A Template for Understanding Big Debt Crises Quotes

“To put these complicated matters into very simple terms, you create a cycle virtually anytime you borrow money. Buying something you can’t afford means spending more than you make. You’re not just borrowing from your lender; you are borrowing from your future self. Essentially, you are creating a time in the future in which you will need to spend less than you make so you can pay it back. The pattern of borrowing, spending more than you make, and then having to spend less than you make very quickly resembles a cycle. This is as true for a national economy as it is for an individual. Borrowing money sets a mechanical, predictable series of events into motion.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“Early on in the top, some parts of the credit system suffer, but others remain robust, so it isn’t clear that the economy is weakening. So while the central bank is still raising interest rates and tightening credit, the seeds of the recession are being sown. The fastest rate of tightening typically comes about five months prior to the top of the stock market. The economy is then operating at a high rate, with demand pressing up against the capacity to produce. Unemployment is normally at cyclical lows and inflation rates are rising. The increase in short-term interest rates makes holding cash more attractive, and it raises the interest rate used to discount the future cash flows of assets, weakening riskier asset prices and slowing lending.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“(BDO) October 22: The Dollar Squeeze A debt is a short cash position—i.e., a commitment to deliver cash that one doesn’t have. Because the dollar is the world’s reserve currency, and because of the dollar surplus recycling that has taken place over the past few years…lots of dollar denominated debt has been built up around the world. So, as dollar liquidity has become tight, there has been a dollar squeeze. This squeeze…is hitting dollar-indebted emerging markets (particularly those of commodity exporters) and is supporting the dollar. When this short squeeze ends, which will happen when either the debtors default or get the liquidity to prevent their default, the US dollar will decline. Until then, we expect to remain long the USD against the euro and emerging market currencies. The actual price of anything is always equal to the amount of spending on the item being exchanged divided by the quantity of the item being sold (i.e., P = $/Q), so a) knowing who is spending and who is selling what quantity (and ideally why) is the ideal way to get at the price at any time, and b) prices don’t always react to changes in fundamentals as they happen in the ways characterized by those who seek to explain price movements in connection with unfolding news. During this period, volatility remained extremely high for reasons that had nothing to do with fundamentals and everything to do with who was getting in and out of positions for various reasons—like being squeezed, no longer being squeezed, rebalancing portfolios, etc. For example, on Tuesday, October 28, the S&P gained more than 10 percent and the next day it fell by 1.1 percent when the Fed cut interest rates by another 50 basis points. Closing the month, the S&P was down 17 percent—the largest single-month drop since October 1987.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“This way of thinking about risk caused many investors to increase their exposures beyond what would normally be seen as prudent. They looked at the recent volatility in their VAR calculations, and by and large expected it to continue moving forward. This is human nature and it was dumb because past volatility and past correlations aren’t reliable forecasts of future risks.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“A “beautiful deleveraging” happens when the four levers are moved in a balanced way so as to reduce intolerable shocks and produce positive growth with falling debt burdens and acceptable inflation. More specifically, deleveragings become beautiful when there is enough stimulation (i.e., through “printing of money”/debt monetization and currency devaluation) to offset the deflationary deleveraging forces (austerity/defaults) and bring the nominal growth rate above the nominal interest rate—but not so much stimulation that inflation is accelerated, the currency is devaluated, and a new debt bubble arises.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“In the immediate postbubble period, the wealth effect of asset price movements has a bigger impact on economic growth rates than monetary policy does. People tend to underestimate the size of this effect. In the early stages of a bubble bursting, when stock prices fall and earnings have not yet declined, people mistakenly judge the decline to be a buying opportunity and find stocks cheap in relation to both past earnings and expected earnings, failing to account for the amount of decline in earnings that is likely to result from what’s to come. But the reversal is self-reinforcing. As wealth falls first and incomes fall later, creditworthiness worsens, which constricts lending activity, which hurts spending and lowers investment rates while also making it less appealing to borrow to buy financial assets. This in turn worsens the fundamentals of the asset (e.g., the weaker economic activity leads corporate earnings to chronically disappoint), leading people to sell and driving down prices further. This has an accelerating downward impact on asset prices, income, and wealth.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“Generally the causes of the top-reversal fall into a few categories: The income from selling goods and services to foreigners drops (e.g., the currency has risen to a point where it’s made the country’s exports expensive; commodity-exporting countries may suffer from a fall in commodity prices). The costs of items bought from abroad or the cost of borrowing rises. Declines in capital flows coming into the country (e.g., foreign investors reduce their net lending or net investment into the country). This occurs because: The unsustainable pace naturally slows, Something leads to greater worries about economic or political conditions, or A tightening of monetary policy in the local currency and/or in the currency those debts are denominated in (or in some cases, tightening abroad creates pressure for foreign capital to pull out of the country). A country’s own citizens or companies want to get their money out of their country/currency.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“There are four types of levers that policy makers can pull to bring debt and debt service levels down relative to the income and cash flow levels that are required to service them: Austerity (i.e., spending less) Debt defaults/restructurings The central bank “printing money” and making purchases (or providing guarantees) Transfers of money and credit from those who have more than they need to those who have less”
― Ray Dalio, A Template for Understanding Big Debt Crises

