Social unrest at a time like this is a “classic” reaction to deleveraging, according to billionaire hedge fund manager Ray Dalio.
About one half of the countries in world, including the U.S. and other debtor nations, including Greece, Spain, and Italy, are in a cycle of “deleveraging” right now. The other half, including Brazil, India, and China, conversely, are leveraging up.
- They spent years overspending, financed by their government’s borrowing
- They are in the process of deleveraging debt
- As a result, they are being forced to lower their debt relative to their income levels, constrain spending levels and make improvements in the job market
- Some are worse off than others. Greece, Spain and Italy, for example, can’t print money to pay off their debts. To make up for slow credit growth, they will have decade-long depressions and debt defaults.
- The U.S. is trading like a country in decline
It’s not surprising that a debtor nation like ours is experiencing social unrest, explains Dalio in the Financial Times,
Tensions between the rich and the poor, capitalists and socialists, those in and out of power and different factions in each group are now intensifying in a manner that is classic in deleveraging. Politicians who are fighting for power in a political year are fanning the flames and are increasingly willing to do risky things (like shutting down the government) in pursuit of their missions and popular support.
In history at least, deleveraging cycles produce so much unrest that they can lead to mob-rule and takeovers by dictators.
In deleveragings bad economic conditions typically lead to emotional reactions, social and political fragmentation, poor decision-making and increased conflict. When this occurs in democracies, the checks and balance system, which is intended to yield the best decisions for the whole, can stand in the way of thoughtful leadership and lead to ineffective “mob” rule. This dynamic can lead to a self-reinforcing downward spiral.
Dalio suggests that economic leaders, politicians, and the disgruntled alike stop that behaviour in its tracks by engaging in thoughtful discourse rather than grabbing “at each others throats.”
One thing that might help, according to Dalio: “[properly distributing] both the austerity and the increased efforts that are required to manage our debt burdens.”
Otherwise, we risk political collapse.