Guest Post: The 'Beautiful' Deleveraging

Tyler Durden's picture

Submitted by Alex Gloy of Lighthouse Investment Management,

Some of my clients like to challenge my (admittedly gloomy) views, forcing me to think – which isn’t such a bad thing to do.

It started off with Cam Hui’s “A Dalio explanation of Evans-Pritchard’s dilemma“. After laying down his strategy on winning the game of Monopoly, Dalio goes on to model the economy onto the board game. So far so good.

Then, Dalio is quoted in a Barron’s interview, describing the current phase of the U.S. deleveraging experience as “beautiful”. He goes on to explain the three options for reducing debt: austerity, restructuring and printing money.

“A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That’s a beautiful deleveraging.”

That sounds pretty good and makes sense. Or does it?

  • I think Mr. Dalio would not be too upset if we labeled him a “Keynesian” (believing the government has to step in where private sector spending falls short).
  • You could respond that it was Keynesian policies which brought us to the current situation in the first place (to which Keynesians will respond that their policies did not work out because there was not enough spending. Which is like saying “the kid is not behaving because you didn’t hit it hard enough“).
  • Furthermore, how is the government sector on a different “planet” than the household sector? In the end, isn’t government debt (and hence fiscal deficits) supported and borne by taxpayers (read: household sector)? No sovereign entity in the world would be able to issue debt unless backed by taxpayers (or, for that matter, gold).
  • As governments incur additional debt it is actually taxpayers’ future income that is on the block (as tax rates will have to go up to pay for additional debt service burden). Leverage is simply being shifted around. Oh, and for that time-shift argument (“tax receipts will have increased by the time the debt comes due”) – I believe it when I see it. There has been not a single country which has paid back its debt incurred under the fiat money system.
  • If the future rate of inflation is below the interest rate paid on additional government debt, the net present value of deficit spending is negative (we are neglecting the argument over whether government can spend efficiently or not).
  • Interest rates at issuance are fixed (exception: floaters). The decision whether to run fiscal deficits boils down to the following question: will future inflation exceed the interest paid (in order to devalue debt faster than accrued interest)?
  • This makes the success of Keynesian policies dependent on elevated inflation. Governments are motivated, in a perverse way, to work towards reducing the value of money.
  • This is in contradiction of central bankers’ (presumed) goal of preserving the function of money as a store of value, setting them up for a clash with governments (assuming they are not in cahoots anyways).
  • However, there is no known case of a government successfully printing its way out of excessive debt (while there are plenty of examples for the opposite).
  • It’s a lose-lose-situation: Should the government succeed in creating inflation, (1) financially prudent savers are punished, (2) low-income families are hurt (as they have no means to invest in assets benefiting from inflation) and (3) debt service costs are likely to increase as existing debt matures and needs to be rolled over.
  • Should the government not succeed in creating inflation, future consumption will be burdened by additional taxes, lowering future growth and making excessive debt unsustainable.
  • Will printing money “compensate” for money destroyed by debt write-offs? Turned the other way ’round, was money ever “un-printed” to compensate for money created from fractional banking and/or increased levels of debt?
  • Cullen Roche of Pragmatic Capitalism states “QE [quantitative easing] doesn’t do much – it’s the great monetary non-event” (“Why QE is not working”).
  • In the comments section of above article Cullen points out that

“It is flawed economic thinking to target nominal wealth. Stock prices are not real wealth until realized gains are taken. More importantly, stocks are based on the underlying value of the assets they represent. Pushing stock prices up does not make the companies more profitable. So hoping that people will spend more of their current income because of a false price appreciation in the market is a misguided policy.”

  • So let’s take a look at Mr. Dalio’s “beautiful deleveraging”. Here’s US debt by sector:


  • Households are de-leveraging; so are financial corporations.
  • This happens at the expense of the government sector, which continues to lever up.
  • Total debt (government + households + corporations) is actually higher (by $800bn) than when the “beautiful deleveraging” began.
Let’s look at the numbers in percent of GDP:
  • Peak debt-to-GDP has been reached in Q1 2009 for households, financial and non-financial corporations.
  • Since then (latest data Q1 2012), households have de-levered by 11%-points of GDP (or $654bn).
  • Non-financial corporations reduced debt by 3%-points (or $406bn).
  • Financial corporations, however, de-levered by a stunning 33%-points (or $3,375bn).
  • The flip-side of this: Federal debt-to-GDP increased by 27%-points (or $4,030bn).
  • While the household sector has done “it’s thing” it usually does during recessions (de-lever), it become clear who the main beneficiary of additional government debt is: the financial sector.

