I am an economist by education and that means I can point lots of directions simultaneously. Candidly, they call it “the dismal science” for a simple reason: The term “the dismal science” is based on the pessimistic predictions of Thomas Malthus, (granted 1834 is a long time ago), who believed that population growth would always outpace food production. Malthus’s theories predicted that starvation would result in unending poverty and hardship. Yup, he was not a super cheerful guy. But I digress…
I am a fan of many old and new writers on the subject of the economy and a contemporary author I like is Ray Dalio. He founded Bridgewater Associates back in 1975 and has grown it to over $171 Billion in AUM – putting it in the top tier of so called hedge funds, (more on that term in a minute).
His most recent book, Principles for Dealing with the Changing World Order: I’ve referenced before it’s worth the read – in fact, it’s an easy read with a novel approach offering RED, Highlighted and Regular text so you can breeze thru it and go back for more detail. I reckon his #1 quote is “No system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.” and this simple fact goes back hundreds – if not thousands – of years. The peoples that have survived these failures are those that have prospered. And one key thread to be thinking about is the concept of “reserve currency”.
Let’s ask our mutual friend ChatGPT first:
Ray also said, “Having a reserve currency is great while it lasts because it gives a country exceptional borrowing and spending power and significant power over who else in the world gets the money and credit needed to buy and sell internationally.”
But wow, when that changes, challenging for whose that for years your dollars, drachma or dinar were the way things were paid for ‘round the globe. You were the de facto standard for most transactions from oil and gas to the stuff filling the shipping containers in every port on earth. But when it changes, it’s like your Visa card is no longer being accepted at the grocery store…you’re forced to scramble for another form of payment and that costs you more money – basically decreasing the intrinsic value of your currency since you now have to buy the new reserve currency.
So let me close with two things: First, the shift of the dollars to some other reserve currency, with the Chinese RMB in the lead, will be very expensive for those of us holding dollars. And second my promised comment about the term “hedge fund”. Some might focus on the term “hedge” as in hedging your bets vs. the British hedge hog.
Nahhh, it’s just a bunch of investors pooling their money hoping the women and men at the other end of the pool are smarter than they are and can use the weight of that pool to make an even deeper pool whose depth and weight impart strength. So I’ll quote Bobby Axelrod: “There’s a small group who can do the math. There’s an even smaller group who can explain it. But those few who can do both, they become billionaires.”