A Template for Understanding Big Debt Crises

by Ray Dalio

Writers of accounts such as this one, who have the benefit of hindsight, typically paint pictures of what happened in ways that make what happened seem obvious. However, as that rally and comment reflect, it is an entirely different matter when one is in the moment.

Although it’s my nature to be forthright, it was important to convey a sense of resolution and confidence to calm the markets and to help Americans make sense of things…I

prices don’t always react to changes in fundamentals as they happen in the ways characterized by those who seek to explain price movements in connection with unfolding news. During this period, volatility remained extremely high for reasons that had nothing to do with fundamentals and everything to do with who was getting in and out of positions for various reasons—like being squeezed, no longer being squeezed, rebalancing portfolios, etc. For example, on Tuesday, October 28, the S&P gained more than 10 percent and the next day it fell by 1.1 percent when the Fed cut interest rates by another 50 basis points. Closing the month, the S&P was down 17 percent—the largest single-month drop since October 1987.

The Fed’s “printing money” would not cause an acceleration of inflation if it was replacing contracting credit.