A Template for Understanding Big Debt Crises

by Ray Dalio

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.

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.

When things are so good that they can’t get better—yet everyone believes that they will get better—tops of markets are being made.

While tops are triggered by different events, most often they occur when the central bank starts to tighten and interest rates rise.

ignorance and a lack of authority are bigger problems than debts themselves.

Currency and debt serve two purposes: to be 1) mediums of exchange and 2) store holds of wealth

Debt is one person’s asset and another’s liability

If a currency falls in relation to another currency at a rate that is greater than the currency’s interest rate, the holder of the debt in the weakening currency will lose money. If investors expect that weakness to continue without being compensated with higher interest rates, a dangerous currency dynamic will develop.

in times when money is flowing out of a currency, real interest rates need to rise less if real exchange rates fall more (and vice versa).

trying to trap people leads them to want to escape.

Devaluing currencies is like using cocaine, in that it provides short-term stimulation but is ruinous when abused.

During inflationary deleveragings, average debt maturities always fall.