The Great Wealth Transfer: Understanding the Current State of the US Economy

In the US and globally, the central governments' balance sheets and income statements are bad and getting worse because the governments ran and are still running large deficits. They also have big losses on the government bonds they bought to fund the government debts and, with their balance sheets where they are, are losing money where interest rates are. Said more simply, central governments took on a lot more debt (so their balance sheets deteriorated) and central banks printed a lot more money (which caused inflation to rise) and bought a lot of the debt to get money into the hands of the private sector which, as a result, is now in relatively good shape financially.

This coordinated maneuver led to good balance sheets and income statements for households and businesses but bad ones for the government.

The charts shown above demonstrate real household wealth along with the real asset and liability levels that make that up. As you can see, real debts were flat and real assets went up so net worths soared. They soared to new highs in response to the fiscal and monetary stimulations and declined a bit due to the Fed's tightening but remain very high by historical measures. And the household sector's borrowings, which, as you can see, picked up during the easings and declined during the tightenings.

Although the real economy is in pretty good shape at the moment,the government's bad financial position will become a problem later on. History shows that this type of situation has happened many times before, and it typically occurs after Monetary Policy 1 and 2 have been implemented. (MP1, which is monetary policy via interest rate changes without big central bank balance sheet changes - i.e., without the "printing of money" and buying of financial assets, and MP2, which is the central bank's "printing of money" and buying of financial assets, also known as "quantitative easing," or QE.) The current situation is referred to as Monetary Policy 3, in which central governments send money directly to those who need it most. While the improved financial condition of the private sector has lessened the impact of the Fed's tightening, there may be future issues to consider.

Over the near term, a mild stagflation period is most likely if there isn't a significant supply/demand imbalance in which the amount of government debt sold overwhelms the amount of demand. However, over the long term, it is virtually certain that central governments' deficits will be large and highly probable that they will grow at an increasing rate as debt service costs and other budget costs compound upward. This leads to a self-reinforcing debt spiral that could lead to market-imposed debt limits and force central banks to print more money and buy more debt, potentially leading to adverse effects on monetary policies directly or indirectly. Central banks' losses are not yet affecting monetary policy but could follow the classic late big cycle dynamic, which destroyed the value of Germany's money in the 1920s and 1940s. Germany and the UK are now considering how to handle central bank losses, and other central banks are contemplating what to do under this type of scenario. This situation might cause political reactions that threaten the central bank's independence and lead to more political controls over it.

Dalio suggests that in addition to the developments and circumstances of different countries, sectors, and businesses being more disparate than usual, there are other significant structural changes underway. These include:

• The domestic conflict force, which will become increasingly powerful over the next two to five years, particularly following the upcoming US elections.

• The international conflict force, which also has the potential to be extraordinarily forceful over the next two to five years.

• The acts of nature force, including the massive climate costs that are certain over the next several years, such as the abandonment of brown energy for green energy, the rebuilding of infrastructure, and the costs associated with these changes themselves.

• The force of technologies, which will undoubtedly have both positive and negative effects and will be highly disruptive.