Government decision-makers' most covert, and therefore most favored and commonly used method to address the problem of excessive debt is to lower real interest rates and real exchange rates.

Written by: Ray Dalio

Translated by: Block unicorn

The principles are as follows:

When a country has too much debt, lowering interest rates and devaluing the currency in which the debt is denominated is the most likely priority path that government decision-makers will take, making it worthwhile to bet on this scenario.

As I write this, we know that significant deficits and a substantial increase in government debt and debt repayment expenditures are expected in the future. (You can see this data in my works, including my new book "How Countries Succeed or Fail: The Big Cycle"; I also shared last week my reasons for believing that the U.S. political system cannot control the debt issue). We know that the cost of debt repayment (interest and principal payments) will rise rapidly, squeezing other expenditures, and we also know that, in the most optimistic scenario, the likelihood of increased debt demand matching the supply of debt that needs to be sold is extremely low. I elaborate on what I believe this all means in "How Countries Succeed or Fail" and describe the mechanisms behind my thinking. Others have also stress-tested this, and there is almost complete agreement that the picture I paint is accurate. Of course, this does not mean I cannot be wrong. You need to judge for yourself what might be true. I am simply providing my thoughts for everyone to evaluate.

My Principles

As I have explained, based on my experience and research from over 50 years of investing, I have developed and documented some principles that help me predict events in order to make successful bets. I am now at a stage in my life where I hope to pass these principles on to others to provide assistance. Additionally, I believe that to understand what is happening and what may happen, it is necessary to understand how the mechanisms work, so I also try to explain my understanding of the mechanisms behind the principles. Here are a few additional principles and my explanations of how I believe the mechanisms work. I believe the following principles are correct and beneficial:

Government decision-makers' most covert, and therefore most favored and commonly used method to address the problem of excessive debt is to lower real interest rates and real exchange rates.

While lowering interest rates and currency exchange rates can provide short-term relief for excessive debt and its problems, it reduces demand for currency and debt and creates long-term issues because it lowers the returns on holding currency/debt, thereby diminishing the value of debt as a store of wealth. Over time, this typically leads to an increase in debt, as lower real interest rates are stimulative and exacerbate the problem.

In summary, when debt is excessive, interest rates and currency exchange rates tend to be suppressed.

Is this good or bad for the economic situation?

It is both; in the short term, it is often good and widely popular, but in the long term, it is harmful and leads to more severe problems. Lowering real interest rates and real currency exchange rates is…

…beneficial in the short term because it is stimulative and tends to push up asset prices……

…but harmful in the medium and long term because: a) it provides lower real returns for those holding these assets (due to currency devaluation and lower yields), b) it leads to higher inflation rates, c) it results in greater debt.

In any case, this clearly does not avoid the painful consequences of excessive spending and being mired in debt. Here is how it works:

When interest rates fall, borrowers (debtors) benefit because this lowers the cost of debt repayment, making borrowing and purchasing cheaper, which pushes up investment asset prices and stimulates growth. This is why almost everyone is satisfied with lower interest rates in the short term.

However, at the same time, these price increases mask the negative consequences of lowering interest rates to undesirable low levels, which is detrimental to lenders and creditors. These are facts because lowering interest rates (especially real rates), including central banks suppressing bond yields, will push up the prices of bonds and most other assets, leading to lower future returns (for example, when interest rates fall to negative values, bond prices rise). This also leads to more debt, creating larger debt problems in the future. Therefore, the returns on debt assets held by lenders/creditors decrease, resulting in more debt.

Lower real interest rates also tend to lower the real value of currency because they make the yield on currency/credit lower relative to alternatives in other countries. Let me explain why lowering the currency exchange rate is the preferred and most common way for government decision-makers to handle excessive debt.

Lower currency exchange rates are favored by government decision-makers and seem beneficial when explaining to voters for two reasons:

1) A lower currency exchange rate makes domestic goods and services cheaper relative to those of countries with appreciating currencies, thereby stimulating economic activity and driving up asset prices (especially in nominal terms), and…

2) …it makes debt repayment easier, which is more painful for foreigners holding debt assets than for domestic citizens. This is because another "hard currency" approach would require tightening monetary and credit policies, leading to persistently high real interest rates, which would suppress spending, typically meaning painful service cuts and/or tax increases, along with stricter loan conditions that citizens are unwilling to accept. In contrast, as I will explain below, lower currency rates are a "covert" way to repay debt because most people are unaware that their wealth is diminishing.

From the perspective of a devalued currency, a lower currency exchange rate also tends to increase the value of foreign assets.

