I saw a video by Ray Dalio (www.youtube.com/watch?v=PHe0bXAIuk0) that was making the rounds a few months ago, an thought I’d summarize here how see sees the economy.
According to him, there are three parts of growth in the economy:
- ST debt cycle (5-8 years)
- LT debt cycle (50 years)
The debt cycle goes something like this: “Spending -> Income -> Wealth -> Credit -> Borrowing” -> Spending…
Obviously, as for now, what we’re going through now is deleveraging. Deleveraging is a Recession with no interest rate left to lower.
4 ways to deal with deleveraging –
- Cut spending (austerity): fails, as causes income to fall and dbet burden gets worse
- Defaults (people, business and banks): this is depression (wealth not being theirs) : debt reduced but income is also reduced (and faster)
- Redistribution: govt. has less tax incoming but has to spend on unemployment and stimulus : this leads to redistributions and higher taxes
- Central bank print money (unlike spending cuts and defaults, this is inflationary): makes people credit-worthy, and but can buy only financial assets. Fed can only buy real assets.
When these are balanced, this can be good.
Overall, it can take 7-10 years to deleverage.