GREY:URPTF - Post by User
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idodiligenceon Dec 09, 2018 3:01pm
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Post# 29089115
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"- Next crisis to leave USD looking like Turkish Lira says Ray Dalio.
- As foreign debt and rising inflation drive currency into the ground.
- Because budget and current account deficits spiral out of control.
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"The U.S. economy is a ticking time bomb with a detonator set for about 2 years time, according to Ray Dalio, the chairman and founder of Bridgewater.
He warned again in another interview with Bloomberg News this week that the world's largest economy will suffer an inflationary depression that is accompanied by a 30% sell-off in the Dollar.
The next big crisis will be caused by an unaffordable build-up of debt in the economy that is exacerbated by a devaluation of the Dollar, which pushes up the cost of servicing an increasingly large pile of foreign currency debt."
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"Dalio’s ideas come from his recent book “A Template for Understanding Big Debt Crises” in which he systematically analyses 48 historical debt crises in order to show how and why they happen.
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"The unique thing about Dalio's next U.S. crisis is that it will be an inflationary one, which is the kind that normally only occurs in developing nations, because those nations tend to rely on borrowings from overseas."
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"The counter argument to this nightmare vision is that the U.S. won’t get into a crisis because the economy is strong enough to avoid one. Yet he is sceptical of this notion.
The current growth spurt experienced in the U.S. is the result of stimulus provided through government tax-cuts. Dalio says that fiscal ‘injection’ will wear off in 18 to 24 months.
He also says the government will not be able to cut back its expenditure easily or quickly enough to prevent it having to borrow increasing amounts from anybody who will lend to it, and so the foreign debt will build."
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"Dalio compares his next crisis to that which happened in the 1930s after the Wall Street crash, which was one of the ‘deflationary’ type.
In both periods interest rates were cut and in the latter new money was injected into the financial system through quantitative easing in order to stimulate the economy.
In both cases, monetary policies led to a recovery in asset prices and in both eras, the social and political effects of those policies were similar in that they exacerbated inequalities of wealth.
QE offered a punch bowl to the stock market, which was great if you owned stocks but not so great if you didn't. In stark contrast, the have-nots of society mainly suffered from the effects of worsening austerity.
The political consequences have also been markedly similar. Both eras saw the rise of ‘populism’ and other types of so-called extremist politics as a reaction to the social injustices that are perceived to have been caused by crises.
This raises the spectre of even worse political extremism on the horizon, possibly even war. Dalio suggests the current period is actually equivalent to the 1935-45 period which encompassed the second world war.
The Silver Lining
If there is a silver lining to Dalio’s analysis it is that debt crises are in some way necessary and are also self-correcting.
The currency devaluation which accompanies the inflationary type of crisis is also the means by which the country’s economy heals itself.
When a currency rapidly devalues it wipes out the value of its own local-currency debt. It also stimulates the economy and helps right the balance of payment deficit by making a country’s exports more competitive.
Dalio recommends waiting for the moment when a country’s fiscal deficits are restructured by loans from the likes of the International Monetary Fund (IMF), which is a sign a country is at rock bottom and that the only way is up.”
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