A Template for Understanding Big Debt Crises

by Ray Dalio

you need better housing and you build it, the incremental need to build more housing naturally declines. As spending on housing slows down, so does housing’s impact on growth. Let’s say you have been spending $10 million a year to build an office building (hiring workers, buying steel and concrete, etc.). When the building is finished, the spending will fall to $0 per year, as will the demand for workers and construction materials. From that point forward, growth, income, and the ability to service debt will depend on other demand. This type of cycle—where a strong growth upswing driven by debt-financed real estate, fixed investment, and infrastructure spending is followed by a downswing driven by a debt-challenged slowdown in demand—is very typical of emerging economies because they have so much building to do.