Principles for Dealing with the Changing World Order by Ray Dalio

1971

Gold was the “real money” (inter-country transaction currency)

Fiat was “checks in a checkbook”; claims that could be settled back to “real money”

Due to excess US spending it became obvious that US gold reserves would run out

There was a rush to exchange USDs for “real money”

August 15, 1971 — Nixon “defaults” on USD-Gold link

“Money as we understood it was ending”

Stock market rallied afterwards

but...

same thing happened in 1933, when FDR broke USD-Gold link

In both cases, US could continue to spend more than it earned simply by printing more dollars

Since number of dollars increased without wealth increasing, the value of each dollar decreased

Since new dollars entered the market without a corresponding increase in productivity, they went to buy stocks, gold, and commodities...hence price rises

Cycle has happened many times

1. Governments spend more than they take in in taxes
2. Conditions get bad
3. Governments run out of money
4. So governments print more
5. Value of money falls
6. Prices of stocks, gold and commodities rise

So: “When central banks run out of money, buy stocks, gold and commodities”

Historical examples

• 2020
• 2008
• ...