Big Debt Crises

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Throughout this section, I’ll include similar archetype charts that are built by averaging the deflationary deleveraging cases. ³ 1) The Early Part of the Cycle This balancing act becomes progressively more difficult as the sizes of the debt assets and debt liabilities increase relative to the incomes.

A successful resolution occurs when policymakers use the right mix of these four levers. The best outcome is a “beautiful deleveraging”: “In this happy scenario, debt-to-income ratios decline at the same time that economic activity and financial asset prices improve.” Almost by definition, financially responsible people don’t like having much debt. I understand that perspective well because I share it. ¹Since 2020 we have experienced the big easing part and most of the big tightening part of the short-term debt cycle. Banks [2] are the intermediaries between lender-creditors and borrower-debtors, so their motivations and how they work are important too. In all countries for thousands of years up to now, banks did essentially the same thing, which is borrow money from some and lend it to others, making money on the spread to generate a profit. If debts are denominated in a country’s own currency, its central bank can and will “print” the money to alleviate the debt crisis. This allows them to manage it better than if they couldn’t print the money, but of course it also reduces the value of the money. In almost all cases throughout history, over time these short-term debt cycles have added up to create long-term debt cycles that have lasted about 75 years, give or take about 25 years. This fundamental imbalance between the size of the claims on money (debt) and the supply of money (i.e., the cash flow that is needed to service the debt) has occurred many times in history and has always been resolved via some combination of the four levers I previously described. The process is painful for all of the players, sometimes so much so that it causes a battle between the proletariat-workers and the capitalists-investors. It can get so bad that lending is impaired or even outlawed. Historians say that the problems that arose from credit creation were why usury (lending money for interest) was considered a sin in both Catholicism and Islam. ²

It is not clear exactly what risky debt levels are because it’s not clear what will happen that will determine future incomes. This template has also been very helpful in my and Bridgewater’s investment decision making, including during the 2008 financial crisis when it allowed me and Bridgewater to both navigate the crisis well and provide some helpful advice to policy makers. A “beautiful deleveraging” can be engineered by central governments and central banks to reduce debt burdens if the debt is in their own currencies. As had happened repeatedly over thousands of years, the much larger financial claims on the money than the actual money in the bank led to a run on the central bank to get the money (i.e., the gold), which led the US in 1971 to default on its promises to allow holders of debt assets to turn them in for the money (gold).

How These Mechanics Have Played Out From 1945 Until Now

In the years ahead it’s likely that acts of nature, most importantly climate change, will be very costly in one way or another—i.e., either because we expend the amounts of money and endure the inefficiency costs to make fast enough progress to minimize the environmental and adaptation costs in the future or we don’t spend the money now and endure the costs later. The climate problem is one of those classic types of problem that isn’t well-handled because the pain is increasing at a pace that is too slow to prompt action and because what’s good for the whole isn’t the same as what’s good for all of the parts so agreeing on how to share the costs is damn near impossible. PDF / EPUB File Name: Principles_for_Navigating_Big_Debt_Crises_-_Ray_Dalio.pdf, Principles_for_Navigating_Big_Debt_Crises_-_Ray_Dalio.epub

During the big money-credit-debt-market-economic cycles (which I will henceforth, for brevity, call debt cycles), different monetary regimes come and go mostly to accommodate and facilitate continued credit and economic growth. Within each of these money/currency regimes there were sub-phases that I call paradigms. For example, the 1970s paradigm was one of high inflation and slow growth while the 1980s paradigm was one of falling inflation and strong growth, while both occurred in the same monetary regime.

How The Machine Works And Principles For Dealing With It

In this up-wave part of the long-term debt cycle, promises to deliver money (i.e., debt burdens) rise relative to both the supply of money in the overall economy and the amount of money and credit debtors have coming in (via incomes, borrowing, and sales of assets). This up-wave typically goes on for decades, with variations primarily due to central banks’ periodic tightenings and easings of credit. These are short-term debt cycles, and a bunch of them generally add up to a long-term debt cycle. The language is straightforward, and all concepts are clearly explained. The author systematically categorizes seemingly unrelated events to uncover commonalities, dissect the relevant components, reveal the source of stress, and evaluate each tool's strengths and weaknesses. Throughout history only a few well-disciplined countries have avoided debt crises. That’s because lending is never done perfectly and is often done badly due to how the cycle affects people’s psychology to produce bubbles and busts. While policy makers generally try to get it right, more often than not they err on the side of being too loose with credit because the near-term rewards (faster growth) seem to justify it. It is also politically easier to allow easy credit (e.g., by providing guarantees, easing monetary policies) than to have tight credit. That is the main reason we see big debt cycles.

That is why, in the end of all big debt cycles, all currencies have either been devalued or destroyed. Since 1971, we have been in what is called a fiat monetary system in which there are no constraints on governments’ abilities to create money and credit. While of course changes over time and differences between countries exist, they are comparatively unimportant in relation to the timeless and universal mechanics and principles that are far less understood than they should be. During this time period, the geopolitical landscape changed as the Soviet Union fell, China rose, and wealth gaps increased. Regarding my estimated probabilities, please understand that they are unreliable, though the measures of the risk levels are higher than at any time in the post-1945 period because the number of militarily powerful (e.g., nuclear) countries and the measured conflict levels between them are both greater than at any time since the last world war.

On the contrary, debt assets and debt liabilities are now very high and still rising, so it looks more likely that most economies’ central banks, most importantly the US’s Fed, Europe’s ECB, and Japan’s BoJ, are approaching the limits in their abilities to continue the money-credit-debt expansions that have been true throughout our lifetimes.