Ray Dalio on COVID-19

Ray Dalio of Bridgwater Associates made a virtual TED appearance to discuss the context and consequences of this current COVID19 crisis. I’ve tried to paraphrase his ideas in this article.

What are the consequences of COVID19?

To imagine who will be affected and how, globally, one has to think in terms of incomes and balance sheets, and realize there will be holes in both.

The response we are seeing, as in similar historical situations such as 1930 to 1945, is the creation of money and credit. Who are the major producers of this money and credit? The United States and Europe. The US Federal Reserve is buying Treasury’s debt, and the Treasury is distributing that money primarily to Americans. The Europeans are doing the same. The European bank is smaller, as the world runs on about 70% dollars.

It’s important to observe that there aren’t many banks around the world, and so the rest of the world will have holes that are not filled. Much of the world will not get the money and credit being created, and this will result in disparities. This question of who gets what, and the resulting wealth distribution is a defining moment.

Defining moments repeat

Such defining moments happen every 75 years or so, and generally occur as the result of four forces that drive economies.

  1. Productivity — This comes from people learning, investing and doing things well. It results in slow growth, 1% to 2% per year. It’s not volatile, because knowledge isn’t volatile. It improves the quality of our lives.
  2. Short-term debt cycle — This is the business cycle. Recessions and expansions, that are about 8 to 10 years in duration.
  3. Long-term debt cycle — These happen with a periodicity of about 50 to 75 years, and whose end are marked by disruption, in which new types of money and credit emerge. The last was 1945, with the end of WWII and emergence of the Bretton Woods monetary system. This created the new world order, the American world order, that we have today, in which 70% of the world runs on the US dollar.
  4. Politics — This is all about how we deal with each other. Internal politics are how we deal with wealth and value gaps. Do we have a common national mission, or do we fight over wealth? Internal struggles lead to revolution, peaceful or otherwise, and shifts in wealth. External politics happen between countries, as rising powers challenge existing ones, producing risk of wars where cooperation isn’t achieved.

Are we headed towards a global depression?

Yes, but with caveats, because that’s a loaded term, often used for fear mongering. What do we actually mean by a depression?

  • Between 1929 and 1932 we had a large drop in the economy, and double-digit unemployment. Are we like that today? Yes.
  • Back then, they printed a lot of money. Interest rates hit zero. Are we like that today? Yes.

So this is not a recession. It’s a structural breakdown that we’ve seen many times in history, and we’ll see the same four levers used in response:

  1. Cutting spending. Austerity.
  2. Debt restructuring, forgiveness.
  3. Redistribution of wealth through taxation.
  4. Printing of money.

Will those things get us out? How will they be balanced? These are the open questions. What we do know is that the greatest force we have is our capacity for inventiveness and adaptation, if we can cooperate.

We also know that when we emerge after two or three years into a new world order, that the restructuring should make us healthier. The people who haven’t saved, or those who have prioritized luxury over saving will face a reckoning, and society will adapt/evolve towards healthy behaviors.

Has the market failed to recognized this?

This is something we can’t know. What we do know is:

  • Developed markets are off 20%. Emerging markets are off 45%, as they won’t benefit so much from the new money and credit being created.
  • We’ll see a huge restructing, and it will be defined entity by entity. For example, we will some some hospitals go bankrupt. Supply lines will change. What it means to be self-sufficient will change.
  • In the crisis of 2008, we had banks with leverage that faced insolvency when things went south. Governments decide which are systemically critical, and then create money and credit to keep those alive. Those not systemic are allowed to fail. This current crisis is more complex. There are banks, but there are far more affected entities beyond banks. All those little businesses. Who will we save, and how?

What kind of industries have the best prospects going forward?

  1. Those that are stable —The lifelong meat & potatoes industries, that are not leveraged.
  2. The innovators—Those who can adapt and innovate and don’t have balance sheet problems. They will be the big winners.

What should an average investor or 401k holder be thinking?