“During the Great Depression there were six big rallies in the stock market (of between 16 percent and 48 percent) in a bear market that declined a total of 89 percent. All of those rallies were triggered by government actions that were intended to reduce the fundamental imbalance.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“While I won’t go into exactly how it works here, the most defining characteristics of bubbles that can be measured are: Prices are high relative to traditional measures Prices are discounting future rapid price appreciation from these high levels There is broad bullish sentiment Purchases are being financed by high leverage Buyers have made exceptionally extended forward purchases (e.g., built inventory, contracted for supplies, etc.) to speculate or to protect themselves against future price gains New buyers (i.e., those who weren’t previously in the market) have entered the market Stimulative monetary policy threatens to inflate the bubble even more (and tight policy to cause its popping)”
― Ray Dalio, A Template for Understanding Big Debt Crises

“While tops are triggered by different events, most often they occur when the central bank starts to tighten and interest rates rise. In some cases the tightening is brought about by the bubble itself, because growth and inflation are rising while capacity constraints are beginning to pinch.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“For some perspective on what these numbers mean, in 1913 a total of six billion marks circulated as currency and coin in the whole German economy. By late October 1923, the entire stock of money in 1913 would just about get you a one kilo-loaf of rye bread.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“if there is very little credit provided for development, then there is very little development, which is a bad thing.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“While the picture is clearly within the downtrend, there were rallies, and in just about all of them, one could make the argument that the bottom was being made. In investing, it’s at least as important to know when not to be confident and when not to make a bet as it is to have an opinion and make one.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“The capitalist-investor class experiences a tremendous loss of “real” wealth during depressions because the value of their investment portfolios collapses (declines in equity prices are typically around 50 percent), their earned incomes fall, and they typically face higher tax rates. As a result, they become extremely defensive. Quite often, they are motivated to move their money out of the country (which contributes to currency weakness), dodge taxes, and seek safety in liquid, noncredit-dependent investments (e.g., low-risk government bonds, gold, or cash).”
― Ray Dalio, A Template for Understanding Big Debt Crises

“the question of whether rapid credit/debt growth is a good or bad thing hinges on what that credit produces and how the debt is repaid (i.e., how the debt is serviced).”
― Ray Dalio, A Template for Understanding Big Debt Crises

“rising stock prices lead to more spending and investment, which raises earnings, which raises stock prices, which lowers credit spreads and encourages increased lending (based on the increased value of collateral and higher earnings), which affects spending and investment rates,”
― Ray Dalio, A Template for Understanding Big Debt Crises

“Foreign capital flows are high (on average around 10 percent of GDP) The central bank is accumulating foreign-exchange reserves The real FX is bid up and becomes overvalued on a purchasing power parity (PPP) basis by around 15 percent Stocks rally (on average by over 20 percent for several years into their peak)”
― Ray Dalio, A Template for Understanding Big Debt Crises

“In either case, during these bubbles the total returns of these assets to foreigners (i.e., asset prices in local currency plus the currency appreciation) are very attractive.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“When things are so good that they can’t get better—yet everyone believes that they will get better—tops of markets are being made.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“the most defining characteristics of bubbles that can be measured are: Prices are high relative to traditional measures Prices are discounting future rapid price appreciation from these high levels There is broad bullish sentiment Purchases are being financed by high leverage Buyers have made exceptionally extended forward purchases (e.g., built inventory, contracted for supplies, etc.) to speculate or to protect themselves against future price gains New buyers (i.e., those who weren’t previously in the market) have entered the market Stimulative monetary policy threatens to inflate the bubble even more (and tight policy to cause its popping)”
― Ray Dalio, A Template for Understanding Big Debt Crises

“2) the fact that debt crises can be well-managed does not mean that they are not extremely costly to some people.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“One classic warning sign that a bubble is coming is when an increasing amount of money is being borrowed to make debt service payments, which of course compounds the borrowers’ indebtedness.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“to pay the rents that are charged when you land on a property that has a lot of them. Some players are forced to sell their property at discounted prices to raise that cash. So early in the game, “property is king” and later in the game, “cash is king.” Those who play the game best understand how to hold the right mix of property and cash as the game progresses.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“In a market-based economy, expansions and contractions in credit drive economic cycles, which occur for perfectly logical reasons.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“more often than not they err on the side of being too loose with credit because the near-term rewards (faster growth) seem to justify it. It is also politically easier to allow easy credit (e.g., by providing guarantees, easing monetary policies) than to have tight credit. That is the main reason we see big debt cycles.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“because credit creates both spending power and debt, whether or not more credit is desirable depends on whether the borrowed money is used productively enough to generate sufficient income to service the debt.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“How investors fared in the bear market varied a lot. They generally fell into three broad categories: 1) those who were clobbered and let their fears prompt them to reduce their risks (sell “risky” assets) the more they got clobbered, 2) those who were clobbered and had blind faith that in the end things would work out, so they held on or even bought more risky assets, and 3) those who had a pretty good understanding of what was happening and did a good job of selling high and buying low. There were very few in the third group.”
― Ray Dalio, A Template for Understanding Big Debt Crises

“business”
― Ray Dalio, A Template for Understanding Big Debt Crises

“In other words, QE certainly benefits investors/savers (i.e., those who own financial assets) much more than people who don’t, thus widening the wealth gap.”
― Ray Dalio, A Template for Understanding Big Debt Crises