Ray Dalio and Tim Geithner on an End of the Cycle World

An unlikely pair of long-term financial thinkers offered a surprisingly similar, if generally grim view of the economic present and future atDelivering Alpha 2016.Ray Dalio, founder of the largest hedge fund in the world, Westport, Connecticut–based Bridgewater, joined Tim Geithner, the former Obama Treasury Secretary and New York Fed chief during the financial crisis, to wrestle with the question posed by CNBC’s Andrew Ross Sorkin: Where is the economy and what is a realistic U.S. growth rate?

The result was a fascinating contrast of personalities and experiences — the ruminative and occasionally impenetrable hedge funder Dalio, and the preternaturally young-looking, tightly wound technocrat Geithner. The pair were eerily aligned, particularly in the view that the near-term future would be seriously challenging.

Dalio, who pegged real GDP growth at the current 1.5 to 2 percent, answered that question by arguing that we’re clearly at a place where it has become much more difficult to squeeze out larger gains from the debt cycle. He laid out a cascading series of real limits: to economic stimulus, to alleviate the wealth gap, to continue to lower interest rates, to generate benefits from quantitative easing. Dalio suggested that Japan is furthest along in this dynamic, followed by Europe, then the United States, then China. Historically, he compared this period to 1935, after the Crash of 1929 and the Depression, when, as he noted, the phrase “pushing on a string” was invented. He linked those economic constraints to the rise of populism, nationalism and income inequality as a global phenomenon.

That said, Dalio did not think it wise for the Federal Reserve to raise rates now. “The risk,” he said, “is all on the downside. We’ve never been in a world like this before.”

Geithner saw a similar period of lower GDP growth. He touched on lower rates of productivity dragging down growth, but “the scariest thing,” he said, “is the politics,” notably a “scary erosion of the pragmatic center,” perhaps a gesture in the direction of Donald Trump. Geithner, now president of Warburg Pincus, denied that the system is incapable of producing better outcomes, particularly since policymakers remain so far from the frontier in terms of policy, in part because of the difficult politics. On the upside, Geithner noted, corporation have been able to raise a large amount of capital very cheaply, and the financial reforms after the crash, while messy and imperfect, still has brought a measure of safety and stability to the financial system.

Sorkin then sent them on a tour around the world. On Europe, Geithner offered the hope that the members of the euro zone would react to the Brexit crisis by taking the necessary steps to hold the euro zone together, much as they did during the financial crisis. On China, Dalio sketched out four great tasks facing China’s leaders: a debt restructuring, an economic restructuring, capital market restructuring and balance of payments issues. Can they do it? “If you get to know the [Chinese] leadership you find that they are very capable. Geithner agreed, adding that the Chinese leadership has “degrees of freedom that are the envy of the rest of the world,” in an economic system dominated by the state and banks. “They have a lot of tools.”

Sorkin did not let Dalio go until he commented about recent controversies over the “radically transparent” culture of Bridgewater. “This is an unusual culture,” he said. “Some people hate it; others could never work anywhere else.”

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