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[From The Archives] Ray Dalio: It’s A Depression, Not Recession

It’s not often that Ray Dalio, the owner and founder of Bridgewater Associates, the world’s largest hedge fund is wrong. However, Dalio is only human and occasionally he makes the wrong call.

During October 1992, an article titled Depression, Not Recession; That, Contends a Seasoned Observer, Is What We’re In, written by Ray Dalio was published within the pages Barron’s magazine.

The article argued that the US economy was already in a depression and economic growth would grind to a halt during the next few years. Additionally, Dalio warned that if the Federal Reserve continued to lower interest rates, without any meaningful improvement in the underlying economic fundamentals, growth would stop altogether, and deflation would set in.

Luckily, Dalio's predictions turned out to be nothing more than hot air, albeit well-reasoned hot air based on historic trends. Fed easing had the desired effect on the economy. US GDP rose by 38% in real terms during the ten years following the article, approximately 3.8% per annum in real terms. Inflation also picked up.

At the time, Bridgewater was only managing $1.5 billion in client assets, a fraction of the $170 billion or so the fund manager presides over today.

Ray Dalio: Depression, Not Recession

“It is becoming increasingly clear to most people that the economy is in something other than a normal recession. Since World War II, there have been seven recessions. All began with the Federal Reserve tightening, usually to fight inflation, and all ended when the Fed eased. This time the Fed has eased a lot and the economy has not responded.” -- Ray Dalio, Barron’s 1992

During the three years preceding Ray Dalio’s article, the Fed had cut the Fed funds rate 22 times, from 9.75%, down to 3%. But this didn’t seem to have any effect on economic growth. Indeed, as Dalio went on to point out, real per capita domestic product, unemployment and the rate of business failures, had all hit levels not seen since the Great Depression.

As a result, Dalio concluded that the US economy was behaving essentially as it did in the 'Thirties, as it was plagued by the same problem: the economy as a whole...