My Review of Ray Dalio's "How Countries Go Broke: The Big Cycle"

 Paying the Piper

Ray Dalio, the founder of Bridgewater Associates, which became the world’s largest macro hedge fund, has written an important book on the inexorable reality that accumulated debts have to be extinguished one way or another. He utilizes a host of international examples and aside from the U.S. he focuses in on Japan and China. No matter the country, the piper has to be paid. Dalio’s big cycle lasts approximately 80 years, and it is in many ways similar to the long cycles discussed in Neil Howe’s “The Fourth Turning.” (See: Shulmaven: My Review* of Neil Howe's "The Fourth Turning is Here: What the Seasons of History......" ) It seems that we are on the precipice of Dalio’s big cycle joining  the crisis point  of Howe’s generational cycle. If that is the case, the turbulent time we are now living in is only in its early stages.

 

Dalio’s debt/credit/economy cycle big cycle is made up of a series of short cycles where credit expands and contracts. However, overtime debt increasingly accumulates because it does not generate the revenue needed to service it. The monetary authorities accommodate the increase in debt by going from MP0 where money is tied to a fixed standard, like gold to MP1 where policy is tied to a policy rate to MP2 where through quantitative easing money is printed. At the end of the day when the debt can no longer be serviced at reasonable interest rate, the debt is either directly repudiated or inflated away in order to deleverage the economy. If the debt is not denominated in local currency, it will be repudiated.

 

Overlapping the credit cycle are two other cycles and exogenous events such as acts of nature and the introduction of major innovations that spur growth. The cycles are an internal political cycle evolving around order/disorder and an external cycle similarly revolving around order/disorder. Today the confluence of the big credit cycle with disorder in both internally and externally means Howe’s fourth turning is upon us. What can mitigate this eventuality or make things worse will be the impact of innovative artificial intelligence on our society.

 

Dalio’s solution to the big cycle calls for reducing the federal deficit as a share of GDP from the current 6% to 3% by increasing taxes, lowering spending and lower interest rates. Similar to the 1990’s deficit reduction, if credible, would work to lower interest rates. Some of these nostrums sound similar to what the Trumpies are arguing, except the part about tax increase, tariffs aside. The Trump way of lowering the debt/GDP ratio relies heavily on much lower long-term interest rates that would bring with it other issues.

 

Dalio is clearly worried, and he makes a compelling case to be worried. My criticism of the book is that although he highlights his main points in bold, it still is way to repetitive and because I read the book on my Kindle, the numerous charts were too difficult to read. I therefore would recommend the hard copy.