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How an Economic Downturn Affects Your Investments

By : Christopher Elliott --- Sep 12, 2018

Possibility of Economic Downturn

According to famed hedge-fund billionaire, Ray Dalio, the U.S. is probably two years away from its next economic downturn.  Although Dalio acknowledges the positive impact of the Trump Administration’s tax cut-driven fiscal stimulus, he also believes its influence will fade in 18-24 months.  The market’s eventual decline may be marked by a significantly weakened dollar, reduced effectiveness of monetary policy, and ramped up borrowing to fund pension, healthcare, and other unfunded obligations.  Dalio also believes there are serious social and political ramifications to consider in the coming crisis.

Watch Ray Dalio explain his predictions in an interview with Bloomberg Television earlier today.

Causes of Inflation

A depreciating dollar would result from the failure of domestic and foreign demand for U.S. debt to keep up with the nation’s borrowing needs.  The Federal Reserve would need to step in as they did with previous quantitative easing programs (QE 1, 2, and 3) to fund the deficit.  Unfortunately, by pumping money into the U.S. economy they would weaken the dollar.

Why Inflation Matters to Investors

Foreign investors currently hold $6.211 trillion in U.S. government debt, more than twice as much as in 2008 (Source:Federal Reserve Bank of St. Louis).  When the dollar weakens, foreign investors demand higher rates on U.S. Treasury bonds to offset the loss in value they would see when they convert dollar-based investments back into their own currencies.  A weaker dollar also pushes prices of some imported goods higher.  To learn more about how a weaker dollar may impact your investment portfolio, contact Mink Wealth Management today.

 

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