Investors must understand they will not be successful trying to “play the game”. Being successful in the market is more difficult than winning gold medal in the Olympics. Nobody thinks about competing in the Olympics, but everybody feels they can compete in the markets. This is the very worst thing you can try to do. Don’t try to time the markets, chase winners, or avoid losers.

So what is the most important thing to do? Be diversified. Have some stocks. Have some bonds. Have a bit of gold. Have a bit of what might be found in a new world order.

Are we retreating from globalization?

Yes, and we have been. There is idealism, and there is reality.

Who will write what checks to people in countries that are outside their domain? The reality is a lot of those people won’t be helped. How will people react? Over the last 500 years there’s been a lot of internal rivalries and wars. There’s no global legal system. Power is the currency.

Dalio is a globalist in ideology; a dreamer that the best of the best can work together for the common good. But the reality is that we’re in a fragmented world. Can I depend on someone not taking advantage of me? No, you can’t. Within countries, nor between countries.

China has been helping many parts of the world during this crisis, but to even acknowledge that is dangerous politically. The world is so fragmented, that it’s dangerous to say thank you.

How does capitalism need to be reformed?

Dalio is a capitalist through and through. But there comes a time when reform is necessary, and that’s when we see that the outcomes of the systems in place aren’t what we want, and understanding the system dynamics that lead to those outcomes.

All throughout history, societal systems work for those who control it. The government and entrepreneurs have a symbiotic relationship, and help each other. The consequence trickles down to education; the top 40% spend 5X more on their children’s education, than those in the bottom 60%. It’s self-perpetuating.

The solution is not to give money away, but find ways to expand productivity to those places where it’s low. This is even a psychologically important distinction—earning vs receiving.

The case for owning Bitcoin

In this article, I’m going to make the case for considering to allocate a small amount of your savings to Bitcoin. I’ll do that by explaining what Bitcoin is, along with how and why it might become valuable.

What is Bitcoin?

Prior to the invention of Bitcoin, there were many attempts to create “digital money”, but they all suffered from the same basic problem: How do you prevent a unit of digital money from being copied, the same way you can copy an MP3 file? If you could duplicate a unit of digital money, you could then spend it more than once, making it worthless.

An anonymous person (or group) named “Satoshi” published a solution to this problem, in which a global network of computers in which anyone (known as “Bitcoin miners”) can participate, compete to process collections (“blocks”) of Bitcoin transactions every 10 minutes, adding those transactions to an ever-growing global database of all transactions, known as the “Bitcoin blockchain”.

Once the database has been modified (a new block of transactions added), the only way it can be changed is for a majority of all miners to agree to modify it. This solved the “double-spend” problem. I can try to spend a Bitcoin twice, but the network of Bitcoin miners will simply reject it, since its original spend is permanently recorded on the blockchain.

Miners are incentivized to compete to process transactions since, anytime they “win”, and get to add a block of transactions to the database, they earn both newly minted Bitcoins, as well as all the fees present in the current block of transactions.

Finally, only 21 million Bitcoins will ever be created, ensuring the “scarcity” that’s such a fundamental characteristic to anything used as “stable money”.

(There is no limit to how many US dollars can exist. Since the United States government can create new money at will, and have always done so, the value of the US dollar, in terms of its purchasing power, can drop as much as 90% over a typical person’s lifetime.)

Once the last Bitcoin, i.e. the 21 millionth Bitcoin, is issued to some miner, future miner revenue will come exclusively from the fees people pay to make bitcoin transactions, and the fees themselves are determine in a free-market process.

In short, Satoshi described, and set into motion, a system of money that runs on the internet, solves the double-spend problem, is permissionless in the sense that nobody can stop you from acquiring or spending Bitcoin, in exactly the same way that nobody can stop you from sending and receiving email, and above all is “sovereign”, meaning that, just like the internet, it’s under the control of nobody and everybody at the same time, such that no state or government can globally stop it.

What gives Bitcoin value?

There is only one thing that gives Bitcoin value, and that’s social agreement. It’s the fact that an ever growing segment of the global population agree that it has value. And since that segment is growing, the demand for Bitcoin tends to exceed the supply (or people willing to sell their Bitcoins) such that, over time, the value of Bitcoin measured in US dollars has increased from zero to (at present), nearly $7,000.