Looking at quarterly changes in sector debt visualizes it nicely:

  •  Mr. Dalio and his firm (Bridgewater Associates, the world’s biggest hedge fund) are part of this financial sector. No wonder he describes this kind of deleveraging as “beautiful”.
  • Mr. Dalio, who, according to a recent Bloomberg story (Connecticut offers millions to aid Bridgewater expansion), “was paid $3.9bn in 2011? is taking all kinds of tax breaks / “forgivable loans” to be lured to move from Connecticut to… Connecticut (at least UBS and RBS moved to the state when receiving tax breaks).
  • I have walked through the waterfront area of Stamford. A lot of low-income families, often minorities, living in simple homes. The city is building new, expensive apartments for the new, well-paid arrivals, gentrifying the area.
  • From Bloomberg:

“If the region [Fairfield county]  were a country, it would be the world’s 12th-most unequal in terms of income, ranking just below Guatemala.”


While Mr. Dalio’s narrative reads well, it doesn’t stand up to common sense. Unfortunately there is lingering suspicion his views on government spending are a mere ploy to advocate for transferring even more debt from “his” sector onto taxpayers, while at the same time transferring taxpayers’ money to his firm via tax breaks.

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diogeneslaertius's picture

on a different planet LLC

"ploy to advocate for transferring even more debt from “his” sector onto taxpayers, while at the same time transferring taxpayers’ money to his firm via tax breaks."

hear, hear

Big Slick's picture

Mistake in labeling:  'Federal' should read 'Household of you and your kids and your grandkids'

The Big Ching-aso's picture



It's beautiful until you run out of other people's money.  Then it's fugly.

Aziz's picture

God-damn pug ugly deleveraging; shifting the private burden onto the Federal balance sheet and passing it onto future generations.

philipat's picture

And what never seems to get mentioned is that EVEN IF artificially propping up equity prices made sense, given the samll percentage of US households that own equities, this is also tantamount to welth transfer from the taxpayer to the top decile and the Financial sector.

slewie the pi-rat's picture

now hear this: mebbe dio; but that is a different subject imo

slewienomics indictes that dalia has nailed it in this respect:  this is EXACTLY what i see the FED doing also under dodd/frank

the beauty is in the eye of the beholder, ok?

but i left the chickenLittle camp many moons ago and this is the argument which i saw myself when i questioned why and how the "system" was remaining functional:

  • staaahbiiilieeeetay
  • QE to keep the checks in the mail [world-wide for NWO] leading to
  • fungibility buoying "assets"
  • centralBankster co-ordination at unprecedents levels (also under dodd/frank)




1Inthebeginning's picture

the slowly boiled frog doesn't realize that its being cooked.  it just seems that it moves the problem farther back and makes it much larger.  investors always have an exit plan.  what is it?


excellent article.

slewie the pi-rat's picture

i agree with your assessment of the article

dalio describes the situ and alexG says how untenable it is in anything but...  the short-to-medium run

but the sky in nor falling... today

we may even make it thru next week!  L0L!!!

the water isn't too hot for you is it?  i think they ran outa wood for the stove...

a thermo-meter helps  Haha!

"investors" plan to get out when they retire i think...  until then:  c'mon in!  robo is topless!  and the tide is going out? 

[been "out" for almost 3 decades]  no debt; no games; small IS beautiful

and fuk rDalio too!  he is just ecstatic not to have rope burn by now!

Diet Coke and Floozies's picture

Do you mind if I call my next company that? I like that name...  Nice ring to it... LMAO

fonzannoon's picture

Who is deleveraging? I am supposed to believe that people right now are taking "excess savings" (nonexistent) and paying down debt? Seriously?

Dr. Richard Head's picture

I can only speak for myself, but can tell you that my family and I are currently, and have been, deleveraging for some time.  However, leveraging up with Federal Income taxes. 

