Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

by Ray Dalio

As explained more comprehensively in my book Principles for Navigating Big Debt Crises there are three types of monetary policy: 1) interest-rate-driven monetary policy (which I call Monetary Policy 1 because it is the first to be used and is the preferable way to run monetary policy), 2) printing money and buying financial assets, most importantly bonds (which I call Monetary Policy 2 and is now popularly called “quantitative easing”), and 3) coordination between fiscal policy and monetary policy in which the central government does a lot of debt-financed spending and the central bank buys that debt (which I call Monetary Policy 3 because it is the third and last approach to be used when the first two cease to be effective). The next charts show how the debt crises of 1933 and 2008 both led to interest rates hitting 0 percent and were followed by big money printing by the Federal Reserve.