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

by Ray Dalio

A currency devaluing and a currency losing its reserve currency status aren’t necessarily the same, though both are caused by debt crises. The loss of reserve currency status is a product of chronic large devaluations. As previously explained, increasing the supply of money and credit reduces the value of money and credit. This is bad for holders of money and credit but a relief to debtors. When this debt relief allows money and credit to flow into productivity and profits for companies, real stock prices rise. But it can also damage the actual and prospective returns of cash and debt assets enough to drive people out of them and into inflation-hedge assets and other currencies. The central bank then prints money and buys cash and debt assets, which reinforces the bad returns of holding them. The later in the long-term debt cycle this happens, the greater the likelihood that there will be a breakdown in the currency and monetary system. Policy makers and investors must be able to tell the difference between systemically beneficial devaluations and systemically destructive ones.