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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:

Observations:

  • 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.”

CONCLUSION:

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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Fri, 08/17/2012 - 11:42 | 2714237 diogeneslaertius
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

Fri, 08/17/2012 - 12:01 | 2714291 Big Slick
Big Slick's picture

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

Fri, 08/17/2012 - 12:08 | 2714318 The Big Ching-aso
The Big Ching-aso's picture

 

 

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

Fri, 08/17/2012 - 14:21 | 2714817 Aziz
Aziz's picture

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

Fri, 08/17/2012 - 22:32 | 2716013 philipat
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.

Fri, 08/17/2012 - 12:37 | 2714446 slewie the pi-rat
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)

OT:

 

 

Fri, 08/17/2012 - 13:16 | 2714617 1Inthebeginning
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.

Fri, 08/17/2012 - 14:50 | 2714907 slewie the pi-rat
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!

Fri, 08/17/2012 - 17:41 | 2715476 Diet Coke and F...
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

Fri, 08/17/2012 - 11:46 | 2714247 fonzannoon
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?

Fri, 08/17/2012 - 11:50 | 2714252 Dr. Richard Head
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. 

Fri, 08/17/2012 - 11:58 | 2714277 Popo
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.

Fri, 08/17/2012 - 11:59 | 2714281 fonzannoon
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.

Fri, 08/17/2012 - 12:05 | 2714296 Precious
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.

Fri, 08/17/2012 - 12:06 | 2714314 fonzannoon
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.

Fri, 08/17/2012 - 12:12 | 2714328 Precious
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.

Fri, 08/17/2012 - 12:14 | 2714342 fonzannoon
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?

Fri, 08/17/2012 - 12:24 | 2714358 Precious
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.

Fri, 08/17/2012 - 12:31 | 2714417 fonzannoon
fonzannoon's picture

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

Fri, 08/17/2012 - 14:07 | 2714778 MachoMan
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.

Fri, 08/17/2012 - 14:48 | 2714902 fonzannoon
fonzannoon's picture

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

Sun, 09/16/2012 - 08:51 | 2800220 Ignorance is bliss
Ignorance is bliss's picture

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

Fri, 08/17/2012 - 12:16 | 2714350 Tinky
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.

Fri, 08/17/2012 - 12:31 | 2714363 Precious
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. 

 

Fri, 08/17/2012 - 12:33 | 2714424 fonzannoon
fonzannoon's picture

I hear you. You make sense. No doubt.

Fri, 08/17/2012 - 12:49 | 2714516 Getting Old Sucks
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.

http://gma.yahoo.com/blogs/abc-blogs/more-social-security-money-withheld-because-unpaid-student-100111510--abc-news-savings-and-investment.html

Fri, 08/17/2012 - 13:07 | 2714571 fonzannoon
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.

Fri, 08/17/2012 - 14:13 | 2714791 silverserfer
silverserfer's picture

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

Fri, 08/17/2012 - 11:56 | 2714271 adr
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.

Fri, 08/17/2012 - 14:15 | 2714802 silverserfer
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!

Fri, 08/17/2012 - 17:18 | 2715409 Withdrawn Sanction
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.

Fri, 08/17/2012 - 17:34 | 2715460 Diet Coke and F...
Diet Coke and Floozies's picture

Spot on sir. +1.

Fri, 08/17/2012 - 12:11 | 2714329 There is No Spoon
There is No Spoon's picture

deleveraging by defaulting/bankruptcy

Fri, 08/17/2012 - 14:09 | 2714781 MachoMan
MachoMan's picture

exactly.  voluntary deleveraging = nil.

Fri, 08/17/2012 - 11:52 | 2714251 aint no fortuna...
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

Fri, 08/17/2012 - 12:00 | 2714288 FL_Conservative
FL_Conservative's picture

Who's going to explain it to Larry?

Fri, 08/17/2012 - 12:02 | 2714297 Big Slick
Big Slick's picture

"Who's going to explain it to Larry?"

Not it!

Fri, 08/17/2012 - 13:55 | 2714745 Raymond K Hessel
Raymond K Hessel's picture

Not it.

