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How Could The Future Be Different? Ray Dalio Weighs In

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Nov. 22 2019, Updated 6:21 a.m. ET

Ray Dalio sees similarities between now and the late 1930s

The last time central bankers faced something similar to the present situation was in the late 1930s. Ray Dalio sees similarities between the current US economic environment and the one in 1937. Asset prices plummeted in 1937, which subsequently dragged down earnings and led to stock market (IVV) (VOO) weakness, just as we’re seeing now. The Fed raised rates once or twice back then as well, but only to reverse course. In 1939, the Fed managed to stimulate the economy by lowering the reserve requirement. According to Dalio, “While we might see a tiny tightening akin to what was experienced in 1936, we doubt that we will see anything much larger before we see a major easing.”

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But the future could be different

Despite some similarities in earlier situations of economic slowdown, there are certain major differences that policymakers are likely to face in the current economic and market (IWD) (IWF) environment.

In Part 3, we discussed how monetary policy has lost its efficacy and is likely to be even more ineffective. Therefore, while monetary policy succeeded in spurring the economy in the 1930s, it may be a Herculean task for central bankers this time.

Political fragmentation has existed in the United States (SDS) since the late 1800s. It refers to the existence of multiple units of government. This fragmentation makes the coordination of fiscal and monetary policies difficult. In an environment where monetary policy is losing its efficacy, the economy may need fiscal policy to take the baton, which would require appropriate regulatory adjustments and coordination.

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