For example, if the dollar depreciates by 20%, American investors can pay foreigners holding dollar-denominated debt with currency that has lost 20% of its value (i.e., foreigners holding debt assets will incur a 20% currency loss). The dangers of a weaker currency are less obvious but do exist, namely that those holding a weaker currency experience a decline in purchasing power and borrowing capacity—purchasing power declines because their currency's purchasing power decreases, and borrowing capacity declines because buyers of debt assets are unwilling to purchase debt assets priced in a depreciating currency (i.e., assets promising currency) or the currency itself. It is not obvious because most people in countries experiencing currency devaluation (e.g., Americans using dollars) do not see their purchasing power and wealth decline, as they measure asset values in their own currency, creating the illusion of asset appreciation, even though the currency value of their assets is declining. For instance, if the dollar falls by 20%, American investors focusing solely on the increase in the dollar-denominated value of their assets will not directly see their purchasing power loss of .20% on foreign goods and services. However, for foreigners holding dollar-denominated debt, this will be evident and painful. As they become increasingly concerned about this situation, they will sell (dump) the currency and/or debt assets, leading to further weakening of the currency and/or debt.

In summary, viewing issues solely from the perspective of one's own currency clearly creates a distorted view. For example, if the price of something (like gold) rises by 20% in dollar terms, we would think that the price of that thing has risen, rather than the value of the dollar has fallen. The fact that most people hold this distorted view makes these methods of dealing with excessive debt "covert" and politically easier to accept than other alternatives.

This perspective has changed significantly over the years, especially from when people were accustomed to a gold standard monetary system to now being used to a fiat/paper currency monetary system (i.e., currency is no longer backed by gold or any hard asset, a reality that became true after Nixon decoupled the dollar from gold in 1971). When currency exists in paper form and as a claim on gold (what we call gold-backed currency), people believed that the value of paper currency would rise or fall. Its value almost always declines; the only question is whether it declines faster than the interest rate earned on holding fiat currency debt instruments. Now, the world has become accustomed to viewing prices through the lens of fiat/paper currency, and they have the opposite view—they believe that prices are rising rather than the value of the currency is falling.

Because a) prices measured in gold-backed currency and b) the quantity of gold-backed currency have historically been much more stable than a) prices measured in fiat/paper currency; b) the quantity of prices measured in fiat/paper currency, I believe that viewing prices through the lens of gold-backed currency may be a more accurate way. Clearly, central banks also hold a similar view, as gold has become the second-largest currency (reserve asset) they hold, second only to the dollar, ahead of the euro and yen, partly for these reasons and partly because the risk of gold being confiscated is lower.

The extent of the decline in fiat currency and real interest rates, as well as the rise of non-fiat currencies (such as gold, bitcoin, silver, etc.), has historically (and logically) depended on their relative supply and demand. For example, enormous debt that cannot be supported by hard currency leads to significant monetary and credit easing, resulting in substantial declines in real interest rates and real currency exchange rates. The last major period when this occurred was during the stagflation period from 1971 to 1981, which led to significant changes in wealth, financial markets, the economy, and the political environment. Given the scale of existing debt and deficits (not only in the U.S. but also in other fiat currency countries), similar significant changes may occur in the coming years.

Whether this assertion is correct or not, the severity of the debt and budget issues seems undeniable. In such times, holding hard currency is a good thing. So far, and for many centuries around the world, gold has been hard currency. Recently, some cryptocurrencies have also been viewed as hard currency. For certain reasons, which I will not elaborate on, I prefer gold, although I do hold some cryptocurrencies.

How much gold should one hold?

While I am not giving you specific investment advice, I will share some principles that have helped me form my perspective on this issue. When considering the ratio of gold to bonds, I think about their relative supply and demand as well as the relative costs and returns of holding them. For example, the current yield on U.S. Treasury bonds is about 4.5%, while the yield on gold is 0%. If I believe that the price of gold will rise more than 4.5% in the next year, then holding gold makes sense; if I do not believe gold will rise by 4.5%, then holding gold is unreasonable. To help me make this assessment, I observe the supply and demand dynamics of both.

I also know that gold and bonds can diversify risk from each other, so I consider what proportion of gold and bonds should be held for good risk control. I know that holding about 15% in gold can effectively diversify risk because it provides a better return/risk ratio for the portfolio. Inflation-linked bonds have the same effect, so it is worth considering including both assets in a typical portfolio.

I share this perspective with you, not to tell you how I think the market will change or to suggest how many types of assets you should hold, because my goal is to "teach a man to fish rather than give him a fish."

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。