Ray Dalio’s Big Debt Crises book in 2022
I want to start off by saying that this is far from a good understanding of the book, macro economics, or investing. These are simply my thoughts on the topic.
I started investing in the stock market 12–13 years ago, when I was 16 years old. The first stock that interested me was Tesla, which I discovered at the time from my Motley Fool monthly subscription newsletter (in paper form). That means I started investing right after the 2008 financial crisis.
I had no idea that 2008 even happened, having lived in Canada and during my carefree teenage years. Everything I bought just went up! I thought I was a genius. I later took a break from investing to focus on school and then university and started up again during the Cannabis legalization hype in Canada in 2017. Again, I felt like a genius. Everything I bought doubled or tripled in price during a very short time period.
After the Cannabis hype died down and the crazy stock growth went away, I started losing money, for the first time in my investing “career”. That’s when I focused on trying to understand the stock market, individual stocks, and macro economics.
It took me another 4 years before I worked up the courage to open Ray Dalio’s Principles for Navigating the Big Debt Crises book. I have just finished reading Part 1 of the book and it has already flipped my understanding of economics upside down. I want to put together some of the ideas that I found the most interesting in this article:
What is the Big Debt Cycle?
I want to start off by saying that this is far from a good understanding of the book, macro economics, or investing. These are simply my thoughts on the topic.
In my understanding, The Big Debt Cycle ultimately comes down to money supply. Almost every country has a central bank that is responsible for the interest rates and regulating the supply of money in the country. The money supply needs to be regulated for a few reasons like more people immigrating to the country, economy is getting larger, and to stimulate the economy. The more money in the system, the less scarce it is, the more access everyone has to money. The less money, the more scarce it is, the harder it is to obtain.
So the central bank’s job is to regulate the supply of money. If there is too much money in the system, money is too easily obtained, and inflation happens. One of the reasons of inflation is that people start having too much excess money and are willing to overspend. If there is too little money, people do not have enough to facilitate trade, get loans to grow their business, and generally become too frugal and the economy slows down. Generally, every currency is inflationary because the money supply continuously increases and loses value over time.
This is not generally a bad thing. It allows people to have easier access to money and facilitates economic activity as people become less worried about money in general and are willing to take on more risk (credit).
Within the Big Debt Cycle, are little debt cycles. These debt cycles usually have a timeline of about 10 years and are the generic credit cycles. At the beginning of the cycles, people take out more debt that they earn which they have to payback. When they are forced to payback, they typically spend less and so the economy slows down.
The Big Debt Cycle usually comes around every 100 years or so and is caused by a variety of reasons, one of which is the system becoming too indebted in general and unable to pay off its accumulated debts.
At this time, there are 4 ways a country can deal with the debt: spendless, debt defaults, central bank printing money money, redistribution of wealth.
Let’s go a little deeper:
Deeper….
When money (or credit) is available freely, there is economic expansion. For example, people are able to more easily take out mortgages for higher amounts, that puts more money into the hands of the people who sold the house. Those people are now able to go out and spend more of that money that wouldn’t have been there before (because the mortgage is actually just credit!).
Generally, rising in spending, increases incomes which in turn increase net worths which in turn allows people to borrow even more money.
The flow goes like this: Easy Mortgage → High Purchase Prices → Seller gets easy money → Spends more → Company gain more revenue, raise prices and invest more → Raises salaries to attract talent → Employee’s income raises → Employee able to get easy access to high mortgage amount→ Employee buys more properties → Seller gets easy money → and the upwards cycle continues.
The Top
Eventually, this upwards cycle comes to some kind of a stop. Usually because central banks start to tighten and interest rates rise. The upwards cycle was only people due to low interest rates and easily available money. During the top, the employment rate is usually at lows and the inflation rate is rising.
Inflation rates need to be put under control so the central banks start to tighten. When the tighten happens, the cycle reverses.
The flow goes like this: Companies revenues goes down → Company reduces salaries or cuts employees → Employee unable to pay for high mortgage → Employee want to sell → Employee unable to get a profit from sale → Employee loses house and money → Employee unable to spend on his favorite brands → Companies revenue goes lower → More firings of employees → cycles spirals downwards.
Eventually, the market reaches the bottom and starts going up again.
2022 in Comparison
At the end of 2021 and beginning of 2022, the biggest worry on everyone’s mind is the rising inflation rates. The interest rates are at all time lows and the central banks printed a record amount of money to prevent the COVID crisis from taking down the economy.
The record amount of money injected in the system allowed for companies to have access to easy capital and low interest rates. This fueled incredible growth and allows the companies to invest by hiring and increasing salaries. Due to this, unemployment reached record lows and real estate prices reached record high. Additionally, a record amount of mortgages was taken on. In summary, people are leverages more than ever. A slight slowdown of the economy could force a large amount of leveraged home owners to sell.
First 2 months of 2022, housing prices have been doing down. This is not a good position to be if you bought your house with hopes of flipping it.
Additionally, the stock market has had its worse month in April since 2020. The overall stock market is down about 20–30% across the board.
According the Ray Dalio’s principles, in May of 2022, we are probably a couple months into The Top.
