Cash Is Trash

Earlier this year, Ray Dalio quipped that “cash is trash.” During a recent Reddit “ask me anything” session, Dalio doubled down, warning that the rush into the US dollar is a mistake.

Why?

Because the Federal Reserve has fired up the printing press and is pumping out cash at a dizzying pace.

Dalio is the founder and CEO of  Bridgewater Associates, the world’s largest hedge fund. Keep in mind, Dalio doesn’t share our economic point of view here at SchiffGold. He is a classic Keynesian who has been supportive of Fed policy in the past. He even claimed after the ’08 crisis that “QE saved the economy.” Nevertheless, he seems to have woken up to the danger of the Fed printing press and the massive levels of debt it encourages. In fact, last summer, he warned of a paradigm shift and said the Fed monetary stimulus train will soon reach the end of the tracks. At the time Dalio said, buy gold.

Investors have rushed into the US dollar as the coronavirus pandemic has unfolded and the stock market has crashed. That led one participant in Dalio’s Reddit event to ask, “A few months ago you said cash is trash. But now cash is king. What gives?”

Dalio made it clear his opinion has not changed.

I still think that cash is trash relative to other alternatives, particularly those that will retain their value or increase their value during reflationary periods.”

Such as?

Gold.

Dalio said the Fed’s response to the coronavirus crisis was to fire up the printing press. Despite the rush into dollars, the central bank has actually made holding cash less attractive.

When the virus hit and it had its negative impact on earnings and balance sheets, asset values plummeted which made cash look comparatively attractive. However, what did the central banks do? They created a ton more cash.”

In a nutshell, that means your cash is losing value relative to the things you need or want to buy.

When you think about what assets are safe to own, and you think of cash, please remember that while it doesn’t move around in value as much as other assets, there is a costly negative return to it in relation to goods and services and other financial assets that amounts to about a couple of percent a year, which adds up.”

Dalio also said he thinks the dollar will eventually weaken.

Having the world’s printing press to produce the world’s currency is the equivalent of having the world’s most important asset, especially in times when so many people need the world’s money. So, we are now having a short squeeze on the dollar. Eventually, that will end because either that shortage of dollars will be satisfied by enough creation of dollars or it won’t be satisfied in which case there will be debt defaults and restructurings that will reduce the need for dollars. When that happens, the dollar will weaken. It will also weaken when those who are holding dollar-denominated debt no longer want to hold that debt because interest rates are inadequate and so much dollar-denominated debt and money is being created that its value is undermined.”

Peter Schiff has taken this analysis a step further. He’s been predicting an outright dollar crisis. In a recent podcast, Peter said all of this Federal Reserve intervention can’t save the economy. But the central bank is trying to save the bubble it blew up after 2008. That is a mistake. It’s exactly what they did before that brought us to where we are today. Furthermore, Peter says he doesn’t think the Fed can reflate the bubble again.

It’s impossible. They’re not going to do it. They’re going to destroy the dollar in the process and we’re going to have this massive inflation.”

In fact, Peter has said that with the central bank and government response to the coronavirus, hyperinflation has gone from being the worst-case scenario to the most likely scenario. If that comes to pass, gold will go through the stratosphere.

Nobody can hold dollars. Nobody can hold any bonds denominated in dollars. This is now like a game of musical chairs where nobody wants to get caught with dollars when the music stops playing.”

And when that happens, what will they buy?

Gold.

What else are they going to do? I mean, what are they going to use as an asset? They’re not going to just swap dollars for euros or swap dollars for yen. They’re going to just buy gold.”

After all, as Dalio said, cash is trash.