Ray Dalio of Bridgewater Associates is an interesting and pragmatic economic thinker. He had a recent interview with Barron’s, in which he described the deleveraging process in the US as “beautiful.” Here’s a snippet:
A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That’s a beautiful deleveraging.
We’re in a phase now in the U.S. which is very much like the 1933-37 period, in which there is positive growth around a slow-growth trend. The Federal Reserve will do another quantitative easing if the economy turns down again, for the purpose of alleviating debt and putting money into the hands of people.
We will also need fiscal stimulation by the government, which of course, is very classic. Governments have to spend more when sales and tax revenue go down and as unemployment and other social benefits kick in and there is a redistribution of wealth. That’s why there is going to be more taxation on the wealthy and more social tension. A deleveraging is not an easy time. But when you are approaching balance again, that’s a good thing.
What makes all the difference between the ugly and the beautiful?
The key is to keep nominal interest rates below the nominal growth rate in the economy, without printing so much money that they cause an inflationary spiral. The way to do that is to be printing money at the same time there is austerity and debt restructurings going on.
It’s interesting that he seems pretty satisfied with the process the US has taken so far, in the sense that we may avoid significant inflation or deflation. The deleveraging process won’t be easy socially or economically, but it’s certainly preferable to a Japan-type scenario. His opinion is interesting to me because so many other commentators are falling into the doomsday camp, although half are expecting Japan-style deflation and the other half are counting on Weimar-style inflation.
I suppose it is human nature to worry about the worst thing that can happen, but Mr. Dalio suggests a middle path might be the most realistic.
I’m not sure what is worse, that Ray wrote this or you guys using it as evidence of anything good. I don’t know where to start so I guess “money in the hands of people” is as good as any other. Seriously, I’d love to see him defend the idea that QE money went to “the people”.
Deleveraging? Can someone directvRay to one of the countless us debt clock sites. The gov is more than taking up the slack in anyone else’s deleveraging cycle.
Is anyone actually paying any attention to what is going on? Garbage in, garbage out.
Terrible article.
I’m not using it as evidence of anything good or bad. I’m just noting Ray Dalio’s opinion. I think his opinion should be taken seriously, given his investment results, much as one would take the opinions of Warren Buffett, George Soros, Jim Rogers, Bill Gross, or Jeff Gundlach seriously. They may or may not be correct in a given situation, but they are serious thinkers with a track record.
Some have argued that aggregate debt is dropping, as writeoffs occur and consumer debt declines. As you point out, government debt is still climbing. Unlike Europe, however, the government sector is still smaller than the private sector in the US economy. If you have data to the contrary, please post it. We would all benefit from better information.
Perhaps we are discussing different metrics but, is the US Treasury market not the largest debt market in the world?
If you aren’t talking about bond market size then the reach of policy should be discussed. Government doesn’t have to be larger than the private sector to have negative effects.
This next bit is strictly anecdotal. Most business owners I know or talk to aren’t making plans to hire or expand because they have no clue what tomorrow will bring by way of government imposed costs.
I read your blog because I use Dorsey charts and tools to back up or say “not yet” to my fundamental research. To me, the borderline permabull musings and quoting of morons like Buffett who talks to MORTALS about buying and holding stocks forever is ridiculous.
In my opinion, the biggest threat to us that use charts or other quant methods is coming from the HFT realm. NANEX research is starting to scare the living daylights out of me with the apparent abuses of the system and possible suspension of supply and demand behind the true driver of market prices. I have yet to find a pnf craftsman as Tom Dorsey would say, who will discuss the merits or more likely demerits of HFT and the effect it is having on prices. A HFT discussion would be truly beneficial. My hunch is that most technical and quant trend guys are having a very difficult time over the last few years because of underlying changes that have taken place. I think they know something is different but they refuse to acknowledge an idea as radical as the price mechanism being broken.
Sorry for rambling.
http://www.sifma.org/research/statistics.aspx
This link at SIFMA will give you some idea of the relative sizes of outstanding debt. US Treasury is about $9.9 trillion, mortage debt is about $8.4 trillion, corporate debt is $7.7 trillion, municipals account for $3.7 trillion, with another $1.8 trillion in asset-backed debt. Based on SIFMA’s data, the amount of outstanding debt has stalled out recently at around $36 trillion. With the slight economic growth we’ve had, there has been very mild de-leveraging as a % of GDP.
By the way, Warren Buffett doesn’t buy and hold. Here’s a blog post on that particular myth: http://systematicrelativestrength.com/2012/02/27/the-myth-of-buy-and-hold/
I’m really not sure how/if HFT has affected the price mechanism. I think the law of supply and demand will be very difficult to repeal, however!