Ray Dalio, the billionaire founder of one of the world’s largest hedge funds, Bridgewater Associates, was recently interviewed. He explains the banking crisis is the tip of the iceberg of problems instigated by the Federal Reserve.
The recent rise in interest rates has devalued bonds, and countries are no longer interested in buying them after witnessing the recent banking crisis.
“If you look at the Silicon Valley Bank issue, it’s not so much their issue as much as a worldwide issue… What’s a bank? A bank takes in deposits, and then it takes that money and invests it in things. So they bought a lot of government bonds that had a higher yield than they were paying out in the deposits.
There’s a tightness of monetary policy, and those yields went up and the bonds went down in value, and then the amount they have to pay out went up in value, and so they went broke.
That is happening all over. That happens not only through banks. Banks as a whole did a lot of that, but insurance companies and so on all around the world.
The same sort of thing happened in Europe. The same sort of thing happened with (Japan), companies even buying US dollar bonds a lot.”
The Banking Crisis
Since the start of the year, numerous banks have collapsed, such as Credit Suisse, Silicon Valley Bank, First Republic Bank, Signature Bank, and Silvergate Bank. These banks have heavily invested in long-term bonds, and as bank runs occur due to a new bank failing every few weeks, these bonds have lost so much value that they have less to cash out than what they put in.
An example is Silicon Valley Bank, which kept most of its assets in long-term Treasury bonds and similar securities; if the bank did not have any net deposit withdrawals, it did not have to report this decline in the market value of its assets.
Dalio believes that the tight monetary policies inflicted by the Federal Reserve have made the environment surrounding US bonds unpleasant, where nations are staying away from bonds just as the United States national deficit rises.
“If you were to mark those (bonds) to market, you would have a terrible calamity, but what’s going to likely happen is they don’t want any more of those bonds, and we’re going to have to sell more bonds because we’re going to have a deficit. So when you have a deficit, you have to pay for it through selling debt, and there’s a lesser demand for that debt.”
