June, 2023
Dalio gets the current macro completely right - US debt is sky high and US inequality is sky high. However, he completely misses the point on the mechanics of macroeconomics that led us here.
The primary mistake he makes is looking at US debt and inequality as exogenous variables, that too internal only to the US. If he were to follow “balance of payments” theory, he would understand that the US’ neoliberal economic policy (open capital account, no industrial policy) has led to certain things in other parts of the world, that are now biting US in the back.
We need to understand what Asian countries, and China in particular, did - they artificially engineered their exchange rates to make exports more lucrative. By making their currencies weaker relative to those of Western countries, the Asian countries increased the purchasing power of other countries for their goods.
However, Asian countries pay a price for this in the form of lower domestic consumption. Essentially, what happens when a country’s exchange rates is fixed is that workers’ real wages don’t grow as fast as the economy, which leads to lower consumption as a percentage of GDP.
This mainly results in such countries producing more than they consume. Case in point - China’s ever increasing trade surpluses. China just can’t consume as much as they produce since internal demand and resulting consumption have been artificially suppressed.
These countries have no option but to have trade surpluses. By the way, this has been true of all Asian countries that leveraged the investment led growth model by suppressing consumption, increasing exports and increasing investment.
However, in reality, what these countries export, is not goods but in fact capital - the excess savings. This is where things get confusing. If there are excess savings in one part of the world, there needs to be some way to balance these savings. This is essentially how “balance of payments” theory works.
US neoliberal economic policy plays a role here. With this policy, US has maintained an open capital account - anyone can buy or sell USD freely. This is also what ensures the dollar is the reserve currency. Given this open system, excess savings from RoW find their way to the US and also other counties that have an open capital account.
These excess savings usually adjust in the form of either (1) higher unemployment since now goods are produced elsewhere displacing local manufacturers and their workers producing the same goods locally, (2) higher household debt or (3) higher government debt.
What transpired in the US once these external savings entered the system is higher household debt and higher government debt as policymakers wanted to keep employment in check.
This further resulted in higher inequality @JakeSullivan46 understands this and hence strongly advocates for industrial policy. The US could also move to a closed capital account at some point.
This thread extends the same theory to explain the link between trade surpluses in RoW and domestic inequality in the US.
Related reading.
