A Template for Understanding Big Debt Crises

by Ray Dalio

The positive, self-reinforcing cycle is enhanced when the demand for the currency is improving. If the currency is cheap enough to offer attractive opportunities to foreign investors (who will typically lend to or invest in entities that can produce inexpensively in that country and sell into export markets to earn the foreign currency to provide them with a good return), and/or the country sells more to foreigners than it buys from them, a country’s balance of payments will become favorable—i.e., the demand for its currency will be greater than its supply. This makes the central bank’s job easier—i.e., it can get more growth per unit of inflation—because the positive inflows can be used to appreciate the currency, to lower interest rates, and/or to increase reserves, depending on how the central bank chooses to handle