"… the debt-financed overspending of the 1960s had continued into the early 1970s. The Fed had funded this spending with easy-credit policies, but by paying back its debts with depreciated paper money instead of gold-backed dollars, the U.S. effectively defaulted."

- Ray Dalio

Principles for navigating big debt crises

Ray Dalio of Bridgewater Associates is one of my role models in life and, when he writes a new book, I would normally visit Amazon.co.uk more quickly than you can count to ten, but not this time!

What? Have I fallen out of love with Ray’s way of thinking? Not at all, but I found out that his new book – Principles for Navigating Big Debt Crises – can actually be downloaded for free. Ray, being the class act he is, has decided that everybody should know how to navigate a debt crisis; hence he has chosen to make it freely available (as a PDF copy).

Much (but not all) of the content below is inspired by Ray’s thinking. He is not as explicit in his new book as I am below (and as he has been before) in terms of the timing of the next debt crisis, but it’s pretty clear that he also thinks the writing is on the wall.

If you want to read the wise words of a very smart man, I suggest you give yourself one for Christmas, which you can do here. Christmas presents rarely come cheaper than this.

Debt crises of different sorts

In the following, I will focus on what Ray calls major debt crises – crises that have caused a slump in GDP of at least 3% but, in reality, there are different types of major debt crises. For example, one should really distinguish between debt crises in OECD countries where most borrowings are in the domestic currency vis-à-vis debt crises in EM countries where much of the borrowings are in foreign currencies, and that is precisely what Ray does in his new book.

That dynamic changes the nature of the crisis. Where the former are very much disinflationary in nature, the latter are often inflationary – sometimes even hyperinflationary. Consequently, monetary authorities react very differently.