiced in recent decades — with its obsession on maximizing profits for shareholders — has also led to horrifying inequality.”
It’s time for a new capitalism — a more fair, equal & sustainable capitalism that actually works for everyone and where businesses, including tech companies, don’t just take from society but truly give back and have a positive impact. Values create value. https://t.co/4AQzBYS6hd
— Marc Benioff (@Benioff) October 14, 2019
Benioff joins such prominent names as billionaire investor Warren Buffett and JPMorgan Chase CEO Jamie Dimon in asserting that capitalism needs reforms. In a sign of how widespread this belief is becoming at the top echelons of business, nearly 200 CEOs signed a letter this August declaring that companies should no longer put profit above people.
Yet, for all the declarations, there are very few specific ideas, beyond raising rich people’s taxes, for how to fix capitalism ― specifically, the central bank-driven debt trap the world has gotten itself into.
Dalio concluded his missive with a declaration that our economic system “is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.”
Yet what that shift will look like is still anyone’s guess.