Ray Dalio on the Next Downturn: What You Need to Know

(Continued from Prior Part)

Helicopter money versus bond-buying: What’s your pick?

Helicopter money—when central banks pour money over the economy as if dumping it from a helicopter—was popularized by Milton Friedman in 1969. Ray Dalio seems to like the concept of helicopter money for its one important advantage over the traditional bond buying method, which puts money into the economy (SPY)(IWM)(QQQ): it gives the money to spenders directly.

What is helicopter money?

According to the World Economic Forum, the basic principle is that if a central bank wants to raise inflation and output in an economy that’s running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers. In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target.

Why Ray Dalio advocates for helicopter money over bond buying

Dalio is a fan of this concept as opposed to bond buying for a simple reason. While bond (BND)(AGG) buying does increase the aggregate money supply in the economy, it usually results in the money going to the wealthy or investors who are less likely to spend that extra cash. They would rather invest than spend. These people deploy this cash in other financial assets, preventing the money from reaching the ultimate spenders and achieving the desired goal.

Helicopter money, on the other hand, puts cash directly in spenders’ hands, so the economic engine moves into high gear right away.

Printing money and just giving it to spenders sounds quite inflationary in nature. But Dalio explains why helicopter money doesn’t have to be inflationary. Find out more in the next part of this series.

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