A Template for Understanding Big Debt Crises

by Ray Dalio

While inflationary depressions are possible in all countries/currencies, they are far more likely in countries that: Don’t have a reserve currency (so there is not a global bias to hold their currency/debt as a store hold of wealth) Have low foreign-exchange reserves (the cushion to protect against capital outflows is small) Have a large foreign debt (so there is a vulnerability to the cost of the debt rising via increases in either interest rates or the value of the currency the debtor has to deliver, or a shortage of the availability of dollar denominated credit) Have a large and increasing budget and/or current account deficit (causing the need to borrow or print money to fund the deficits) Have negative real interest rates (i.e., interest rates that are significantly less than inflation rates), therefore inadequately compensating lenders for holding the currency/debt Have a history of high inflation and negative total returns in the currency (increasing lack of trust in the value of the currency/debt) Generally speaking, the greater