Popo's picture

If by "beautiful" he means that the status-quo is not disrupted, and that the criminal banker oligopoly remains steadfastly in power ready to exploit the next wave of market exuberance,  then yes,  it's fucking gorgeous.

fonzannoon's picture

I hope you are and I applaud you. You are up against it big time. I have no CC debt, no debt other than my mortgage. I am self employed, and on my wife's health insurance. Our health insurance costs $1,500/mo. We have one kid, in daycare. That costs $1,300/mo. Between my mortgage and those other two items I have 6k removed automatically on the 1st of every month from my checking account. Thats before auto/food etc. I am not in debt. I have not contributed into a retirement plan in 4 years however and we have maybe $3 dollars left over at the end of the month.

When I go to collect social security I will be met with a 357 hollow point. Apparently when I complain about the weather they are going to put a cap in my ass too. At least fantasy football is coming.

Precious's picture

Dump the health insurance.  It gets you nothing unless you're going to have another child. It's good to have health insurance when a baby is born, because you don't know what kind of complications might be involved.  After that, most of the risk is over for 50 - 60 years or so, depending on lifestyle and diet.

fonzannoon's picture

It's funny...I know you are right. I know I am paying 18k a year for catastrophic insurance at best. I know all the rules of the game, and yet that is the one set of handcuffs I can't seem to take off.

Precious's picture

Don't be afraid.  I did it recently.  You'll get over it.  Especially when you're banking that savings.

Also, there is a negative side to being insured.  insurance cards are like a big red sign that tells the hospital "perform unnecessary procedures on me".  The last thing you need are unnecessary procedures -- especially in an age of hospital infection risk.  Be very skeptical of hospital and even clinical care.  Always get second opinions and consider changes to diet, exercise, and seek physical therapy instead of intervention.  You know this is wise, if you see the proportion of MD's who elect surgery for themselves.  It's far below the general population.  What does that tell you.

fonzannoon's picture

Good points all of them. What about my daughter? Leave her uninsured? Somehow I can[t wrap my head around that? Can I get her a stand alone insurance policy?

Also thats to the supreme court if we go uninsured don't we get penali...ahem...taxed?

Precious's picture

You really want to protect your daughter?  Take that 18k each year and invest it in 1/10 oz gold coins or some other investment you like.  The amount you have in 10 - 15 years will probably cover her medical expenses for the rest of her life  --- long after you're gone.

I'm not a gold bug.  But I can see doing that.

fonzannoon's picture

I would rather not advertise but that department has and continues to be addressed.

MachoMan's picture

Get her a standalone policy...

Here's a suggestion...  call around to local insurance agencies...  have them bid out insurance.  Ask them what the cheapest way to get it would be.  My guess is that you'll save a shit ton by having 3 different policies.  It doesn't hurt to make a call...  (note: don't apply for insurance, just call).  While on the phone, you might also ask about what insurance changes are coming about due to obamacare...  (this tends to help weed out the idiots)

My guess is you'll be able to get insurance for the daughter (clearly an emotional issue rather than practical given your income levels affect your daughter, including you having injury without insurance)...  while also saving a shit ton of money...  set that money back for a rainy day...  and if it piles up too quickly, consider alternative currencies.

If you really need to, you can probably get catostrophic insurance on the cheap... 

If you're planning on shooting out another baby, then plan the pregnancy and only buy maternity coverage at the appropriate time (remember 9 mo - 1 yr waiting period on coverage depending on the provider).  For many maternity riders, it's $200-250/mo...  standard vaginal birth = $8k+...  you do the math.  (note: you'll likely need to have wifey on a full blown insurance plan if she's to get a maternity rider).  You're not often presented the ability to break even/gain on insurance companies...  plan accordingly.

fonzannoon's picture

This is why I come to this site. Good stuff machoman

Ignorance is bliss's picture

"Insurance" is a perception game. Many people bankrupt from healthcare costs are insured.

Tinky's picture

I'm in my mid-50s, and have never had health insurance. I've never had a serious illness of injury, and learned early on how to keep myself healthy.

There are risks in terms of catastrpohic events, of course, but *regular* health care costs are negligible for those who know their bodies, and how to take care of them.

Precious's picture

And don't ride motorcycles without a helmet -- or do other crazy, risky stuff.

Unnecessary risks include mammograms, colonoscopy, prostate biopsy, etc.

The only reason colonoscopies are popularly recommended at all is because gastroenterologists had nothing to do once Barry Marshall discovered stomach ulcers were bacterial induced and could be eliminated simply by antibiotics.  That killed a multibillion dollar drug industry and the careers of many stomach MDs.  So they had to find something else to do.  Colonoscopies.  This is how it works. 


fonzannoon's picture

I hear you. You make sense. No doubt.