This might seem strange, but there’s nothing to stop society from agreeing to assign value to a scarce commodity. In fact, we’ve been doing that for thousands of years—i.e. gold! With Bitcoin, it’s exactly the same.

Why do people value Bitcoin?

Bitcoin has many of the same money-like properties that make gold valuable, but with improvements:

  • Scarcity — There will never be more than 21 million Bitcoin. If you own 1% of the Bitcoin supply today, you will own 1% of the Bitcoin supply in 50 years from now.
  • Divisibility — The smallest unit of Bitcoin is a “Satoshi”, which is one hundred millionth of a single Bitcoin. With Bitcoin, you can transact in extremely small values, far more conveniently than with gold.
  • Durability — Bitcoin is digital, and therefore doesn’t degrade over time as most commodities do that have been used as money in the past.
  • Transportable — Sending and receiving Bitcoin is as easy as sending and receiving email; far more convenient than gold. Furthermore, given that a Bitcoin wallet can hold any amount of Bitcoin, you could literally cross a border with a billion dollars of Bitcoin stored in your head!
  • Unseizable — If you acquire Bitcoin and choose to hold it yourself (rather than keeping it stored with an institution), no person or government can seize it from you, because no person or government controls the Bitcoin network.
  • Uncensorable — Nobody can stop you from sending Bitcoin to anyone in the world, and nobody can stop you from receiving Bitcoin from anyone in the world.
  • Sovereign — Bitcoin is a truly sovereign network. Just like the internet itself, it can not be stopped by any person, group of people, or government. This is the first time in history that humans have created a truly sovereign form of value, independent of any country. Just as we have international standards for weight and distance, the “Satoshi” (Bitcoin’s smallest unit) could become an international standard of value.
  • Utility — Given the sovereignty of the Bitcoin network, all sorts of innovative applications are emerging that are built on top of the Bitcoin network, which in themselves work to increase its value.

So who does control Bitcoin?

Just like the US government has three branches to provide for checks and balances (the President, the Legislature and the Judicial), Bitcoin has three fundamental groups that independently and inter-dependently control Bitcoin:

  • Software developers — Bitcoin is open-source software. Anyone can participate, and through consensus, changes are proposed and integrated into that software. The Bitcoin “Core” development community have been extremely conservative regarding changes to the software. They prioritize security, simplicity and stability to features.
  • Miners — Bitcoin miners run the computers that run the Bitcoin software that processes blocks of transactions every 10 minutes, adding them to the blockchain. If miners as a group disagree with a new release of the Bitcoin software, they can collectively choose not to upgrade.
  • Users — These are people like you and I. If our evolving needs are not met by the current Bitcoin network, we can vote with our feet, moving to another crypto currency.

In a famous historical dispute, one group wished to increase the number of Bitcoin transactions that get processed every 10 minutes, thereby allowing the Bitcoin network to function more like the Visa network (high transaction volume, low fees). Increasing the number of transactions per block would result in only those with the most powerful computers being able participate in Bitcoin mining (transaction processing).

The Core community preferred to keep the number of transactions fixed, thereby trading off higher fees (as many transactions compete to be included in the next constrained-sized “block”, the transaction fees get bid up) for ensured broad distribution (minimal centralization) of Bitcoin mining.

The conservatives won that dispute, and the “big blockers” duplicated the Bitcoin software, creating what’s known today as “Bitcoin Cash” (a completely different cryptocurrency.) Bitcoin Cash (known as BCH) has never achieved the value of Bitcoin Core (BTC).

What could Bitcoin become worth?

