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Kindle Notes & Highlights
by
Ray Dalio
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November 1 - November 11, 2019
From my experiences and my research, I have learned that too little credit/debt growth can create as bad or worse economic problems as having too much, with the costs coming in the form of foregone opportunities.
because credit creates both spending power and debt, whether or not more credit is desirable depends on whether the borrowed money is used productively enough to generate sufficient income to service the debt.
downside risks of having a significant amount of debt depends a lot on the willingness and the ability of policy makers to spread out the losses arising from bad debts. I have seen this in all the cases I have lived through and studied. Whether policy makers can do this depends on two factors: 1) whether the debt is denominated in the currency that they control and 2) whether they have influence over how creditors and debtors behave with each other.
lending is based on the expectation that the above-trend growth will continue indefinitely.
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.
Monetary Policy In many cases, monetary policy helps inflate the bubble rather than constrain
postbubble period, the wealth effect of asset price movements has a bigger impact on economic growth rates than monetary policy does. People tend to underestimate the size of this effect. In the early stages of a bubble bursting, when stock prices fall and earnings have not yet declined, people mistakenly judge the decline to be a buying opportunity and find stocks cheap in relation to both past earnings and expected earnings, failing to account for the amount of decline in earnings that is likely to result from what’s to come. But the reversal is self-reinforcing. As wealth falls first and
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However since the ratio of financial assets to money is high, when a large number of people rush to convert their financial assets into money and buy goods and services in bad times, the central bank either has to provide the liquidity that’s needed by printing more money or allow a lot of defaults.
depression can come from, or cause, either solvency problems or cash-flow
Lack of cash flow is an immediate and severe problem—and as a result, the trigger and main issue of most debt crises.
Still, if everyone went to sleep and woke up with no memory of what had happened, we would be in the same position, because debtors’ obligations to deliver money would be too large relative to the money they are taking in.
As this implies, a big part of the deleveraging process is people discovering that much of what they thought of as their wealth was merely people’s promises to give them money.
For example, the creditor who is leveraged 2:1 would experience a 60 percent decline in his net worth (i.e., their assets are twice their net worth, so the decline in asset value has twice the impact).7 Since banks are typically leveraged about 12:1 or 15:1, that picture is obviously devastating for them and for the economy as a whole.
1) austerity, 2) debt defaults/restructurings, 3) debt monetization/money printing, and 4) wealth transfers (i.e., from the haves to the have-nots).
To reiterate, the two biggest impediments to managing a debt crisis are: a) the failure to know how to handle it well and b) politics or statutory limitations on the powers of policy makers to take the necessary actions. In other words, ignorance and a lack of authority are bigger problems than debts themselves.
swiftly recognize the magnitude of the credit problems; b) don’t save every institution that is expendable, balancing
transfers to banks by pricing them at above market prices. AMCs are typically publicly owned entities that are mandated to sell the assets within some targeted time frame (e.g., 10 years)
Wealth gaps increase during bubbles and they become particularly galling for the less privileged during hard times. As a general rule, if rich people share a budget with poor people and there is an economic downturn, there will be economic and political conflict. It is during such times that populism on both the left and the right tends to emerge. How well the people and the political system handle this is key to how well the economy and the society weather the period.
If central banks just give people money (helicopter money), that’s typically less adequate than giving them that money with incentives to spend it. However, sometimes it is difficult for those who set monetary policy to coordinate with those who set fiscal policy, in which case other approaches are used.
A country’s own citizens or companies want to get their money out of their country/currency.
because the very act of trying to trap people leads them to want to escape.
The currency has a big initial depreciation, on average declining around 30 percent in real terms The decline in the currency is not offset
“catharsis” when describing hitting bottom. In theater (or for that matter, in one’s own personal life) crisis sows the seeds for change and ultimately renewal.
Devaluing currencies is like using cocaine, in that it provides short-term stimulation but is ruinous when abused.
(goods and services prices more than doubling every year or worse) coupled with extreme losses of wealth and severe economic hardship.
(By late October 1923, toward the end of the crisis, Germany’s entire 1913 stock of money would have just about gotten you a one-kilo loaf of rye bread.)
With each round of printing, more of the printed money is transferred to real or foreign assets instead of being spent on goods and services that fuel economic activity.