Fri, 08/17/2012 - 11:57 | 2714255 Seasmoke
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 !

Fri, 08/17/2012 - 11:52 | 2714258 Scalaris
Scalaris's picture

Liquidodebtjubilinflation daiquiri.

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

Fri, 08/17/2012 - 11:52 | 2714260 Seasmoke
Seasmoke's picture

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

Fri, 08/17/2012 - 12:29 | 2714408 MsCreant
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.

Fri, 08/17/2012 - 11:53 | 2714262 FieldingMellish
FieldingMellish's picture

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

Fri, 08/17/2012 - 11:54 | 2714266 Haager
Haager's picture

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

Fri, 08/17/2012 - 11:56 | 2714274 antidisestablis...
antidisestablishmentarianismishness's picture

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

Fri, 08/17/2012 - 11:59 | 2714284 francis_sawyer
francis_sawyer's picture

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

Fri, 08/17/2012 - 12:08 | 2714308 Dagny Taggart
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.

 

Fri, 08/17/2012 - 12:18 | 2714348 Cognitive Dissonance
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 Wednesday.....to discuss keeping your stories straight?

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

Fri, 08/17/2012 - 12:22 | 2714374 Dagny Taggart
Dagny Taggart's picture

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

Fri, 08/17/2012 - 12:28 | 2714406 Cognitive Dissonance
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. :) 

Fri, 08/17/2012 - 11:57 | 2714276 nikku
nikku's picture

I guess some of the Dalio "dream team" will be asked to pull this analysis apart (or consider thoughtfully without predjudice), right? Because we all know that Bridgewater Associates are la creme de la creme and the secret to size is based on their integrity and accuracy of analysis...

...yeah

.... right.

Fri, 08/17/2012 - 11:58 | 2714279 tricky rick
tricky rick's picture

Hey Dalio (and all 1%s)  Beautiful Financial Repression....  

But seriously folks,  I always liked those plate spinners on Ed Sullivan...

The spinners:  Fed Heads

...  the sticks:  economies 

the plates:  that's us baby!

Fri, 08/17/2012 - 11:59 | 2714283 Duke Dog
Duke Dog's picture

If I hear that  we have the option of "inflating" away our debt problem one more time, I might have to puke! I've read it hundreds of times from contributers and commenters here on ZH -  most of whom I respect. Someone please explain how printing more money, which is debt itself, can possibly result in our debt burden being reduced or in any manner resolved.

There are only two ways out - 1)Outright Default/Forgiveness or 2)Pay it back - increase revenue/reduce spending or a combination of the two!

Inflation is not an option for "solving" the problem, only a means of shoving one of the two real options above sometime into the future. JD.

Fri, 08/17/2012 - 12:05 | 2714305 Hedgetard55
Hedgetard55's picture

Money printing is default by another name, but instead of having the owners of the debt take the losses, everyone who owns cash or it's equivalent takes the loss through inflation. However, I guess you already knew this. You are right, it does not "solve" anything, merely spreads the pain onto the innocent.

Fri, 08/17/2012 - 12:18 | 2714359 adr
adr's picture

The idea is that wages will rise along with inflation to enable you to be able to afford to live, while allowing that wage to pay off old debts in a short period of time.

If your salary increased from $30k to $200k over a period of five years, and during that time you did not accumulate new debt, a debt load of $20k could be paid off in no time. If your mortgage payment was $1200 a month, it would become a very small percentage of income on a $200k a year salary. The value of your home will also increase substantially, creating a huge asset to borrow against. In theory you are now far better off after the inflationary period.

That is the academic explanation how inflation will reduce debt. University professors and most Keynesian economists actually believe in this theory.

Now for the reality.

Inflation in the cost of goods will always outpace inflation in the level of earned income, forcing you to borrow ever greater sums in order to afford to live. Even if your home increases in value by a factor of ten, the taxes on that property will increase by that factor as well. Your mortgage payment may be $1200 while you are earning $200k, but your monthly tax payment may be over $10k. Standard living expenses like food and gasoline will reach unfathomable price levels. If prior to the inflationary episode, standard living expenses took up 40% of your gross income, they will still take up at least 40% of your gross income. Most likely even more, since the pace of inflation in necessary goods will always outpace your income growth.