There are many scenarios that would lead to different values of Bitcoin in the long term:

  • Digital gold — If one-third of the existing gold market moved to Bitcoin, a single Bitcoin would be worth more than 50,000 dollars. However, given the advantages of Bitcoin over gold, if Bitcoin emerges as a “digital gold”, then the market of people interested in holding a state-independent money could well increase beyond gold’s current seven trillion USD market.
  • Increasing utility — Innovative technical solutions are being built on the Bitcoin network. For example, a company called Abra built an app that allows people anywhere in the world to connect a bank account, transfer in money in any currency, and buy US stocks.Unbeknownst to the users, the app is built on top of the Bitcoin network. When a person transfers in 1,000 USD, they are, under the hood buying Bitcoin, and the amount of Bitcoin they own will fluctuate such that the app will always show them that they own “1,000 US dollars”. If they purchase four shares of Apple stock with that 1,000 USD, the app deploys a “smart contract” on the Bitcoin network that tracks the price of Apple stock. In actuality, they own Bitcoin, and the amount of Bitcoin fluctuates up and down to show that they own “four Apple shares”. As far as they can see, they’re working with US dollars and Apple shares, but under the hood, it’s all Bitcoin. Why did Abra choose Bitcoin? Because they considered it the most secure network in the world, and it allowed them to democratize the purchase of US shares without having to get a money-transmitter license in any state or country. Innovative applications like Abra increase the buy pressure on Bitcoin, and therefore its price.
  • Stock-to-flow model — An anonymous economist on the internet has built a mathematical model that predicts the price of commodities like gold, silver, diamonds, palladium, etc. based on something called “stock-to-flow”, and with those commodities the model has been extraordinary in its price prediction. When applied to Bitcoin, the stock-to-flow model predicts an eventual price of one Bitcoin to be worth multiple millions of dollars.
  • Crash and burn — At the other end of the spectrum, a bug could be discovered in the Bitcoin software, or a competitor could emerge, that would cause the value of Bitcoin to go to zero. However, at the time of this writing, Bitcoin is over 10 years old, has been the target of continual, unsuccessful hacking attempts, and has a lead in “network effect” that would be extremely difficult for any other cryptocurrency to overcome.

What we can be fairly certain of, is that in ten years from now, Bitcoin will not be $7,000. It will likely either be worth zero, or much much more than it is today. And as every year passes, the latter outcome appears more probable!

Should you own some Bitcoin?

The dramatic range of possible outcomes for the price of Bitcoin in the long term (zero to millions of dollars) makes investing in it a tremendously asymmetric bet. For that reason, it would seem to make sense (as recommended by successful entrepreneur Wences Casares) that everyone should own a small amount of Bitcoin, perhaps one to five percent of your wealth.

At that level, if it goes to zero, your life won’t be impacted too much, but if it increases by 100 from where it is today, it would have a big impact on your net worth.

Moving on from COVID-19

Seeing so many fragmented discussions about how and when we move on from COVID-19, I wanted to try to capture the considerations in a single, coherent note.

The vaccine and its timeline

Let’s start with the vaccine. Once a vaccine is available, then this crisis is mostly over and the world can return to normal, as getting vaccinated will (for most people) immunize them against getting sick from infection.

From the time of this writing (April 2020), we’re looking at 12 to 18 months before a vaccine will be available. Why so long? Because you can’t inject billions of people with something that isn’t very, very, very well tested.

Since closing the global economy for 12 to 18 months would be a financial and humanitarian catastrophe, a lot of energy is being spent thinking about how we can “open up” earlier. But this is far more challenging than many realize.

Herd immunity

If everyone in the world could get infected, most would live, and we’d find ourselves in a state in which the large majority of people have immunity through COVID-19 antibodies. This is often referred to as herd immunity.

So why don’t we just let the virus run its natural course, and reach herd immunity as fast as possible? For two reasons:

  1. An unacceptable number of deaths. Say 60% of Americans were infected through herd immunity. With a mortality rate of 1%, that would result in close to 2 million deaths. A reasonable ethics question is whether the costs (economic and health) of stopping the economy compensates the loss of such life? The United Kingdom, in fact, originally planned to attempt herd immunity, but back-tracked in the face of the second problem.
  2. Because of how extremely contagious COVID-19 is, letting the virus run its course quickly overwhelms the hospital system—which, in turn, results in a skyrocketing effective mortality rate, as many who would otherwise survive, die from lack of medical treatment.