Trying to adequately convey how war economies work would take a whole different book, so I’m not going to delve deeply into the subject now, but I
When 1) within countries there are economic conflicts between the rich/capitalist/political right and the poor/proletariat/political left that lead to conflicts that result in populist, autocratic, nationalistic, and militaristic leaders coming to power, while at the same time, 2) between countries there are conflicts arising among comparably strong economic and military powers, the relationships between economics and politics become especially intertwined—and the probabilities of disruptive conflicts (e.g., wars) become much higher than normal.
Mutually threatening relationships in which the parties think about how they can harm the other and exchange painful acts in the hope of forcing the other into a position of fear so that they will give in. In this type of lose-lose relationship, they interact through “war” rather than through “negotiation.”
Trade War
The worst thing a country, hence a country’s leader, could ever do is get into a lot of debt and lose a war because there is nothing more devastating. ABOVE ALL ELSE, DON’T DO THAT.
commercial bills, as collateral for the money it was printing.4 The pace of printing that followed was rapid: By the end of August, the quantity of Reichsbank notes in circulation (i.e., paper marks) had increased by approximately 30 percent.
Good future refernce for a fiction book
or ending convertibility and printing more money.
domestic debt.5 In 1914, German government debt was insignificant. By 1918, Germany had amassed a total local currency debt stock of 100 billion marks, about 130 percent of German GDP.
When a country has to borrow in a foreign currency, it’s a bad sign. By
Greece
Unlike local currency debt, hard currency (foreign currency and gold denominated) debt cannot be printed away.
indemnity.”
This triggered another sharp plunge in the exchange rate,28 with the mark falling 90 percent against the dollar between July, 1919 and January, 1920. Inflation surged, hitting 140 percent by the end of the year. Once again, the mark’s drop was driven primarily by German
The stimulative policies allowed Germany to escape the global contraction and enjoy relatively strong economic conditions. Between
speculative bubble, with Keynes even calling it “the greatest ever known.” Many of those flooding the market with mark orders were new buyers, with no prior experience in the market they were trading—one of the classic signs of a bubble. According to Keynes:
The reparation schedule created a balance of payments crisis. In many ways, a balance of payments crisis is just like any other serious problem faced by individuals, households, and corporations in making a payment. To come up with the money, a country must either 1) spend less, 2) earn more, 3) finance the payments through borrowing and/or tapping into savings, or 4) default on the debt (or convince creditors to give it relief). Unlike its domestic
Upper Silesia (an important coal mining and industrial region) to Poland, despite a majority vote by its residents to remain in Germany.
“The Allies must make up their minds as to whether they wanted a weak Germany who could not pay, or a strong Germany who could pay. If they wanted a weak Germany they must keep her economically weak; but if they wanted her to be able to pay they must allow Germany to exist in a condition of cheerfulness, which would lead to successful business. This meant, however, that you would get a strong Germany, and a Germany that was strong economically would, in a sense, be strong from a military point of view also.”
assassinated by a right wing group. Rathenau, despite some of his belligerent speeches, was one of the few German politicians who was trusted by the Allied powers and enjoyed significant support at home.
In the case of Weimar Germany, the cost of not printing was not only potential economic collapse, but political fragmentation. France’s repeated threats to occupy German territory if reparations were not paid made halting the printing press an invitation to a foreign invasion. It also lowered hopes for productive reparations negotiations.
“The inflation in which we find ourselves at this time is murdering the Republic. It will be the gravedigger of our Republic.”116 The
“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.”5
Prices are high relative to traditional measures Prices are discounting future rapid price appreciation from these high levels There is broad bullish sentiment Purchases are being financed by high leverage Buyers have made exceptionally extended forward purchases (e.g., built inventory, contracted forward purchases, etc.) to speculate or protect themselves against future price gains New buyers (i.e., those who weren’t previously in the market) have entered the market Stimulative monetary policy helps inflate the bubble, and tight
extremely high multiples financed by borrowing (i.e., margin). Many stocks were valued as much as 30 times earnings.7 The popular book New Levels in the Stock Market, published in 1929 by Ohio State professor Charles Amos Dice, captured the pervasive sentiments
It’s when there’s a run on deposits and the assets fall in value that banks have problems.
