Ray Dalio fired his gun across the macro bow, arguing that the Fed’s latest balance sheet guidance risks “stimulating a bubble” rather than stabilizing a weakened economy. This is a reversal of the classic post-crisis quantitative easing strategy that could have a significant impact on hard assets, including Bitcoin.
In his post titled “Stimulating the Bubble,” Dalio casts the Fed’s tipping point, which signals the need to end quantitative tightening and resume reserve growth, as the next milestone in the later stages of the big debt cycle. “Did you see the Fed’s announcement to stop QT and start QE?” He warned that even if it was described as a technical ploy, it was “a mitigation measure to track the progress of the big debt cycle.”
If balance sheet expansion is combined with interest rate cuts and persistent budget deficits, markets will focus on “classic monetary-fiscal interactions between the Fed and the Treasury to monetize government debt,” Dalio warns. He added that in a climate of high stock prices, tight credit spreads, low unemployment, above-target inflation and AI-driven fanaticism, “it would look to me like the Fed is stimulating a bubble.”
Related books
The policy background for Dalio’s warning is not imaginary. After months of tightening liquidity and reducing bank reserves, the Fed announced it would end balance sheet outflows (QT). Chairman Jerome Powell emphasized that within the framework of ample reserves, the central bank will need to add back to reserves at some point. “At some point, you’re going to want to start increasing reserves gradually in line with the size of the banking system and the size of the economy. So we’re going to add to reserves at some point,” he said at a press conference on October 29.
Officials and many sell-side desks stress that reserve management need not be the equivalent of crisis-era quantitative easing. Practical similarities: Even without the label, the market experience could rhyme with quantitative easing if the Fed once again steadily nets out Treasuries and maintains “adequate” reserves as deficits persist.
Although Dalio has distanced himself from Bitcoin from his post, the mechanism is well known to Bitcoin investors. He argues that if central banks buy bonds and push down real yields, “what happens next depends on where the liquidity goes.” If it remains in financial assets, “multiples widen, risk spreads compress, and gold rises,” creating “financial asset inflation.”
Related books
When it trickles down to goods and services, it can increase inflation and reduce real profits. Importantly for cross-asset allocation, Dalio clearly frames relative returns. If gold yields 0% and, say, a 10-year government bond yields around 4%, gold will outperform, especially if price growth is expected to exceed that rate as inflation expectations rise and the purchasing power of the currency declines. In such an environment, “the more money and credit the central bank creates, the higher the inflation rate, and I don’t like bonds very much compared to gold.”
What this means for Bitcoin
Commentators quickly translated those mechanisms into Bitcoin. “Fed resumes quantitative easing → liquidity increases → real interest rates fall,” Coin Bureau CEO Nick Pucklin wrote. “Lower real interest rates → Bonds and cash become less attractive → Money chases risk and real assets… Inflation risk rises → Investors hedge with gold, commodities, and digital stores of value.” He emphasized Dalio’s own words: “As gold rises, there is inflation in financial assets,” and that quantitative easing “depresses real yields and drives up P/E ratios.” He concludes that “Bitcoin thrives in exactly that environment…it’s digital gold on steroids.”
Billionaire investor Thomas Clarow pointed to the timing risks built into Dalio’s framework, saying it would be a “manic stimulus” rather than a “recession stimulus.” In his words, the usual risk-on sequence will occur across the crypto complex, with liquidity “flooding an already overheated market… stocks will crash, gold will be stripped away, and cryptocurrencies will… go vertical.” His warnings echo Mr. Dalio’s late-cycle warnings of a current liquidity collapse and, in the long run, reacceleration of inflation, forced policy shifts, and violent bubble bursts.
With Bitcoin, short-term sending is easy. Lower real yields and greater liquidity have historically coincided with better performance in the long-term, high-beta, scarcity narrative. This is similar to the 1999-style crash and late-cycle boom in hard assets, including gold, and by extension BTC as a proxy for “digital gold.”
However, medium- to long-term tensions remain unresolved. If the same easing stimulates inflationary pressures again, there will be an exit point where policy will have to tighten in the bubble, a regime collapse that Mr. Dalio is approaching.
Mr. Dalio’s ultimate aim is not to signal a deal, but to warn the administration. “Whether this will amount to a complete and classic stimulative quantitative easing (with large net purchases) remains to be seen,” he wrote. If the Fed is indeed easing towards a bubble, Bitcoin may benefit on the way up, but according to Dalio’s own schema, that path ends in shock.
At the time of writing, Bitcoin was trading at $99,717.
Featured image created with DALL.E, chart on TradingView.com