Hospital saturation

For those who develop life-threatening COVID-19 complications, hospitalization, and in particular, access to an Intensive Care Unit (ICU), is their only hope of survival.

As it happens, there aren’t many ICU units in the world. As a consequence, a relatively small outbreak can immediately overwhelm the local hospital system. If on average there’s one ICU per 10,000 people, and a COVID-19 outbreak quickly results in 1% requiring an ICU, that’s one ICU available for every 1,000 who need one.

And when that happens, the consequences can be terrible, as we saw in Italy and Spain, where at one point, people over the age of 65 arriving to hospitals were simply sent home to die, as there was nowhere to treat them. Under such circumstances, the natural mortality rate of COVID-19, which appears to be roughly 1%, can increase to 10% and more, because so many die due to lack of hospital access.

And that brings us to possibly the most misunderstood aspect of this crisis:

The main problem with COVID-19 is not the individual risk of death. Rather, it’s that the virus’s contagiousness leads to outbreaks that immediately overwhelm local hospital systems, and that, in turn, results in a spike in deaths.

Mandatory lockdown works

How do you prevent outbreaks? Simple. You prevent humans from coming in contact with each other, which is what countries are doing through mandated lockdowns. Here in Spain, it’s illegal to leave your home except for necessary trips to the grocery store, pharmacy, doctor, etc.

When lockdowns are in place, people stop coming in contact with each other, and you soon start to see the “flattening of the curve”:

Voluntary lockdown, less so

The approach in the United States began mostly as an appeal for voluntary “social distancing”, which helps. However, in a voluntary system, not everyone will follow it. In fact, many—especially the young—don’t even understand the need to, as they perceive the problem to be one of individual mortality, which is a low risk for them.

And so we get situations like Albany, Georgia, where a group of people who likely didn’t really understand the risk, or perhaps believed that COVID-19 wasn’t present in their community, gathered for a funeral, which prompted a local outbreak, and immediate overwhelming of the local hospital system.

The problem with opening up

Donald Trump often speaks about wanting to open up, as soon possible, even if on a limited basis. This sentiment is echoed by politicians in other countries. Just today, as the curve is flattening in Spain, the scope of people allowed to return to work was increased.

So what’s the problem?

We are nowhere close to reaching herd immunity, and so new outbreaks will occur. And it only takes a very small outbreak to overwhelm the hospital system.

There is clear optimism of re-opening in the United States, as daily new cases have stabilized. But as of today, 60% of all cases in the United States are concentrated in only five states!

At present, there are 560,000 cases in the US. Since testing has been limited, let’s assume the total infected and/or recovered is 10 times higher, or 5.6M. With a population of 350M, that would represent less than 2% of the country’s population having been infected today. As such, the United States, like nearly all countries, is nowhere close to herd immunity.

So as soon as the United States, or any country in a similar situation, “opens up”, there will be people who mistake individual-mortality as the core risk, or are otherwise uninformed, will gather with other people, new outbreaks will occur, requiring new lockdowns, to flatten the new curve. This will happen over, and over.

This has already been observed in countries like Japan and Singapore.

What’s the solution? Test, Isolate, Trace

In the short-term, there’s little that can be done. We can watch each day as Donald Trump speaks of opening up soon, followed by Dr. Fauci trying to reign in false hope.

In the medium term, the solution seems to be a process called test, isolate, trace. Let’s call it TIT.

In a TIT process, the general population would be broadly, randomly and frequently tested, in order to try to find the real danger—those who are infected and contagious, but are asymptomatic. These are ones that cause outbreaks.

Such testing would obviously require a cheap and fast testing technology. When available, one could imagine traffic stops, voluntary drive-ins, random stops in malls, etc. Testing would be happening everywhere.

When an infected person is discovered, they would immediately be transported to an isolation center, where they would be kept until testing negative. Here in Spain, the federal government has been asking counties to identify hotels, convention centers and similar venues where infected people could be placed in such a TIT process.

When an infected person is discovered, an attempt would then be made to identify everyone they’ve been in contact with, and then those people would be located, tested, and for the positives, the process would start again.

