Ray Dalio's latest post: This time is different — the Federal Reserve is fueling the bubble.

Author: Ray Dalio

Translation: Golden Ten Data

On November 5th, local time, Bridgewater Associates founder Ray Dalio posted on social media with the following insights:

Have you noticed that the Federal Reserve announced it will stop quantitative tightening (QT) and begin quantitative easing (QE)?

Although this has been described as a “technical operation,” it is nonetheless an easing measure. This is one of the indicators I (Dalio) use to track the progress of the “big debt cycle” dynamics I described in my previous book, and it warrants close attention. As Chair Powell said: “…at some point, you’ll want reserve balances to start gradually increasing to keep pace with the size of the banking system and the economy. So, at some point, we will increase reserves…” How much they will increase will be a key focus.

Given that one of the Fed’s roles during bubbles is to control the “size of the banking system,” we will need to watch this closely, while also observing how quickly easing is implemented through rate cuts amid emerging bubbles. More specifically, if the balance sheet begins to expand significantly while rates are being lowered, and the fiscal deficit is large, then in our view, this is classic monetary and fiscal interaction—effectively monetizing government debt.

If this occurs while private credit and capital market credit creation remain strong, stocks are hitting new highs, credit spreads are near lows, unemployment is near lows, inflation exceeds targets, and AI stocks are in a bubble (according to my bubble indicator, they indeed are), then it looks to me like the Fed is stimulating a bubble.

Considering that the current government and many others believe in significantly easing restrictions to pursue growth “at all costs,” and given the looming issues of massive deficits/debt/bond supply and demand, it’s understandable to suspect that this isn’t just a technical matter.

While I understand that the Fed is highly focused on the risks in the money markets—favoring market stability and fighting inflation aggressively, especially in today’s political environment—it remains to be seen whether this will develop into a full-blown, classic easing cycle with large-scale net purchases.

Let’s not forget this fact: when Treasury supply exceeds demand, and the Fed is “printing money” by buying bonds while the Treasury shortens the maturity of its debt issuance to meet long-term demand shortfalls, these are classic late-stage “big debt cycle” dynamics. I’ve explained the mechanics of this extensively in my book How Nations Go Broke: The Big Cycles, but I want to highlight that this milestone is approaching in this big debt cycle and briefly review its mechanism.

I look forward to sharing my understanding of market mechanics and illustrating what’s happening—like teaching how to fish—leaving the rest to you, because that’s more valuable for you and better for me, as it avoids turning me into your investment advisor. Here’s what I see happening:

When the Fed and/or other central banks buy bonds, they create liquidity and push down real interest rates, as shown in the chart below. What happens next depends on where that liquidity flows.

Change in Money Supply vs. Short-term Real Interest Rates

If liquidity remains within financial assets, it will push up asset prices and lower real yields, leading to higher P/E ratios, narrower risk spreads, rising gold prices, and “financial asset inflation.” This benefits holders of financial assets relative to non-holders, exacerbating wealth inequality.

This often seeps into commodities, services, and labor markets, raising inflation. In such cases, automation replacing labor seems to limit the extent of this inflation. If inflation becomes high enough, nominal interest rates may rise to offset the decline in real rates, which would harm bonds and stocks on both nominal and real terms.

Mechanism: Quantitative Easing and Relative Price Transmission

As I explained in How Nations Go Broke: The Big Cycles, all financial flows and market movements are driven by relative attractiveness rather than absolute attractiveness, a more comprehensive explanation than I can provide here.

In short, everyone has a certain amount of funds and credit, and central banks influence these through their actions. Everyone decides how to use these based on their relative attractiveness. For example, they can borrow or lend depending on the relationship between the cost of funds and the returns they can earn; they allocate funds based on the expected total return of various alternatives, which equals the yield plus expected price changes.

For instance, gold yields 0%, while the 10-year Treasury yield is about 4%. So, if you expect gold prices to rise at less than 4% annually, you prefer holding bonds; if you expect more than 4%, you prefer gold. When comparing gold and bonds relative to this 4% threshold, you should consider inflation, because these investments need to generate enough returns to compensate for the erosion of purchasing power caused by inflation.

All else equal, higher inflation means gold will rise more, since most inflation results from the decline in other currencies’ value and purchasing power due to increased supply, while gold’s supply remains relatively stable. This is why I focus on monetary and credit supply, and why I pay close attention to what the Fed and other central banks are doing.

More specifically, for a long time, gold’s value has been linked to inflation. As inflation rises, the 4% bond yield becomes less attractive (e.g., a 5% inflation rate makes gold more appealing and supports its price, while bonds become less attractive with a negative real return of -1%). Therefore, the more monetary and credit expansion by central banks, the higher I expect inflation to be, and relative to gold, I tend to prefer holding gold over bonds.

All else equal, an increase in QE by the Fed should lower real interest rates and increase liquidity, leading to compressed risk premiums, lower real yields, higher P/E multiples, especially boosting valuations of long-term assets (like tech, AI, growth stocks) and inflation hedges (like gold and TIPS). When inflation risk re-emerges, tangible asset companies (like mining, infrastructure, real assets) may outperform pure tech stocks.

The lag effect is that QE should push inflation higher than its natural level. If QE causes real yields to fall but inflation expectations rise, nominal P/E ratios can still expand, but real returns will be eroded.

It’s reasonable to expect a wave of liquidity and risk appetite similar to late 1999 or 2010-2011, which eventually became too risky and had to be curtailed. During this liquidity surge and before tightening measures that could burst the bubble, it’s a classic sell signal.

This Time Is Different: The Fed Is Easing a Bubble

While I expect the mechanics to operate as described, the conditions under which this QE occurs are very different from previous episodes because this time, easing is supporting a bubble rather than stimulating a recession. Specifically:

In past QE episodes:

• Asset valuations were declining or undervalued.
• The economy was contracting or very weak.
• Inflation was low or falling.
• Debt and liquidity issues were severe, with wide credit spreads.

Thus, past QE was “stimulus for a recession.”

Now, the opposite is true:

• Asset valuations are high and rising. For example, the S&P 500’s earnings yield is 4.4%, with the 10-year Treasury yield at 4%, and real yields around 1.8%. Equity risk premiums are very low (~0.3%).
• The economy is relatively strong (about 2% real growth over the past year, with unemployment at 4.3%).
• Inflation exceeds the target, at a moderate level (~3%), with “de-globalization” and tariff-related inefficiencies pushing prices higher.
• Credit and liquidity are abundant, with credit spreads near historic lows.

Therefore, today’s QE is “stimulating a bubble.”

U.S. Economic Data in Different Phases

So, today’s QE is no longer “stimulus for a recession,” but “stimulus for a bubble.”

Let’s examine how these mechanisms typically influence stocks, bonds, and gold.

Because fiscal policy now has a highly stimulative bias—due to enormous existing debt and deficits, financed by large-scale Treasury issuance, especially over relatively short maturities—QE effectively monetizes government debt rather than simply injecting liquidity into the private sector.

This is what makes the current situation different and seemingly more dangerous and inflationary. It looks like a bold and risky “big gamble,” betting on growth—especially growth driven by AI—financed through very loose fiscal, monetary, and regulatory policies. We will need to monitor closely to respond appropriately.