Recently, Ray Dalio was interviewed by several medias after he had published his new book named as “A template for understanding big debt crises” (hereafter “Crises”, free PDF available here). Dalio became more public after he had published his new book “Principles” in 2016. This year, 2018, the newly published book “Crises” makes the situation subtle. I have downloaded the new book and prepared to read it. However, now, I hope to summarize the key points that Mr. Dalio raised in the interviewed video.
Everything happens over and over again.
Template: Inflationary depression
Key point: The debt is nominated in the nation’s own currency or foreign currency.
If the debt is nominated by foreign currency, e.g. dollar. When the dollar goes up, the country does not have enough cash to pay the debt, so print more money to pay the debt, and the inflation and devaluation come.
However, if the debt is nominated in the country’s own currency, the depreciation will wipe out the debt, naturally.
Then, when the currency becomes cheaper, the country will export more and import less. If the country remains an healthy environment to invest, foreign capitals will come back.
The central bank, by monetary policy, should make the interest rate compensate the depreciation of the currency.(Interest = Infaltion + Devaluation) This is the way to track the bottom of the devaluation of the country’s currency.
(Turkey, Argentina is around 1/3 distance to the bottom)
- Central banks: print money and buy financial assets.
- Price of financial assets goes up, and cause greater wealth gap.
- Most people do not benefit from the process. Populism comes.
- The central bank starts to raise the interest rate (we are in tightening cycle), with populism, it is hard. (political and social problem/extreme monetary policy) ~ 2 years since 2018.9.17 (30% down of dollar prices) Gradual down.
About China, tariff.
China can handle this. Big deal: relationship with China (antagonism is bad!).
China’s debt is denominated in CNY, and dealing with it before the crisis, and from a top-down method, Dalio thinks China can deal with it well enough.