Why Ray Dalio Thinks a “Civil War” Is Brewing

Billionaire hedge fund manager and philanthropist Ray Dalio

Stocks opened lower this morning before gaining back most of their losses by noon. Heading into the second half of today’s trading session, the indexes are mostly flat.

And that’s a blessing for bulls given how high equities have risen over the last few weeks. The S&P 500 broke new ground just yesterday, surging past resistance.

A possible sell-off still worries traders, however, now that Congress is back to workshopping a coronavirus relief package.

“The potential for fiscal stimulus in the lame duck session does appear to be on the rise, but any package that will be considered will likely be significantly smaller than the $1 trillion that had been talked about prior to the election,” explained StoneX strategist Yousef Abbasi.

But perhaps the most sobering take came from billionaire hedge fund manager Ray Dalio, who believes a period of dramatic civil disobedience is on its way.

“People and politicians are now at each other’s throats to a degree greater than at any time in my 71 years,” Dalio wrote in a post published to his LinkedIn page.

“How the U.S. handles its disorder will have profound implications for Americans, others around the world, and most economies and markets.”

He continued, adding:

“It is in this stage when there are bad financial conditions and intensifying conflict. Classically this stage comes after periods of great excesses in spending and debt and the widening of wealth and political gaps and before there are revolutions and civil wars. United States is at a tipping point in which it could go from manageable internal tension to revolution and/or civil war.”

Dalio then went on to cite the many civilizations that have existed since 500 B.C., arguing that the most successful and longest-lasting ones were meritocracies – societies that gave responsibilities to people based on their merits, not inheritance or privilege alone.

Artificial manipulation of the populace by a strong central government, on the other hand, was a recipe for disaster. Since 2008, the Fed has exhibited similarly destructive behavior.

Dalio says it’s what creates major wealth gaps and can often result in a revolution among the lower classes.

Which, these days, can be construed as anyone who’s not a billionaire that’s directly benefited from a central bank or body of government. Back in the day, the nobility enjoyed this kind of treatment.

In modern America, it’s the folks who own tech mega-corps and social media networks.

Covid-19 layoffs drained the savings accounts of millions of working-class Americans earlier in the year. Meanwhile, billionaires only got richer. $1 trillion richer according to the Institute for Policy Studies.

Much of it has to do with the shuttering of small businesses, which were forced to close due to strict lockdown restrictions. Revenues were funneled to the top dogs instead.

Amazon (NASDAQ: AMZN), for example, reported a series of blowout quarterly revenues as a beneficiary of that trend. The online retailer is now positioned to dominate the marketplace once again in 2021, even after a vaccine is deployed.

And don’t worry, AMZN shareholders, the FTC won’t come calling for CEO Jeff Bezos’s head any time soon. Though the coronavirus pandemic has certainly put Amazon into a more monopoly-like position, online shoppers continue to enjoy 2-day shipping and major discounts on brand name goods.

So long as the consumer isn’t being harmed, the FTC won’t take action. The agency doesn’t exist to break up monopolies, it was formed to protect the consumer.

Online shopping has never been easier. The consumer, according to recent surveys, has never been happier.

And sure, that comes at the cost of a competitive business environment as well as a prosperous working class.

But it’s exactly what happens in countries that completely disregard the integrity of their currency. In ancient Rome, silver and gold coins were once key to the burgeoning republic that became an empire. Roman currency spent nearly everywhere in ancient Europe, and prosperous Romans were happy to pay their taxes with the world’s most desirable coin.

Over time, though, only 80% of the imperial budget could be paid for by taxation. Roman leaders quickly learned that they couldn’t raise taxes any further (and weren’t willing to reduce spending), so instead, they simply made more currency to cover the gap.

Unfortunately, silver and gold supplies were getting harder to come by. Emperor Nero decided to reduce the precious metal content (by 4.5% for gold coins, 11% for silver) in each coin, allowing Rome to mint more currency as a result.

Commodus, Septimius Severus, and Caracalla followed suit.

Eventually, silver coins – the most popular – went from pure silver to 50% silver, and at one point, dropped to as low as 2% silver. Romans noticed the trend and began hoarding the purer versions of the currency, paying their taxes in the decidedly less valuable coins instead.

It was direct currency manipulation by a strong central government. The strategy kept the Roman economy afloat for many years, but during that time its citizens suffered. Personal wealth dropped drastically among citizens and plebs (lower class) alike, while the upper classes desperately clung on to what they had left.

Following the 3rd century CE barbarian invasions, Rome’s silver denarius collapsed. The nation had to switch to its gold coin – the aureus – to maintain its financial structure. Years later, it switched off gold and silver coins completely despite attempts to revive the currencies.

A cheap bronze coin eventually replaced the denarius and aureus – both of which met their untimely demise.

Just like the Roman Empire, which fell not too long after its precious coins were devalued by the government.

So, is a similar conclusion awaiting the United States in response to the Fed’s post-2008 maneuvering? Maybe, maybe not.

If history’s any indicator, however, it could mean we’re just at the start of our currency troubles. The dollar’s currently at a 2.5 year low.

Let’s hope it doesn’t fall much further.

Even though another glut of stimulus and more dovish monetary policy almost guarantees that it will.


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