Ray Dalio 'What Monetary Policy 3 (MP3) Will Look Like'.

There are certain people in the world of finance, that when they speak, one should listen. Ray Dalio is certainly one of those people.

I find Ray Dalio's latest piece of work fascinating, particularly as it is in accordance very much with what I have been thinking lately. Central banks have thrown every bullet in their considerable arsenals to try and kick start their economies, the latest move by Japan seems to stink of desperation, and has certainty not been received well. Nonetheless, the situation in the global economy seems to be reaching the point where some drastic action is going to be needed. - I was thinking about this, and like Ray Dalio, I don't have the answer, but I was thinking of this in light of the situation when inflation was running out of control on the upside in the early 1980s. Yes I am old enough to recall that time. The fear of Hyperinflation was huge, and the Fed decided that it was time to throw the proverbial kitchen sink at the problem. The chart of the Fed Funds rate below highlights this period. From the 1976 to 1979 the fed fund rate rose from 5% to 10%, then over the next few years twice they raised rates sharply to 20%, sparking a major double-dip recession. This hugely painful medicine certainty did the trick, and inflation steadily subsided. This was the first major salvo in a near 30 year war to defeat inflation. Ironically it was the oil price rally of the late 70s that was the major catalyst in the inflation price spike. It would be fair to say right now inflation is not the enemy, in fact it maybe that inflation, or at least a dose of it has to be the cure (If not quite a friend). The big threat to the world is clearly deflation. There is a ideal spot, not too hot, not too cold, a little inflation but not much. To get there the central banks are clearly going to have to do a little playing with fire. Who knows what it is? But whatever it is, it will be a game-changer I don't think we are there yet, but I think we are getting closer..

Dalio article can be seen at the following link - https://www.linkedin.com/pulse/what-monetary-policy-3-mp3-look-like-ray-dalio -  (You will need to be on linkedin to see this) 

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The 'Behavioural Trading' blog is written and managed by leading Risk Performance consultant and coach Steven Goldstein. Steven is Managing Director at Alpha R Cubed, who work with banks, hedge funds and investment firms to help them improve their people's capabilities and performance. To know more about Alpha R Cubed, visit the website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com. Follow Steven directly on Twitter.

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