Dalio, biggest hedge fund manager: "We may risk social, political, and economic collapse."

Ray Dalio has written an OpEd for the Financial Times. Reading it is free, but requires registration.

http://www.ft.com/intl/cms/s/0/ed4439d4-fbeb-11e0-9283-00144feab49a.html#axzz1bkZXuKOc

For those of you who don't want to register, I will try my best to paraphrase his points and provide contexts if you haven't seen his interview with Charlie Rose.

Dalio says that until recently people and governments have taken on more debts, but since the financial crisis of 2008 the process of reducing debt has started to take place. He calls this process deleveraging. This has happen before in history. For example, The Great Depression.

During such times, societies and governments are tested. Emotions run high, which can lead to bad decisions. The greatest danger during such times is mob rule and populism. For example, it was during a similar time that Hitler was elected in 1933.

Mob rule and populism puts our economy at risk and threatens to put us into a global depression.  The mob will attack the Federal Reserve, foreigners, and financial institutions.

The mob is beating down the gates of the Federal Reserve and other central banks, who saved us until now, of falling into a depression. However, central banks are almost out of tools to ease the deleveraging because "their capacities to ease are very limited because they cannot stimulate private credit creation and because they cannot get money in the hands of people who will spend it. For these reasons there is greater risk that central banks cannot save us as they have always saved us in the past."

The mob is blaming foreigners, especially the Chinese, who "took our jobs", and are accused of manipulating their currency, and are said to be competing unfairly. Trade and capital flows are in danger of being used as weapons in economic warfare, which will hurt economic prosperity.

Risks to global banking systems are much greater than normal because of the anger people feel towards financial institutions. People are calling for jail and for bankers and cynical politicians are fanning the flames to win votes.  Banks are levered 15-1, so as deleveraging continues there is a good chance they will ask for more equity in a hostile political environment.

Dalio, calls for us to approach the problems calmly, implement austerity and work through debt burdens rationally and evenly. Otherwise "we may experience an economic, social and political collapse."