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Hedge fund king Ray Dalio: Middle class needs 'wealth transfers' to bridge income gap

  • That wealth gap is "our biggest economic, social and political issue" and played a significant role in Donald Trump's election victory, Bridgewater Associates CEO Ray Dalio says in a LinkedIn post.
  • Dalio prescribes a re-examination of how the nation is using its resources, and an unspecified wealth transfer.

The U.S. is deeply divided politically and socially because of an escalating wealth disparity between the top and bottom tiers, according to Ray Dalio, who manages the largest world's hedge fund.

That gap is "our biggest economic, social and political issue" and played a significant role in Donald Trump's election victory, the head of $122 billion Bridgewater Associates said in a LinkedIn post Monday.

To bridge the gap, Dalio prescribes a re-examination of how the nation is using its resources, and an unspecified wealth transfer. The issue has been one of his favorite topics, and one he said he will continue to visit.

"The polarity in economics and living standards is contributing to greater political polarity," Dalio wrote. "It is also leading to reduced trust and confidence in government, financial institutions, and the media, which is at or near 35-year lows."

To make his point, Dalio divides the country into two groups — the top 40 percent and the bottom 60 percent. Looking specifically since 1980, the top 40 percent has seen growth in real income while the bottom 60 percent has not. As a result, the top 40 percent hold 10 times as much wealth as the bottom 60 percent, up from six times as much in 1980, according to statistics he cited.

The top bracket is advancing faster than the bottom because it can spend more on education and is more adaptable to the changes technology is making in the job market. A 30 percent decline in manufacturing jobs over the past 20 years has impacted the middle class especially hard, Dalio said.

"While conditions for the lowest income groups have long been bad, conditions of non-college-educated whites (especially males) have deteriorated significantly over the past 30 years or so," Dalio said. "This is the group that swung most strongly to help elect President Trump."

By way of solution, Dalio advises policymakers, particularly those at the Federal Reserve, to look deeper into statistics when making decisions. The Fed is in the midst of plans to enact gradual but steady interest rate increases and to reduce the $4.5 trillion portfolio of bonds the central bank holds.

Looking at "average" conditions could provide a misleading picture as the concentration of wealth at the top skews the numbers. Instead, he advises a closer look at the plight of the middle class.

"Because the economic, social, and political consequences of an economic downturn would likely be severe, if I were running Fed policy, I would want to take this into consideration and keep an eye on the economy of the bottom 60%," Dalio wrote. "By monitoring what is happening in the economies of both the bottom 60% and the top 40% (or, even better, more granular groups), policy makers and the rest of us can give consideration to the implications of this issue."

His solution is "some mix of a) directing resources so that they are used productively to generate more than enough income or savings in order to pay for themselves and b) productive wealth transfers appears inevitable."

He appears, however, to reject the universal basic income proposal advocated by some prominent business people, including Facebook CEO Mark Zuckerberg. Dalio said "giving money to be used for consumption" will merely "diminish the value of money and not increase the size of the pie."

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