It’s believed that a TIT process—combined with societal behavioral changes including social distancing, wearing masks and frequent hand-washing—would allow life to return to something resembling normalcy prior to the availability of a vaccine.

How do we implement TIT quickly? First, we need fast and cheap test kits to be available. Second, we need governments to organize and execute the process. Finally, we are likely to see achieving a TIT process tremendously accelerated through private technology initiatives.

Apple and Google have already announced a collaboration to develop mobile device based contract tracing technology, that preserves individual privacy.

There’s tremendous scope for technology to help. In addition to contact tracing, I would imagine that app-based tracking would also help in widespread testing, as it would be easier to identify those who have previously been infected, have antibodies, and can be skipped. At a certain point, random testing could be replaced with notifications of those requiring a test.


One final possibility to shortening the path to re-opening the world would be the discovery of one or more therapeutics that prove effective in the treatment of COVID-19. You’ve probably already heard mention of some leading candidates in the press—i.e. remdesivir and hydroxychloroquine.

Such therapeutics, if effective, wouldn’t provide the preventative protection of a vaccine, but would lower the effective mortality rate of infection in those places where the medicines are broadly available. For example, if something like hydroxychloroquine could improve the mortality by a factor of ten, then COVID-19 would become more akin to the common flu.


I’d like to conclude with a summary of what I believe are the key take-aways:

  1. It will likely be more than a year before a vaccine is available.
  2. The main problem with COVID-19 is not the individual risk of mortality. Rather, the main problem is that its contagiousness leads to outbreaks which overwhelm local hospital systems, resulting in a spike in deaths.
  3. The problem with opening-up prior to a vaccine, is the near certainty of new outbreaks, overwhelmed hospitals, requiring new lockdowns to flatten the new curves.
  4. The medium term solution will be a process called Test, Isolate, Trace i.e. TIT.
  5. Private technology may result in TIT moving from a medium-term solution, to a short-term solution.
  6. Therapeutics offer the potential to shorten the time to re-opening, as a means of lowering the effective mortality rate.

The Unfolding — Anatomy of the COVID-19 financial crisis

In 2020, I learned about the macro economist Raoul Pal through a number of podcasts, and his pessimistic view of the global macro situation resonated with me prior to the COVID-19 crisis. He believed a nearly perfect-storm of characteristics existed that pointed to the coming of a deep recession. And then COVID-19 happened.

To continue having access to his views, I subscribed to his Real Vision service, which he dubs, “The Netflix of Finance”. One of his latest videos, titled “The Unfolding”, lays out the ideas behind his belief that we are headed into the worst economic crisis of our lifetimes.

Although I don’t pretend to understand all of this completely, I’m wanted to try to summarize his thesis here, as much for myself as for the reader. I would, however, encourage readers, if they can afford it, to subscribe to Real Vision, as the content for those interested in finance is outstanding. (I felt The Unfolding alone was worth the subscription price.)

How we got here

COVID-19 hit the world at the worst possible time; at the tail end of a sequence of bad events:

  • In 2016, interest rates began to rise globally, which, as one would expect, caused economies to slow as we saw GDPs around the world begin to drop.
  • This would generally lead to a “normal” recession, but a second bad event happened at the same time: a trade war, which pushed world-trade into the negative, as seen by the dropping of the PMI (purchasing managers’s index), an index of the prevailing direction of economic trends in manufacturing and services sectors.
  • Less trade resulted in a stronger United States dollar, as USD were being removed from the global system. A strong dollar isn’t good for the world as a whole.
  • Lastly, we had an oil conflict, as Russia and Saudi Arabia began competitive production, which led to the collapse of oil prices. This severely impacts economies like the United States, which are heavily dependent on their energy industries.

Then we had the massive black swan, COVID-19, in which world economic out has ground to a halt. COVID-19 has created both demand and supply shocks. Demand, as in people are not consuming. Supply, as in companies aren’t producing anything.

Raoul anticipated three resulting phases:

  1. Liquidation
  2. The Bounce
  3. The Insolvency

Phase 1: Liquidation

Because of sudden panic and uncertainty, we saw the sale and liquidation of everything—stocks, bonds, gold, bitcoin, etc.—as people rushed to get into the temporary safety of cash.

