Debt has been one of the hottest topics in financial news this year. Headlines about tackling personal debt, dealing with America’s growing debt, debating debt forgiveness, and so on have dominated the news sources in our industry. We’ve written about it quite a bit; you might remember our September newsletter about how to get ahead of the sinking ship that is the U.S. national budget.
A while back, our resident economics expert and bookworm Jim Dickson (who runs our Multifamily Acquisitions department here at Hughes Capital) shared a book with me called Principles for Navigating Big Debt Crises by the ever-prescient Ray Dalio. Dalio is a billionaire investor and fund manager who always has his finger on the pulse of world financial news, so it’s no surprise that Dalio’s advice in this book remains relevant even a few years after publication. Here are Jim’s top three takeaways from Big Debt Crises:
1. Every economy in the world revolves around short- and long-term debt cycles. The cycles can be inflationary or deflationary. Inflationary cycles typically come when a country has foreign debt denominated in a foreign currency and are much harder to deal with than a deflationary debt cycle. A frequently studied inflationary debt cycle is Germany in the 1920s. Some deflationary debt cycles that are often evaluated include the Great Depression in the United States (1930s) and the Great Recession in the United States (2008-2013). (I suggest reading Jim’s historical analysis of this from a few months ago; it’s very interesting and informative.)
2. Since interest rates and quantitative easing (the process of a central bank making new money to purchase assets from commercial banks, which become those banks’ new reserves) are at their limits, “the central bank,” Dalio writes, “has very little ability to provide stimulus through these two channels.” In other words, monetary policy has little “gas in the tank.” To combat this during a financial crises (such as 2008 and again in 2020), the Fed uses strategies such as the aforementioned quantitative easing. This typically happens in the later years of a long-term debt cycle (e.g., 1937-38 and present day in the U.S.), which can lead to “pushing on a string,” as Dalio explains it. In financial terms, this adage refers to the limits of ineffective and inefficient monetary policy, where you can only push a string and not pull it (which, as it sounds, is very difficult to do).
3. So why does that matter? Loose monetary policy, like quantitative easing, creates capital asset inflation, which widens the income gap and in turn produces an environment conducive to populism. This is what we’re seeing play out now, in politics and in finance. How so? The idea is that the growing wealth gap is part of what’s behind a lot of the polarization in society today; for example, the drama and hostility that you see on social media forums these days is emblematic of increasing tensions. The types of politicians who get elected these days (extremes across the spectrum) are also indicative of what happens when there are big wealth gaps. If you think back to the last time there was this kind of wealth gap — notably, back in the 1930s — you saw the same thing. Franklin D. Roosevelt was elected during that time and he ended up being one of the most extreme presidents the country has ever seen. When he was president, he made extreme decisions like outlawing gold and increasing the top marginal income tax rate to 94%, and he spent an unprecedented amount of money (through the New Deal).
I highly recommend adding this book to your to-read list. You can add this book to your holiday reading list by purchasing here.