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Ray Dalio Predicts a "Controlled Depression" for 15 to 20 Years

In a recent speech made at the Council on Foreign Relations in New York, famed hedge fund manager Ray Dalio suggested that because there is so much debt in the world, what we are faced with will be 15-to-20 years of what he called a “controlled depression.” He said he thinks the world is so much leveraged (debt to income) that the natural direction for the economy is into a deflationary depression. But the Fed and other central bankers will continue to pump enough money into the system to keep the economy from catapulting downward into the kind of bottomless pit that Robert Prechter sees with the Dow on its way below 1,000.

In other words, Dalio is suggesting the status quo will be able to hold the existing system together with its high levels of unemployment and lower living standards for the middle class for the next 15 to 20 years until the enormously high debt/GDP levels fall back into some more normal range of 175% to 225%. The chart on you left shows just how far out of whack our debt/GDP has risen, thanks in no small part to Nixon detaching all money from gold in 1971.

I hope I’m wrong. I hope Dalio is wrong and that somehow we can emerge into a situation of healthy growth immediately. But I’m afraid Dalio is right in suggesting it will take a lot of time for us to reach normal leverage ratios. In fact, I’m most afraid that Dalio is actually being optimistic that the status quo can prevail. I’m not sure the social pressures will not explode and force a major change in the global financial architecture, especially if we get a massive decline in equity prices. In any event, it seems to me that the Basel III proposals are providing the handwriting on the wall that we are heading forward to some formal remonitization of gold. And as John Butler has proposed, the dollar price required to achieve that would have to be at least $10,000/oz.

As always, it is nature’s force via the markets that ultimately dictate policy. What has been happening is that European banks, which are in trouble thanks to bad loans, need more equity. How do they get it? Since the Basel II policy only allows 50% of the market price to be considered as equity, they have been selling their gold and buying Treasuries valued at 100% for capital calculations. But now suppose that as Moody’s is proposing, the U.S. Treasuries are downgraded. Don’t you suppose there could be a flood of money out of Treasuries and into gold? And given the enormous size of the Treasury markets compared to the gold markets, if that happens, what do you think the price of gold might be? Indeed if that happens a $10,000 gold price may turn out to be a conservative price.

Of course, that is all speculation on my part. What is not speculation however is the steady rise in the “real price” of gold as measured against the Rogers Raw Materials Fund. As the chart on your left shows, an ounce of gold has risen from about 17% of the Rogers Raw Materials Fund in the summer of 2008, just prior to the Lehman Brothers failure to 44% in March of 2009. It has spiked as high as 49.5% with the most recent European financial crisis, but as you can see, as the great deleveraging process has gotten under way, gold has become much more precious in terms of how much energy, base metals, food items and clothing items it will buy. So regardless of how this whole global fiat currency mess unfolds, one thing I am eminently confident about is that gold will continue to get more precious as confidence erodes slowly (in a continued controlled depression) and/or if God-forbid the bottom suddenly falls out and the whole world’s financial system crashes.