Credit spreads widened, as everybody realized credit was going to get liquidated as well. This caused the financial system as a whole to freeze-up, at which point the Federal Reserve stepped in with a huge stimulus package.

However, this wasn’t really providing “stimulus”, but rather an attempt to simply getting the financial plumbing working again.

The stock market dropped by over 30%, which would be characteristic of a mild recession. Raoul feels there’s a strong possibility it will later drop by 80%, characteristic of a true depression.

Phase 2: The Bounce

Just like in 1929, we can expect and have seen an initial bounce. Over the past week, the stock market has risen more than 10%. In a six month period of 1929, the bounce of the Great Depression saw a 45% rise in the stock market.

Why? Because there is optimism in the face of the initial shock. New COVID-19 case numbers are stabilizing. Maybe we’ll find a therapeutic. Maybe we’ll get a vaccine. Maybe, maybe, maybe!

But the 1929 bounce was based on a false narrative, and this one likely is as well. Raoul believes things are far worse than the market is reflecting.

And this leads us into the final phase, the insolvency.

Phase 3: The Insolvency

Raoul believes we’re going to see the largest insolvency event in recorded history.

  • Global GDP growth will be negative, quarter after quarter.
  • The world has far too much debt. United States corporate debt between 1950 and 2019 has grown as a percent of GDP from 20% to 45%.
  • The United States government debt has grown to 110% of GDP, and will take massive additional amounts to try to stimulate the economy with new money. Central banks all around the world will try to stimulate.
  • The problem, however, is that the velocity of money will be zero. People have clearly changed their habits, until a COVID-19 vaccine is available. We can see this in sales data (50%+ drops) and traffic data from TomTom (down 80% in China on the weekends). I personally see this in myself; Even after this lockdown is over, I’m not going to expose myself to infection by going to restaurants, coffee shops, gyms and other group settings before a vaccine is available.
  • Perhaps one third of the $3T of BBB-grade United States corporate debt will be downgraded to junk rating, requiring their sale by credit-rating-constrained entities. But there won’t be any buyers, and so the market will freeze.
  • A pension crisis is being born, as the largest wave of people ever (the Baby Boomers) enter retirement, and they currently own (and will sell) a huge amount of stocks and bonds.

None of this can get resolved quickly, as “flattening the curve” means power cycling the economy over and over, country after country, as localized outbreaks occur, preventing the full economic re-synchronization.

US 10-year bond yields are dropping to zero. But then, the Consumer Product Index (CPI) will go negative (because nobody’s consuming). This means that real yields (the difference between CPI and the bond yields) will go up, and when real yields go up, you destroy the economy.

And this time, the Federal Reserve can not fix this. They have no room to continue dropping rates.

The growing strength of the US dollar will break the global financial system, as there is far too much global debt denominated in dollars, and not enough dollars to go around to pay this debt. All non-US currencies will drop, and some will collapse.

Corporations in South Korea, India, Brazil and elsewhere are desperate for dollars, and the banks will issue the limited supply to the best creditors. The worst will be left scrambling, and go insolvent.

The end result in a world of negative GDP, nobody with cash, everyone in debt—is insolvency. And full debt-deflation then happens when everybody becomes insolvent.

Raoul believes this is a generational shift, the “Fourth Turning” that Neil Howe talks about in his book. A massive, massive change in which the market crashes to depression levels, everybody goes bust, and which may end with the world having to abandon the dollar standard, as the US dollar skyrockets.


How to protect yourself? Raoul believes:

  • United States bonds should be OK in the short- to medium-term.
  • United States dollars should be OK for the short- to medium-term.
  • Gold and bitcoin should do very well in the medium- to long-term.

Readers of my book Money for Something who followed my own allocation, the Golden Butterfly—a slight tweak on the Harry Browne Permanent Portfolio—will fortunately already have a sizable allocation to long-term bonds, gold and cash, that will have held up well in the current crisis, and hopefully going forward.