Barron’s Sandra Ward recently scored an interview with Ray Dalio, one of the world’s most successful yet secretive hedge fund managers.Dalio offers his view of the global economy and markets including his take on Europe, U.S. Treasuries, and gold.
However, his assessment of deleveraging was particularly interesting.
Dalio notes there are three types of deleveraging:
- austerity: “pull in you belt, spend less, and reduce debt”
- debt restructing: “creditors get paid less or get paid over a longer time frame or at a lower interest rate”
- printing of money: “typically happens when interest rates are close to zero, because you can’t lower interest rates any more”
Dalio describes the U.S. deleveraging process as beautiful. Here’s an excerpt from Barron’s:
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.
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