I had the opportunity to read a good chunk of Ray Dalio’s book, How Countries Go Broke: The Big Cycle. He published a five minute synopsis here in the event you might be interested.
Dalio is a hedge fund manager who is probably toward the tail end of his career. He has ample investing experience dealing with debt instruments and currencies.
His thesis is that we have both short term debt cycles and also long term debt cycles.
Short term debt cycles typically last less than ten years and represent periods when interest rates go in a certain direction. For instance, we are now in the midst of a short term debt cycle that began a few years ago when the Fed began increasing interest rates.
Long term debt cycles (or Big Debt Cycles) typically last 50-100 years according to Dalio. This is a period during which a given country accumulates significant debt. A Big Debt Cycle consists of numerous short term debt cycles. He thinks our current Big Debt Cycle began in 1945 and was exacerbated when Nixon ditched the gold standard backing the dollar.
He studied debt cycles in our own country and in foreign countries over a period of centuries to derive certain conclusions. He asserts we are now toward the end of a Big Debt Cycle; and is concerned it will have severe effects when it resolves itself if we don’t fix our debt problem. He describes our current situation as a “death spiral”.
His solution? Our federal budget deficit should be no more than 3% of GDP (Gross Domestic Product).
That sounds easy. But what is his proposal for how we achieve this?
He says we would need an 11% increase in taxes, a 12% cut in spending or a 3% cut in interest rates. But he proposes a combination of spending cuts, interest rate cuts and tax increases in order to make the above numbers less severe.
He is therefore, like Trump, calling upon the Fed to cut interest rates because he knows this will help our deficits. In addition, he supports the concept of using tariffs to achieve the tax increases– not unlike Trump.
Dalio’s presentation is fairly technical; and he cites considerable research to make his case.
I hope some people in positions of power are listening.
“In the long run we are all dead”
John Maynard Keynes
Keynes’ policies certainly lead in that direction, Fred. And we have been living under Keynes’ policies for decades…
There is a lot to criticize in that synopsis. 1981-2020 is such an obvious debt cycle, which we are now living in reverse for the rest of our lives.
How do you lower the price (interest rate) of loanable funds without increasing the supply?
In an honest society, loanable funds = savings. In a society ruled by organized crime (the Fed), the Fed counterfeits new savings, diluting and stealing the value of your existing savings.
J. Sobran, from reading Dalio’s book, I think he recognizes the problem with our fiat currency, the Fed, and specifically with the Fed being able to print dollars. He also recognizes the profligate congressional spending that has been taking place. You and I would like to reverse those circumstances. Dalio assumes that most of these circumstances will not change, although he hopes there will be less spending.
Lynn Alden’s book Broken Money is a good read. Our fiat system not backed by gold is destined to fail. Her conclusion: we need to transition back to a gold standard, or probably even better, a Bitcoin standard.
MJH, I agree about the fiat system. I like the idea of reverting to a gold standard. Otherwise, the only question is how badly people are going to get hurt when the system implodes.
Yes, I think the pain will be significant!
I just wonder what it will look like– what form it will take in the lives of real people, average people. It will be new territory for all of us.