Topic: It is time to read Ray Dalio (A Template For Understanding Big Debt Crises) (Read 131 times)

Who is Ray Dalio and why it is so important for us to know about him? Raymond Dalio (born August 8, 1949) is an American billionaire investor, hedge fund manager, and philanthropist. Dalio is the founder of investment firm Bridgewater Associates, one of the world's largest hedge funds. As of January 2018, he is one of the world's 100 wealthiest people, according to Bloomberg. You can read more about him in Wikipedia (https://en.wikipedia.org/wiki/Ray_Dalio) but for us the most interesting part of his life is his book "A Template For Understanding Big Debt Crises" where for the first time ever, Ray Dalio shared his unique template for understanding debt crises. You can get the ebook for free here (https://www.principles.com/big-debt-crises/).


To summarize some of the key points found in the book:

1. All big debt cycles go through six stages, which I describe and explain how to navigate:.
The Early Part of the Cycle
The Bubble
The Top
The Depression
The Beautiful Deleveraging
Pushing on a String/Normalization

2. Getting the balance right between having too much debt (that causes debt crises) and too little debt (which causes suboptimal development) is never done perfectly. Cycles always swing from having too little debt relative to the opportunities to having too much and back to having too little and back to having too much. These swings are exacerbated because people tend to remember what happened to them more recently rather than what happened a long time ago. As a result, it is pretty much inevitable that the system will face a big debt crisis every 15 years or so.

3. There are two major types of debt crises—deflationary and inflationary—with the inflationary ones typically occurring in countries that have significant debt dominated in foreign currency. The template explains how both types transpire.

4. Most debt crises can be well-managed if 1) the debts denominated in one’s own currency and 2) the policy makers both know how to handle the crisis and have the authority to do so. As I write in the book: “Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one’s debts are in one’s own currency. The biggest risks are typically not from the debts themselves, but from the failure of policy makers to do the right things due to a lack of knowledge and/or lack of authority.”

5. There are four ways of managing debt crises to produce a deleveraging. They are:
Austerity
Printing money to stimulate the economy
Debt defaults/restructuring
Wealth redistribution

6. The way to manage a debt crisis well so there is a “beautiful deleveraging” (i.e. a deleveraging in which debt burdens go down at the same time as economic growth is positive and inflation is not a problem) is to balance these paths so that the deflationary forces balance with the inflationary ones.

7. In general, central bankers could do better jobs of smoothing the cycles and preventing big debt crises if, rather than having a single mandate to control inflation or a dual mandate to control inflation and growth, they have a three-part mandate that includes preventing investment bubbles by curtailing the excess debt growth that is funding them.

8. When in a big debt crisis, saving the system (by providing lots of liquidity, guarantees, etc.) is most important–and not trying to be precise about it. This includes putting aside moral hazard considerations at that time. As I write: “How quickly and aggressively policy makers respond is among the most important factors in determining the severity and length of the depression.”

9. It’s important that economic policy makers have sufficient knowledge and emergency powers to handle crises well and don’t get caught by legal or regulatory barriers: “ignorance and lack of authority are bigger problems than the debts themselves.” I am particularly worried about how these factors will affect the next debt crisis due to the way regulations now constrain the freedoms to do the right throngs and the fragmented political state of affairs.

10. After the restructurings and the passing of the debt crisis, policy makers typically need to provide significant stimulus for a number of years (5 to 10) until the hangover effects wear off. “The recovery in economic activity and capital formation tends to be slow, even during a beautiful deleveraging. It typically takes 5-10 years (hence the term “lost decade”) for real economic activity to reach its former peak level.”


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Here are some useful links:

Hedge Fund Legend Ray Dalio On The Economy
https://www.youtube.com/watch?v=5C43i3yclec

Ray Dalio's Lessons From The Financial Crisis
https://www.youtube.com/watch?v=7WXidoI9ppw

Ray Dalio: Beating The Stock Market By Learning History (2017)
https://www.youtube.com/watch?v=i5LqCAtNJJ4

Ray Dalio: We're in the seventh inning of the economic cycle
https://www.youtube.com/watch?v=HgiWK6P4hVs

The End of Easy Money - RAY DALIO
https://www.youtube.com/watch?v=RQlgWTOa7q0

Principles by Ray Dalio
https://www.youtube.com/user/Bridgewater


I hope you enjoy reading the book and watching the interviews.