Getting Old Sucks's picture

Fonz, just make sure you don't take out any parent student loans and have to default cause the MAN will get it back come social security time.  Congrats on being debt free.  Try to stay that way if you can.

fonzannoon's picture

I went to a SUNY school. Majored in drinking beer with a minor in f'ing around. Was lucky to catch a few breaks and wake up soon after. My kid will not have that choice and especially not that luxury.

silverserfer's picture

yeah shop around a bit moe in the INS and kiddycare youre taking it in the arse on those.

adr's picture

Actually I am deleveraging. Not that I leveraged myself out to begin with.

I accumulated around $10k in debt when I lumped my wife's debt into mine when we got married. I took advantage of a generous offer from Chase to lock in 2.9% interest on that debt. Since then I have not added any further interest accumulating credit card debt.

I could pay off all my debt, outside my mortgage, with my savings. However, I do not want to blow all my savings when I could very easily lose my job at any moment.

The higher this bullshit stock market goes, the better the chance that my company goes bankrupt. As the market goes higher there is more pressure on corporate buyers to support the lofty P/Es of the channel stuffed set. In doing that there are far less dollars dedicated to supporting private enterprise.

People do not understand that there is no such things as increased sales of Nike, only increased fraud.

silverserfer's picture

get your money out of Chase now!!!!!!!!!!!!! ther are dozenes of 0% balance transfer offers out there you can move your debt around for a small fee. Fuck JPM!

Withdrawn Sanction's picture

If you OWE Chase money, who cares if they go belly up?  If they owe YOU (deposits), then that makes sense.  Now, whether that 2.9% is truly "locked" in is another question.

On a different note, if you're earning 1/10th% on your savings while paying 2.9% on your debt, you'd actually be far better off paying off that debt w/your savings.  Dont deplete an emergency fund to do it, but once that's covered, paying off debt is one of the best ways to "earn" any return in a zero-interest rate environment.

There is No Spoon's picture

deleveraging by defaulting/bankruptcy

MachoMan's picture

exactly.  voluntary deleveraging = nil.

aint no fortunate son's picture

I can just hear a certain clueless teleprompter-in-chief uttering those words over and over for the next 2 1/2 months at whistle stops all over the country - "beautiful deleveraging" - maybe he can get Larry Summers to tell him what it means in monosyllables

Seasmoke's picture

forgot the most beautiful of all....... repudiate ALL debt and do not ever pay it back.......cant think of a quicker way than that to bring down the status quo !

Scalaris's picture

Liquidodebtjubilinflation daiquiri.

Fed Debt-to-GDP = Military/Industrial complex Debt-to-GDP = No Mas

Seasmoke's picture

just "deleveraged" another credit card all the way down to zero, all in one quick was truly beautiful

MsCreant's picture

I applaud you. At the same time, when they fail when we fail, they get bailed out by us (tax backstop). They get to keep their fucking skim. 

They even screw us when we default.

FieldingMellish's picture

Greenwich lives in a bubble (my personal experience). Reminds me of Topeka from A Boy and His Dog or Stepford.

Haager's picture

Households (and fin.) biggest to deleverage - and government exceeding. Kick em out.

antidisestablishmentarianismishness's picture

What, no new Dark Ages? Now what am I supposed to do with my 700 year stash of dried beans?

francis_sawyer's picture

start an orchestra... after all ~ they are the musical fruit...

Dagny Taggart's picture

"Now what am I supposed to do with my 700 year stash of dried beans?"

You might want to hold onto your doom preps just a   >wee bit<   longer lol.


Cognitive Dissonance's picture

Mrs Cog tells me the same damn thing all the time.

Is there some kind of grand female conspiracy going on? Do all you females meet every.....say discuss keeping your stories straight?

I know this is the case so go can spill the beans. <snicker>

Dagny Taggart's picture

Silly goose... doom porn meetings are Tuesdays and Fourth Thursday of each month. Men never pay attention.

Cognitive Dissonance's picture

And here I thought Mrs. Cog was seeing a man named "Herb" on those nights. How could I ever have doubted her?

Guess I'd better buy her that new concealed carry piece she's been carrying on about. :)