RAY DALIO
I received a lot of great questions over the weekend and I wanted to share some of my answers with you here, with more to come in the following days.
QUESTION:
What’s your view on countries with low public debt but high private debt (i.e. consumers in debt but not the government)?
ANSWER:
Countries with low public debt and high private debt quickly become countries with high public debt when bubbles burst because governments typically take on debt to help save the private sector.
QUESTION:
You say the current situation looks like 1935. What different dynamics can we expect due to pension funds and a dollar which is not linked to anything like gold anymore?
ANSWER:
I would expect much more central bank printing of money and pushing money directly into people’s hands to do MP3 (as distinct from just buying bonds).
QUESTION:
After reading the first 64 pages of your template, I have a question. Between debts denominated in foreign currencies and one's own currency debts, which to choose for avoiding debts crisis and also have economic growth?
ANSWER:
Don’t have debt in foreign currency because you won’t be able to print the money to help service it and it will be more difficult to restructure on favorable terms.
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Some more answers to your questions that were submitted over the weekend.
QUESTION:
In which stage do you consider the major economies to be in the current situation? Do you see a debt crisis coming soon?
ANSWER:
By my measures, all the major developed countries are a) late in their long term debt cycles (because debt and non-debt obligations like pensions and health care obligations are very high, at the same time monetary easing will be less effective because interest rates are near 0pct and quantitative easing is less effective) and b) 60-80 percent through their short term debt cycles. Japan is closest to pushing on a string, Europe is between pushing on a string and normalization and the U.S. is closer to normalization. The next big debt crisis, which probably won’t happen for a couple of years, will likely quickly move them all toward pushing on a string.
QUESTION:
How would you consider Italy's debt load? I would consider it as "foreign-denominated" which leaves the country vulnerable to an inflationary type of depression.
ANSWER:
Italy won’t have an inflationary spiral as long as it remains in the Union because it can’t print money. Think of Italy like being a state in the US - let’s say Texas during an oil bust or like Greece in the EU.
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If you're interested, here's some more questions and answers from this past weekend's posts.
QUESTION:
Is there room for higher public spending and tax cuts around the world to stimulate the economy in a future recession?
ANSWER:
Yes, fiscal stimulation coupled with monetization of the debt is the logical next move as long as the foreign demand for our currency remains a strong reserve currency. Political fragmentation that stands in the way of good policies and foreign investors losing confidence in the dollar because of unsound policies are the two biggest risks in the next downturn.
QUESTION:
Between debts denominated in foreign currencies and one's own currency debts, which to choose for avoiding debts crisis and also have economic growth?
ANSWER:
Don’t have debt in foreign currency because you won’t be able to print the money to help service it and it will be more difficult to restructure on favorable terms.
QUESTION:
Did you release this book because you see one coming around the corner?
ANSWER:
No. I released it because it was the 10th anniversary of the debt crisis and I thought people would be more interested in the subject matter and because I now want to pass along the principles that helped me.