If you need to sell your home, that may be worth 100 times what it was, you will need to pay for a new home now priced 100 times what it was.

While the debt inflation will take care of old debts, it will just create new debts of a far greater magnitude.

Fri, 08/17/2012 - 12:32 | 2714422 MsCreant
MsCreant's picture

That was tight adr. I have never read anything that got into the minds of the folks who think inflation is okay. That helped a whole lot.

Fri, 08/17/2012 - 12:41 | 2714471 Duke Dog
Duke Dog's picture

Thanks ADR. I understand the "academic" concept, but even if you believed it to be true/achievable at the individual/corporate/local govt level, the money creation required to cause the desired inflationary effect would result in even more debt at the federal level than is reduced at lower levels of society. As you accurately point out, the burden of debt at the federal level will be shared by all. Again, I cannot see how creating more money (which is derived from debt itself) can even be proposed as a faintly potential solution. Thanks again.

Fri, 08/17/2012 - 12:43 | 2714484 Hedgetard55
Hedgetard55's picture

Also, who would lend under such a scenario? The lender got jobbed in your example.

Fri, 08/17/2012 - 13:17 | 2714625 Oldwood
Oldwood's picture

And the best part is we get to pay a progressive income tax on all of our ill gotten gains from the appreciation of our assets. Remember when making $200k/yr was rich? The Government policy is a 2% inflation (which is a joke) and if we were so lucky as to find someone willing to pay us 2% on our savings, we would pay tax on it. Why can't I think up a scheme like this?

Fri, 08/17/2012 - 13:07 | 2714582 tricky rick
tricky rick's picture

Inflation is the government's way of reducing IT'S debt.  By keeping interest rates below inflation.  The split between ...

assets go down (delationt), costs go up (inflation).   and don't forget taxes. 

IRS doesn't give a hoot it the street value of that $1 million you made off facebook dropped to only $250K goods and services.  you pay the tab for the $1 mil...

You may find Dan Amerman interesting cause if you don't know about it Dog... you are going to be the bone.

Fri, 08/17/2012 - 12:00 | 2714286 ebworthen
ebworthen's picture

Let's see; "If we beat little old ladies, retired vets, and kids over the head for whatever cash they have - this could work"

Fri, 08/17/2012 - 12:07 | 2714289 notbot
notbot's picture

While I'd love savings-based economy (i.e. Austrian econ) and am a Ron Paul supporter, I think switching overnight away from the system we have would be catastrophic.  Good luck unwinding all the derivatives. Unfortunately, TBTF also means too big to unwind.

It has to be gradual...Dalio is likely just being pragmatic.  I know I'm not going to get any love with that comment, but I think it's true.

As ZH has said many times, there is a lot of leverage to unwind....

http://www.zerohedge.com/news/deleveraging-needed-next-4-years-28-trillion

 

Fri, 08/17/2012 - 12:00 | 2714290 Manthong
Manthong's picture

To a deer, headlights are beautiful.

Fri, 08/17/2012 - 12:01 | 2714292 Hedgetard55
Hedgetard55's picture

Ray has been made wealthy by the Ponzi economy/financial system, maybe he realizes it, maybe not. He does not appear real bright to me. A rich putz, but still a putz.

Fri, 08/17/2012 - 12:04 | 2714303 adr
adr's picture

More and more people are deleveraging. That is why we are reaching peak fraud. The only people that are actively engaging in reckless spending are the top and the bottom. The top can't support a $16 trillion economy, and the bottom can't actually pay for anything they buy on credit.

You can spit out subprime loans for a short time and make sales look good. Soon the losses become larger than the level of new loans you are able to write. Ask Mitsubishi how the subprime loans they wrote in 2000 turned out for the company. More cars started to be repossessed than they could sell.

You can also channel stuff and circulate inventory to fake sales for a while as well. Sooner or later there isn't enough actual sales to finance the channel stuffing operation.

