Lesson 1
Dalio's Big Debt Cycles
We're in the late phase of a long-term debt cycle. This means: monetary policy less effective, more reliance on fiscal, eventual resolution through inflation/restructuring. Position for a world where traditional rules don't apply.
Ray Dalio identifies a long-term debt cycle (~75-100 years) distinct from the short-term business cycle (~5-10 years). Understanding where we are in this supercycle changes everything.
The Long-Term Cycle:
- Early Phase (Debt Rising from Low Levels):
- Debt growth is productive (funds real investment)
- Each unit of debt creates >1 unit of income
- Leverage rising from low base
- Example: 1950s-1970s US
- Middle Phase (Debt Growing but Still Productive):
- Debt growth continues but productivity slowing
- Each unit of debt creates ~1 unit of income
- Financial engineering begins
- Example: 1980s-2000 US
- Late Phase (Debt Saturation):
- Debt growth no longer produces proportional income
- Each unit of debt creates <1 unit of income
- Diminishing returns on stimulus
- Example: 2000-2020+ US
- Deleveraging/Resolution:
- Debt cannot grow further relative to income
- Some combination of: default, inflation, austerity, redistribution
- 'Beautiful deleveraging' if balanced; 'ugly' if not
Check your understanding
Lesson Quiz
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Quiz Check
According to Dalio, what characterizes the 'late phase' of the long-term debt cycle?
Quiz Check
Japan has had near-zero rates for 30 years but growth never recovered. What does this tell you about their debt cycle position?