- Ray Dalio - The Changing World Order: How Countries Go Broke

Highlights

Understand the Debt Cycle

• Understand the debt cycle like a circulatory system where credit creates debt needing repayment to avoid economic strain.
• Watch debt service payments closely as rising debt squeezes spending and leads to financial crises. Transcript: Chris Williamson Debt money cycle works? Ray Dalio Gladly. And it really is simple. Chris Williamson We'll see. We'll see if you can stress test just how simple I am, but let's give it a crack. Ray Dalio Okay. The system works like the circulatory system of your body that brings nutrients in the form of buying power by credit. It brings credit, and that credit produces debt. However, when it produces that debt, if you earn enough money because of that credit, it will pay back that credit and you will have a healthy system. If it doesn't, it will build up debt and debt service payments like plaque in the arteries of your system that will squeeze out other spending. That is true for you. That's true for governments. Okay. The only difference between your finances or a company's finances or the government's finances is the government has the ability to print money to pay off those debts. And it has the ability to take money from others by taxes. But the economics work the same. So a healthy system. And you can watch it almost like a doctor watching an MRI. You can see that happening. And I'll take you through it for the U.S. Government. I'll explain it. But that is now happening. And you see the debt service squeezing out other spending. And I'll take you through it a minute. The second thing to know about that is when you run a deficit or have a lot of debt, you have to sell that debt to a buyer. So there's a supply and a demand for debt. One man's debts earn other man's assets. And if they believe that that's a good storehold of wealth and they get an adequate real return, they will hold that debt and so on. If they believe that it's not, not only will they not buy the new debt, but they may sell the old debt. And when they sell the old debt, their selling is greater relative to the buying. And like anything, when the selling is greater relative to the buying, the price goes down and the interest rate goes up. And that's to ration debt. Okay. So what the central banks do, okay. They print money and buy the debt like our central banks did. Okay. And they always do that. And so part of the mechanics. So that is the dynamic. So now let's look at the United States government. The United States government this year will sell, will sell will spend about $7 trillion, and it will take in about $5 trillion. Okay, so it's spending 40% more than it is taking in. And because it's spent a lot more than it has taken in for a long time, it has a lot of debt. Its debt is about six times what it takes in every year. And it can't really cut back on expenses because some of those expenses are commitments, like you have to pay off the debt with the interest rate. And the debt roll over the debt service is huge. So there's a deficit, seven minus five equals two trillion. Okay. One trillion of that is interest that keeps building up because you build up the debt. In addition, you have to roll over $9 trillion worth of debt that's expiring. So that's $10 trillion. What does expiring mean? It's rolling off. It's maturing. So I got to sell to replace that. And then in addition to that, so we have the one interest, one trillion interest, nine trillion expiring, plus the new two makes 12 trillion that I have to sell. Okay. The buyers have a lot of these dead assets and are not, for various reasons, not eager to buy that debt. (via) ^rwhi937241944

Fix Debt by Sharing Cuts

• To fix fiscal problems, take small amounts from taxes, spending, and benefits fairly across the board.
• Avoid zero-sum promises because otherwise debt grows unchecked, pushing the economy toward crisis. Transcript: Ray Dalio You have to take a little bit from taxes. You have to take a little bit from spending. And it isn't easy, but you can reduce the budget deficit from 7% of GDP to about 3% of GDP. And if you do that with everybody giving something a little bit, you can achieve that. And if you do that, then supply demand for bonds improves and interest rates come down and that helps. But if you don't do it now, you're going to have the next big increase in debt. And when you get that debt compounding on itself, you're beyond hope. And, uh, and, and that's where we are. And then every, and I say, um, so I call that process, the 3% three part solution. And I would just say, take the three part, take that pledge, but it's, and it's like being on a boat, to rocks. And the politicians on the boat headed to rocks know that they're going to go to the rocks, but they're arguing about how to turn. And I say, I don't care even how you turn. Just everybody, take it equally from everything. I don't care. But you got to turn. But they argue, am I going to go left or am I going to go right and I don't turn? (via) ^rwhi937241939