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Economists are almost always wrong, but Ray Dalio is not an economist. He’s a fund manager with billions of dollars and thousands of clients on the line. Dalio has made billions from the dot-com bubble and 2008 recession, but now he’s building up the mother of all shorts. He can’t afford to lose money, so you must take Dalio seriously. Dalio recently disclosed a $10 billion short position in Europe and he’s likely been building an even bigger short position on the US market.

We’re currently in one of the worst types of crises: stagflation. Stagflation is when the economy is weak and has high inflation at the same time. The inflation rate has crossed over 8 percent and the GDP has declined in the latest quarter. This is extremely concerning because stagflation typically occurs right before a recession. Ray Dalio has studied the economy over the past few centuries and has recognized a pattern. The cycle typically starts with an increase in government debt, which boosts the economy in the short term. This might sound logical in the short term, but lending is a two-sided transaction with creditors and debtors. The creditor is the one lending out the money and the debtor is the one receiving the debt. When there’s too much debt in the system, it’s not possible for both sides of the transaction to survive. This is because one man’s debt is another man’s assets. Whenever the creditor lends out money, they are loaning out assets. If the debtor has taken out too much debt, this means that the creditor is low on assets and will rightfully want to earn more income. The only problem is that when debt levels are too high, debtors don’t have the money to pay back the creditor. This will cause the debtor to sell assets to pay off the debt. An example of this is Chinese property developer Evergrande, which had to sell off properties in order to pay off its debt. When this happens, the economy will reach a poor position. The central bank will see this weak economy and print money to save the economy from crashing. While printing money might work in the short term, it creates long term problems. Money is simply paper that is supposed to represent value. When that paper’s value is disrespected, then its value will inevitably decline. So as a result of the central bank lowering interest rates, prices will begin to rise. So first, debt levels become overextended. Then, debtors default on their debt, putting the economy in a weak position. This causes the central bank to print money to boost economic activity. Throughout this time, we still have the same underlying problem of a weak economy. The only difference is that printing money adds a new problem: inflation. That’s where we are right now: stagflation. Because printing money doesn't boost the economy over the long term, we simultaneously have a weak economy and high inflation. The next step in the pattern is for the central bank to slow the economy by raising interest rates. Dalio has noticed that in the past, doing so almost always leads to a recession or depression. There’s no way to stop it from happening. If the government continues printing more money, it exacerbates the problem of inflation. The only way to stop inflation is to destroy demand, which is done by pulling money out of the economy. So in other words, stagflation is the middle course between the peak of a debt cycle and a serious economic slowdown. According to Dalio, we are currently in stagflation, so the next step in the pattern is a recession or depression.

The interviewer cut off Dalio at the end, but Dalio was going to say that stagflation precedes recessions. The last time we had stagflation was in the 1960s. Due to the Vietnam War and social programs, the government took out debt to purchase food and weapons. However, the US government didn’t have the money to pay off this debt, so they printed money. This led the US to have a weak economy and high inflation at the same time, also known as stagflation. The 1970s was unprecedented at the time, and set the stage for the US to run out of money in 1971. Dalio explained on Twitter, “At the time, the United States was spending a lot more money than it was earning by writing a lot more of these paper money checks than it had gold in the bank to exchange for them. As people turned these checks into the bank for gold money, the amount of gold in the US started to dwindle. It soon became obvious that the US couldn’t keep its promises for all the existing paper money, so people holding dollars rushed to exchange them before the gold ran out”. Dalio indirectly pointed out the two different types of money: commodity money and fiat money.