Ray Dalio, the billionaire fund manager who was among the experts to advise the US Federal Reserve in
recent months, has said interest rate cuts are not the solution to the turmoil in the credit markets.
Rather, Mr Dalio, founder and chief investment officer of money manager Bridgewater Associates, said
the longer-term solution would involve currency policies – such as a revaluation of the Chinese renminbi –
to address the US’s trade imbalance.

“Our current credit problems are the flip side of our balance of payments problem,” he told the Financial
Times. “The world has been awash with liquidity and money has been pouring in from abroad, so lots of
money had to get invested fast.

“The dollar being the world’s dominant reserve currency, coupled with the major surplus countries having
their currencies pegged to the dollar, has led to a dollar denominated debt bubble – a lot of irresponsible
lending in dollars. The mortgage crisis is just one reflection of this.”

Mr Dalio called for the Fed to set a “realistic” target rate for US growth of 2.2 per cent a year. That would
be the lowest since the 1930s, and below the 2.5 per cent that is the Fed’s target.

“The basic problem is that, at current exchange rates, Americans will not earn enough income to pay for
their spending, so they will either get deeper into debt or sell off their assets to make up the difference,” he
said.

“When the Fed lowers interest rates, it just postpones the problem because it causes debt-financed
consumption to pick up.”

The views of Mr Dalio run counter to the prevailing wisdom that interest rates are key to economic
management. His opinions are widely followed in the money management world.

Originally published in the Financial Times Online

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