Dalio's latest warning: the US debt crisis may explode within three years. The antidote is...
Author: Ray Dalio, founder of Qiaoshui Foundation Original title: How Countries Go Broke: The Dynamic Behind What is Incurable Now Compiled and organized by: bitPushNews In “How Countries Go Bankrupt: The Big Cycle,” I detailed an analytical framework to describe dynamic processes that are highly likely to occur due to unsustainable imbalances between debt supply and demand. Recently, three things happened at the same time: 1) The Japanese government sold part of its US Treasury holdings to return capital to Japan to support the yen and the Japanese capital market, and reduce exposure to US Treasury bonds while avoiding being forced to raise interest rates beyond its wishes in order to support the yen; 2) US bond yields hit new highs under long-term leadership, while the dollar weakened. The reasons include not only the current and anticipated supply of huge debt, but also weak demand for US bonds; 3) Treasury Secretary Bessent announced this week that the US Treasury would buy US Treasury bonds and be able to buy other US Treasury bonds The amount of capital used is limited, and many people ask me : Do these events fit the classic template I set out in my book? The answer is yes. To anticipate what might happen next, let's first review this operating mechanism. The operating mechanism explains in detail that the central government's debt dynamics are the same principles as the debt dynamics of individuals or companies. The only difference is that the central government has a central bank that can print money (this will depreciate the currency), and it can obtain funds from the public through taxation. Because of this, if you imagine how the debt dynamic would work if you or the business you run could print money, or get capital from people through taxation — then you can understand this process. But remember, your goal is for the entire system to work well, not only for yourself, but for all citizens. In my opinion, the credit/market system is like the human body's circulatory system, delivering nutrients to every corner that makes up the market and economy. If credit is used effectively, it can generate productivity and income to repay debt and interest on debt, which is a healthy state of affairs. However, if credit is not properly used to generate sufficient income to repay debts and interest, debt payments will continue to pile up like plaques in blood vessels, squeezing other expenses. When debt payments become very large, debt repayment problems arise, and eventually evolve into debt rollover problems — because debt holders are unwilling to continue to roll over and instead want to sell. Naturally, this will lead to a shortage of demand and sell-off of debt instruments such as bonds; when demand is scarce relative to supply, it either causes a) interest rates to rise, thereby suppressing the market and economic downturn, or b) the central bank “prints money” and buys debt, which will reduce the value of the currency, thereby driving up inflation (compared to the original level). Banknote printing also artificially lowers interest rates and harms lenders' returns. Both options are bad. When debt sell-offs are too large and difficult to contain, and the central bank has already purchased large amounts of debt, rising interest rates can cause the central bank to lose money and damage its cash flow. If this continues, the central bank will fall into a situation where net assets are negative. When this situation became serious, the central government and central bank needed to borrow money to repay the principal and interest of the debt, while the central bank printed money to provide loans due to insufficient free market demand, so a self-reinforcing spiral between debt/banknote printing/inflation formed. In summary, the classic indicators to pay attention to are the following: the ratio of government debt payments to government revenue (which is like the amount of plaque in the circulatory system), the ratio of government debt sold to the demand for government debt (this is like a plaque falling off and causing a heart attack), and the amount of government debt purchased by the central bank to cover the gap between the demand for government debt and the supply of government debt to be sold (this is like the central bank applying a larger dose of liquidity/credit to mitigate liquidity shortages, and the central bank has a risk appetite for these debts). These indicators usually rise over a long cycle of decades — debt and debt payments continue to grow in relation to income — until this state of affairs cannot continue because: 1) debt repayment expenses unacceptably crowd out other expenses, 2) the supply of debt that must be purchased is too large, causing interest rates to rise sharply, leading to a sharp decline in the market and economy, or 3) central banks are unwilling to let interest rates rise and suffer bad market/economic consequences, so they print large amounts of money and buy large amounts of government debt to cover the demand gap, thereby making the value of the currency significant Decreased. Either way, the return on bonds will be poor until the money and debt eventually become cheap enough to attract demand, or the government can cheaply buy back or repay...