The period after peak fraud isn't going to be pretty. That is why CEOs and CFOs love Obama. By not prosecuting fraud he has enabled that bubble to reach epic heights, far greater than anyone could have imagined.

Fri, 08/17/2012 - 12:09 | 2714321 khakuda
khakuda's picture

Nice piece.  I particularly liked the pull quote that pushing up stock prices does not make companies more profitable and, hence, doesn't add value and only creates false price appreciation, a misguided policy.

Central planners have learned nothing from history.

Fri, 08/17/2012 - 12:23 | 2714382 adr
adr's picture

Oh but pushing up stock prices does make directors far more wealthy. Who needs profit to pay executives when pushing paper can pay them far more than they ever dreamed.

I'm sorry to say but the answer to all of our problems is taxing capital gains at 80%. Destroy the ability for the stock market to generate millions in unearned income for individuals, and we might have a chance at bringing back a truly productive economy.

Fri, 08/17/2012 - 13:02 | 2714566 slewie the pi-rat
slewie the pi-rat's picture

L0L!!!

Fri, 08/17/2012 - 13:24 | 2714650 Oldwood
Oldwood's picture

All personal income should be taxed at the same rate, capital gains or otherwise. We should however be able to deduct the effects of inflation from those gains. As a small business person i invest my capital everyday knowing full well the risks at hand, yet my gains are taxes as regular income. Why should someone sitting in their pajamas, trading stocks or bonds pay less?

Sat, 08/18/2012 - 02:03 | 2716156 ebworthen
ebworthen's picture

Sacrilege!

How dare ye disdain the gods of rehypothecation, the luminaries of high level gambling with other people's money, the sleight of hand witches and warlocks of Wall Street and Washington!

'Sblood!  Next ye will be demanding sound money, the return of the rule of law, and branches of government actually representing the citizenry!

Chaos I tell you!  Chaos! 

Fri, 08/17/2012 - 12:09 | 2714325 Renewable Life
Renewable Life's picture

And meanwhile in the real world, Britain is going to storm an embassy to arrest an Australian so he can be extridited for treason against the US!!!!! For uncovering and discovering the truth about the wars, political lies, bankster propaganda, and politicians on this planet!!!!

Russia puts 4 girls in a band, in jail for speaking out against its gangster leader, and south African police murder 34 protesters/striking workers at a rare earth minerals mine!!! Just another day in our corporate globalization utopia!!!!

So today they came for those people, and we didn't do shit about it, tomorrow they will come for us, and im pretty sure no one will say shit about it!!! Jefferson and Adams are rolling over in their graves!!!

Fri, 08/17/2012 - 12:44 | 2714486 madcows
madcows's picture

I just visited the site of the shot heard round the world this weekend (Concord, MA).  I'm afraid our current military is much more effective than the redcoats.  I'm guessing that instead of revolution we'll just have collapse and disintegration... to be replaced by some other despotic regime in due time.

 

Fri, 08/17/2012 - 12:16 | 2714346 partimer1
partimer1's picture

I didn't get why this post attacks Dalio.  He just offered his view on the macroeconomy, and he believes certain things.  He didnt offer to fix anything, and he said it will take 10-15 years to recover.  he doesn't give shit about anyone who agrees or disagree with him, but he is an independent thinker. I believe he is right about economy and society. 

Fri, 08/17/2012 - 12:23 | 2714380 MsCreant
MsCreant's picture

Do you trust central bankers? I think he worships them. Central banking is an evolutionary dead end.

Fri, 08/17/2012 - 17:44 | 2714648 slewie the pi-rat
slewie the pi-rat's picture

so what?

evolutionary?  L0L!!!

imo dalio is correct about the macro:  he is describing what is presently happening accurately imo

can kicking; and here's your bill for it too:   $???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

 

 

Fri, 08/17/2012 - 12:17 | 2714354 Inthemix96
Inthemix96's picture

Try this on folks,

Do exactly what our respective CB's are doing.  Tick yourselves up to the fucking eyeballs, have a great time and default.

Because at the end of the day, that is exactly what is coming our way within the next six months.  Fuck them, they dont give a flying fuck about you.

