Ray Dalio: Debt Monetization

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another one of your publications is
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carry with me is principles for
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navigating the big debt crisis we follow
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debt levels here we do debt reports debt
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accumulation port set aside some
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statistics this morning are you worried
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about where we are in debt accumulation
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at the household sovereign or global
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level or are we near tipping points as
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you look in debt accumulation around the
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world are you concerned I’m I look at
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things in a very mechanic mechanical way
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and so what concerns me about debt we’re
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in a new world now and what concerns me
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about debt is the nature of the dynamic
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in which you don’t have to service debt
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and what I mean by that is to a larger
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extent than ever before this debt growth
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the maturity of the debt has been
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extended a lot the interest rate becomes
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negative or or near negative so the debt
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service payments for the interest rate
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go down a lot and it’s almost the
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situation where there’s guaranteed debt
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rollovers so principle does not have to
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be rolled over in a number of cases and
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there’s low covenants and so when you
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start to look at this the thing you say
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what is going to cause a debt service
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problem in 2007 we calculated that we
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would have the 2008 financial crisis by
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doing those pro-forma numbers and then
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when we’re dealing now in this seemingly
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crazy or odd other reality in which the
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you don’t have to pay interest and you
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don’t have to rollover your debt and and
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that and then you play with negative
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interest rates you say how do how will
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that work okay and so if we look at
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periods of time in history and we’re
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somewhat those types of things happen
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maybe for example of war years one if we
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look at the war years and we look at ya
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let’s call year-old yield curve
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targeting with the low interest rates
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and the mechanics of that that produces
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a different
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mechanics now so when I look at what’s
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ahead and I think about that and my
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stretches my imagination because I I
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know even beyond that we will have much
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larger deficits so if we not only do we
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have the debts that you’re referring to
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right and their maturities but we have
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will have larger deficits which will
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grow and in addition we have pension
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liabilities and healthcare liabilities
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and other forms of liabilities that will
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come at us
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they’re very cashflow driven because
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you’ll have to make those types of
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payments and so they’re coming at us at
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the same time and then you deal with
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okay how will that be dealt with and
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funded so you have to go through the
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imagination of the fact that they will
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probably be monetized and in other words
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they’ll have debt
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central banks will be in a position that
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they’ll have to buy the debt and so as
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we go from other countries let’s say if
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we go from Japan which 46% of it’s very
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large debt is owned by the Bank of Japan
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and we keep moving that up that’s the
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mechanics that we have in place and so
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when I extend that and I look at that I
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think we are in the last stages or the
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less end of last stages of what is
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currency what is a reserve currency how
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does that monitor that our Fiat monetary
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system work because let’s say currency a
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bond is an asset that is a promise to
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receive a lot of currency okay now how
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do much do I want that and and because
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I’m going to have let’s say a negative
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interest rates are close to a negative
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interest rate so you know then you start
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to think of the arbitrage as do I want
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the paper currency in the thing do I
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want gold do I want some other
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alternative type of currency and then
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increasingly there will de facto be
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taxes on owning that asset because tax a
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negative interest rate is a form of
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taxes and as we go more and more to
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digital currencies the arbitrage between
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putting cat paper in a vault will be
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increasingly eliminated
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so we’re at the when I talk about the
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long-term debt cycle
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I mean that there’s in in the history
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you know you wipe out the debts and then
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you don’t have debts but and then you
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can create the stimulation and that
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happens and you always hit it with a
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jolt of stimulation until then you get
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to interest rates hitting zero or close
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to zero and then they don’t work so
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that’s monetary policy one is interest
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rates monetary policy two is then when
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that doesn’t work you print money and
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you buy it when that doesn’t work you
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have this phenomenon that we’re in we’re
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at the end of the long term debt cycle
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and you have the dynamic so the classic
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debt crisis that we’re looking at is
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doesn’t look like the ones that I’ve
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seen in the past it looks more like the
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ones in the like and at one late-30s
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what we’re at the end of that cycle
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because in the past the way they would
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happen would be you know do you have a
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certain amount of debt central and the
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economy’s overheating central bank
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tightens monetary policy or even that
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you run through and you say what’s the
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debt rollover problem right so we’re not
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going to have the classic debt rollover
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problem we’re not going to have the
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classic tightening of monetary policy so
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when we think about those things and say
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oh we’re going to have a debt problem we
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have things to be concerned about in the
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way I’m describing but they’re not going
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to be the classic ways that this has
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come to an end if we can’t afford the
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liabilities and I agree that if you look
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at the net present value of the US
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government’s entitlement programs that
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the gap the net present value is about
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35 trillion and add to that 20 trillion
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and federal debt and we’re adding a
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trillion a year so huge sums of money if
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to your point that we end up cancelling
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or reducing those liabilities for every
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liability that’s an asset so someone
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who’s holding that asset is going to be
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poor and there could be a distributional
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piece of that so making to your point if
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we simply write off the debt we’re
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destroying a tremendous amount of growth
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so the way that it’ll be done is by
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printing it and evaluating the currency
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because that’s the very subtle way and
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it’s also
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looks it looks good because when you
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have a currency depreciation first of
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all it’s very hidden tax right let’s put
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a negative interest rate it’s not like a
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tax rate change that’s a that’s
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controversial you just have a negative
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interest rate and okay that’s one that
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form of tax and when you have a currency
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depreciation it causes one’s assets to
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go up
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it’ll be inclined to make the stock
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market go up depreciate the currency I
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was one of my great lessons I was
clerking on the floor of the New York
Stock Exchange in 1971 when the August
15 1971 Sunday night
Nixon floated the dollar right and I
went on the floor of the New York Stock
Exchange that clerking and I thought wow
we have a real crisis here and the stock
market rose the most in my lifetime
because a currency depreciation also
tends to raise asset prices in various
ways so the the if you’re in that
position the hidden way the effective
way to do that is to monetize the debt
and have the depreciation as distinct
from like you write it down and like you
say somebody’s assets that doesn’t work
we cover these things in that book by
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economic principles calm but it’s so
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these things have happened over and over
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again
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I think mechanistically it means that we
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will print the money that doesn’t mean
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necessarily inflationary okay like in
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the 1930s we had a series of currency
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depreciations a lot of printing of money
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but you also had the other forces that
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meant that and so the Dinah I think
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it’ll be kind of seemingly hidden but
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it’ll but we’re still right close to the
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point where nobody that you may not want
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to own those bonds okay and you’ll look
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for what else and the question is what
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else what is that else okay that’s the
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environment I think that will be it and
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you know there’s a
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that gold is the only asset you can have
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that’s not somebody else’s liability so
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anyway I don’t know what those
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alternatives are but I would say if more
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gold is more likely than the