Bridgewater Associates founder Ray Dalio disparaged central banks while sharing the stage with monetary policymakers at the World Economic Forum’s annual meeting in Davos, Switzerland.
The founder and chairman of the world’s largest hedge fund, during a panel on currency and monetary policy issues, argued that balancing growth and inflation is a difficult task that could be done better.
“Central bankers never get it right, because it’s not a perfect balance,” Dalio said. “That’s why we have recessions.”
More bitingly, the hedge fund manager suggested that the central banking community did not fully understand the forces driving global economies. He pointed to the failing efforts to lift persistently low inflation as an example.
“Technology and the nature of that is changing completely the relationship between inflation and growth,” Dalio said. “Everybody’s just so focused on growth and that linkage to inflation, but yet, after all this quantitative easing and all of this struggling, they’re still struggling to get a core inflation rate in the United States, Europe, and Japan of 2 percent.”
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Dalio shared the stage with Benoît Coeuré, a European Central Bank executive board member, Swedish Central Bank deputy governor Cecilia Skingsley, UBS board chairman Axel Weber, and Min Zhu, chairman of the National Institute of Financial Research.
At a minimum, Dalio argued that central bankers need to admit that they can no longer rely on traditional models for managing inflation rates — namely, the Phillips curve, a measure developed in 1958 of the supposed inverse relationship between unemployment and inflation.
Coeuré defended the ECB, pointing out the “huge effort” behind warding off Eurozone deflation risk. He agreed with Dalio, however, that the bank needed to find the right policy balance, but declined to say if the ECB would permit inflation above 2 percent to help prevent a recession.
“We want to be patient and prudent along that road,” Coeuré said.
During the panel, Dalio also questioned the U.S. dollar’s future as a reserve currency and discussed the next recession.
He saw a “reasonably high probability” of an economic downturn before the next U.S. presidential election, resulting from a bear market in bonds. Given the widening gap between rich and poor, Dalio suggested that such a situation would be particularly damaging.
“We’ll have to assume that won’t be a pretty picture,” he said.