(E) If you want to understand how the economy works, listen to hedge fund manager Ray Dalio. Following Sunday’s announcement of the Federal Reserve, Mr. Dalio published today an article on LinkedIn, The Implications of Hitting the Hard 0% Interest Rate Floor:

Point number 1

“As you know, for some time now I have been concerned that when the next economic downturn would come it would lead to hitting the 0% interest rate floor with a lot of debt outstanding and big wealth and political gaps in the same way that configuration of events happened in the 1930s. The coronavirus was the thing to cause a downturn, which surprised me. While it is an extremely serious infectious disease that will produce many harmful economic impacts, these things alone don’t scare me; however, when combined with long-term interest rates hitting the 0% floor, it really worries me.

Long-term interest rates hitting the hard 0% floor means that virtually all asset classes go down because the positive effects of interest rates falling won’t exist (at least not much).”

Point number 2

“While some fiscal stimulation measures are being put into place, they’re not large or targeted enough to neutralize the contagion of the economic and market effects of the virus, and they are being argued about. However, there are some emerging signs that some important policy makers might move to a “whatever it takes” posture. If so, then we will have to see if works given the previously described circumstances being so limiting.”

Conclusion

“1) the 0% interest rate floor and the absence of other effective central bank tools requires much greater fiscal stimulation that is targeted to hit the most important pain points, with the cooperation of central banks holding rates down and providing plenty of liquidity

2) the response thus far has been inadequate in size, focus, and coordination but that has varied a lot by country

3) in the last few days there have been signs of fiscal and monetary policy makers moving to much stronger “do whatever it takes” policies

4) the wealth and political gaps will test social and political abilities to cooperate and help rather than hurt each other in dealing with these problems.”

Note: The picture above is some pieces of an apple pie shaped as roses.

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