Ray Dalio, one of the most successful money managers alive, is both a phenomenal investor and a rigorous thinker.
Over the past decade, he has spent a growing amount of time sharing how he operates and makes sense of the world.
A recent example of this is a newsletter series he has been writing on LinkedIn called “Principled Perspectives.”
He has been sharing a post every 2 weeks or so on his notes on the changing world order.
This week’s post on “Money, Credit, and Debt” was an education in how to think about money, credit, and debt.
It is dense, long, and would fit in well into a thesis written for a graduate school finance class. He takes the time to explain how our financial system works, what long and short term debt cycles are, how currencies rise and fall, and why reserve currencies matter to the strength of nations.
I am grateful to him for taking the time to educate us. It is an amazing way to spend 20-30 minutes.
Here are some of the quotes from his writings:
“In order to understand why empires and their economies rise and fall and what is happening to the world order right now, you need to understand how money, credit, and debt work. Understanding how they work is critically important because that which has historically been, and still is, what people are most inclined to fight for is wealth—and the biggest single influence on how wealth rises and declines is money and credit. So, if you don’t understand how money and credit work, you can’t understand how economies work, and if you can’t understand how economies work, you can’t understand the most important influence on economic conditions, which is the biggest driver of politics and how the whole economic-political system works.”
“If one entity has a large net worth (i.e., many more assets than liabilities), it can spend above its income until the money runs out, at which point it has to slash its expenses, and if it has significant liabilities/debts and not enough income to pay for both expenses and debt payments, it will default on its debts. Since one person’s debts are another’s assets, that defaulting on debts reduces other entities’ assets, which requires them to cut their spending, and a self-reinforcing downward debt and economic contraction ensues.”
“While wealth and power are what most people want and will fight over most, some people and their countries don’t think that these things are the most important and wouldn’t think of fighting over them. For example, some believe that having peace and savoring life are more important than having a lot of wealth and power and wouldn’t think of fighting hard enough to gain enough of the wealth and power to make it into the group included in this study.”
“Throughout History Wealth Was Gained by Either Making It, Taking It from Others, or Finding It in the Ground”
“Throughout recorded history various forms of groups of people (e.g., tribes, kingdoms, countries) have gained wealth and power by building it themselves, taking it from others, or finding it in the ground. When they gathered more wealth and power than any other group, they became the world’s leading power, which allowed them to determine the world order. When they lost that wealth and power, which they all did, the world order changed in very big ways.”
“Nowadays we think mostly in terms of countries. However, countries as we know them didn’t come into existence until the 17th century, after Europe’s Thirty Years’ War. In other words, before then there were no countries—generally speaking, though not always, there were kingdoms instead. In some places, kingdoms still exist and can be confused with being countries, and some places are both. Generally speaking, though not always, kingdoms are small, countries are bigger, and empires are biggest (spreading beyond the kingdom or the country)…”
PS: Here is my synthesis of his posts:
- We are approaching the end of the long term debt cycle that started at Bretton Woods in 1944;
- While there have been many short term recessions and expansions, the long term debt cycle will likely be a reset that will involve a deflation of major reserve currencies [in this case, the dollar];
- While the US still benefits from being the dominant reserve currency, the end of a long term debt cycle typically brings major domestic and international changes.