A Template for Understanding Big Debt Crises

by Ray Dalio

One classic warning sign that a bubble is coming is when an increasing amount of money is being borrowed to make debt service payments, which of course compounds the borrowers’ indebtedness.

Because wealthy people have fewer incentives to spend the incremental money and credit they get than less wealthy people, when the wealth gap is large and the economy is weak, directing spending opportunities at less wealthy people is more productive.

For some perspective on what these numbers mean, in 1913 a total of six billion marks circulated as currency and coin in the whole German economy. By late October 1923, the entire stock of money in 1913 would just about get you a one kilo-loaf of rye bread.

“New Era:” “The New Era…meant permanent prosperity, an end to the old cycle of boom and bust, steady growth in the wealth and savings of the American people, [and] continuously rising stock prices.”

In investing, it’s at least as important to know when not to be confident and when not to make a bet as it is to have an opinion and make one.