Fri, 08/17/2012 - 12:18 | 2714356 daxtonbrown
daxtonbrown's picture

I'm in the process of "deleveraging" Citibank about $20k in credit card debt, caused by two clents deciding they needed my commission more than I did throwing me into default. One client was in the end a bank, so it is fitting that a bank is in effect screwing a bank.

Fri, 08/17/2012 - 12:19 | 2714362 MsCreant
MsCreant's picture

"Let them eat 'deleveraging.'"

Where are the Guillotines? Now there is an artful use of leverage.

Fri, 08/17/2012 - 12:20 | 2714367 Börjesson
Börjesson's picture

"There has been not a single country which has paid back its debt incurred under the fiat money system."

In 1998, the Swedish national debt was SEK 1449bn. It is currently SEK 1071bn. That's a drop of 26 percent in currency terms. (The drop as a percentage of GDP is much greater than that, obviously.) I'm sure there are plenty of other countries that can show similar periods of debt reduction, so the above statement is simply not true.

Fri, 08/17/2012 - 12:28 | 2714405 gaoptimize
gaoptimize's picture

Sweden in demographically and culturally doomed.  Recommend you get out before immigrants rape your daughters and bring down your welfare state.

Fri, 08/17/2012 - 12:44 | 2714489 falak pema
falak pema's picture

It can't be, Julian Assange loves going there!

They have an awesome plan B for demographics : get all people on the run, UK tax dodgers, US oligarchs, Russian pussy eaters, French cheese barons not wanting to pay 75% Income T, Syrian freedom fighters, Somalian ship hijackers, South African mine pickets, to come and spend ONE NIGHT in Stockholm with a blonde bevy of busty, lusty local femalista horny bunch.

You have one nite of delight and then its the plane back to homeland. Meanwhile the Swedes hope that their maidchen will hatch a few new babies in 9 months. 

I think Julian pissed them off becuse he wanted more than one nite  and several bites at the peaches and that was not on the contract! 

The Swedes as stickers for social contracts; especially sexual ones! Ask Tiger Woods on that!  

Fri, 08/17/2012 - 12:54 | 2714543 Börjesson
Börjesson's picture

Actually, the imminent threat to the Swedish welfare state is the massive housing bubble. That's how the government debt has been reduced - by transferring it to households instead.

Fri, 08/17/2012 - 12:35 | 2714438 adr
adr's picture

Has Sweden paid back the entirety of its debt?

Until every drop of debt is paid back the statement is true. I can pay $19,999 of my $20k car loan, but if I don't pay back that last dollar I will default and they'll come take back my car.

Fri, 08/17/2012 - 12:24 | 2714391 MsCreant
MsCreant's picture

Where is this guy's car? I will let the air out, gently, slowly, gradually, beautifully, from his overinflated tires. I am sure I can do it just right and I won't make any mistakes.

Sat, 08/18/2012 - 09:45 | 2716395 monad
monad's picture

Grenwood Drive

Greenwich, Connecticut

...and he may have a place in Westport. If you can't figure out which car is his, do them all.

 

 

Fri, 08/17/2012 - 12:37 | 2714449 philosophers bone
philosophers bone's picture

Amazing to characterize creditors and savers getting (partially) fucked over as "beautiful".

LOL

 

Fri, 08/17/2012 - 13:06 | 2714578 billsykes
billsykes's picture

How is any of what he is seeing "beautiful", unless his aesthetics run towards mushroom clouds, tower 7 implosions and james nachtwey pictures.

Here is the biggest HF in the world, assuming the most smart successful, intelligent all with a perfect insiders view.

Why is his outlook so different to that of gross, bass, chanos, rogers, paulson, and the myriad that are ringing the bell saying things are not alright?

And he has a commodity background to boot, so I don't understand the beauty of the gutting of America when the fund is primary focused on USA based investment. Everyone knows that when there are too many predators and not enough feeder fish, everyone dies, but are acting like its great. Look at housing, PE is piling into these vacant houses and blowing billions, and they have to divest in 5-7 yrs tops, vacant houses require upkeep, and premium rents to counter the cost of interest +fees doesn't seem to be a winning formula.  Like buying a reinsurance company specializing in hurricanes in a hurricane area. 

