While many economists are busy discussing whether we will have either a “V” or “U”-shaped recession once our country’s economy opens again, the man who runs the world’s largest hedge fund says we have a much more painful road ahead.
Ray Dalio, who’s Bridgewater Associates manages an estimated $160 billion, says we are headed for a depression, with a “d”.
A recession is when we see economic productivity slow for a few quarters. A depression is when the economic productivity slows for a few years.
Dalio says the economic slowdown we are just now starting to experience closely resembles the Great Depression from 1929-33. During the Great Depression, unemployment rates topped out at 25% and the country’s output (GDP) dropped by almost 30%.
“Do I think we’re in that? Yes,” Dalio responded during an interview on Wednesday when asked about the likelihood of the country dipping into a depression.
He says he expects the country will soon see an unemployment rate that is “double-digits” and a quarterly GDP decline of more than 10% with knock-on effects that could last for years.
“I think you could look at this like a tsunami that hit — the virus itself and the social distancing — and then what are the consequences in terms of the wreckage [from that],” Dalio said during the interview. He said the “wreckage” are the long-term effects the shutdown will have on businesses’ balance sheets and individuals’ finances who have lost their jobs or been laid off.
Dalio added that “a lot of people are going to be broke” as a result of the downturn.
“This is bigger than what happened in 2008,” Dalio said, referring to the 2008 financial crisis that turned into the Great Recession. During that recession, GDP fell 4.3% and unemployment topped out at 10%.
Compare that to today’s crisis, where in just the last 3 weeks, almost 17 million American’s have lost their jobs, which is roughly 10% of the workforce. By mid-summer Goldman Sachs predicts an unemployment rate of 15% and a GDP decline of 34% in the second quarter.
JPMorgan economists just came out with an even scarier forecast. They see a 40% decline in GDP for the second quarter and a 20% unemployment rate with 25 million jobs lost.
Dalio also says the fallout from this slowdown is wider reaching than anything we saw during 2008.
“This is more complex than , because there are the banks and then there are all of those that are beyond banks. All of the little businesses, all of those in all the different places that are beyond it,” Dalio said.
Dalio wouldn’t commit to a recovery timeframe, but says that it will take “a long time” for the economy to get back to where it was before the shutdown.