I have read his employee manual, and I have to say it is weird, weird like a autistic person wrote it.

 

Fri, 08/17/2012 - 13:06 | 2714579 Reese Bobby
Reese Bobby's picture

Great post. A good example of why I still come to ZH. Thanks.

Fri, 08/17/2012 - 13:44 | 2714643 shovelhead
shovelhead's picture

Dalio is right. It is beautiful.

Transferring crap bets to taxpayers paying them off goes from 'totally impossible' to merely 'impossible' to pay off.

You have to look deep to see the beauty, like a homely girl that has a wonderful personality.

The little guy needs this kind of reassurance that all is well.

Fri, 08/17/2012 - 13:44 | 2714719 Martin T
Martin T's picture

My comments to Cam Hui's post re Dalio's monopoly analogy:

Couple of points re Dalio's Monopoly analogy I picked up from a great French book I am reading by Philippe Herlin (Rethinking the economy - unfortunately he doesn't have an English editor, if you know one let me know, I'll pass on the info to him).
In order to understand the difference between a "Gaussian" universe from a "Power law" universe, one can use as well the Monopoly analogy according to Philippe Herlin. In essence, Dalio is right that there are indeed two sequences in the game. In the first sequence, which is Gaussian, it is almost impossible to default. One can not lose or win the game on one throw of dice. At the end of the first sequence players will have roughly the same amount of properties. If you consider 4 players, 22 properties, they will have around 5 to 6 properties each. Lucky ones might get 7 or 8, unlucky ones might only get 3 or 4. But the probability of one of the player getting 50% or two thirds of the properties is extremely remote. Therefore the distribution during the first sequence of the game is "normal".
The second sequence is more interesting and highly unprobable given the game's concept is that the winner accumulate the properties and money of the unlucky ones. You can lose or win on one throw! The distribution is no more "normal"! The differences between those who have most properties and those who have not increased exponentially. "Money" goes to "Money" during the second phase. The winning player distort the game to his advantage because he earns more "money" and is able to buy more properties therefore distorting the probabilities space. The aim of the second phase is in essence to be the last one to "default".
During the 1st sequence of the game of Monopoly, the risk is limited because of the "Gaussian" distribution, but, in the second sequence, the risk obeys to the "law of power", where risk is exponential, so goes Philippe Herling great explaination in his book.

Ironically the game of Monopoly was invented in 1934, following the crash of 1929...

Dalio' explaination is correct as far as the two sequences are concerned. But "printing more money" as in Dalio's Monopoly game with rules being changed do not necessarily change the outcome (or risk) or remove the randomness.

Banks have already learned the hard way about what it costs to be "fooled by randomness" in similar fashion to the Monopoly game described by Dalio and the second phase of the game.

"A Throw of Dice will Never Abolish Chance" - Stéphane Mallarmé

Best,

Martin

Fri, 08/17/2012 - 18:36 | 2715621 Ghordius
Ghordius's picture

GREAT comment. Thanks.
The interplay between "Gaussian" and "Power law" goes further, though.
Eventually, wealth settles back to it's standard - power law - setting: the Pareto Curve. It might just take a very long while...

Fri, 08/17/2012 - 13:57 | 2714736 ThisTimeIsDifferent
ThisTimeIsDifferent's picture

"While Mr. Dalio’s narrative reads well, it doesn’t stand up to common sense."

Alex - 'common sense' is positively not required here. Facts and figures are.

Fact 1:

a truly beautiful balance of LIRP + inflation + growth has delevered US govt from 117% (1945) to 35% (1973).

Fact 2:

all fear of an imminent breakdown since 2008 has actually helped the CBs to pursue inflationary policies.

Fact 3:

while Mises is right and the 1800s were the Golden Age of capitalism, Austrian economics does not help with timing.

Please correct me if I miss anything, esp on 3.

Fri, 08/17/2012 - 15:10 | 2714967 WhiteNight123129
WhiteNight123129's picture

Well, the spread of knowledge on currency matters and money matters is a phenomenon which, while a remote probability is the biggest threat to the beautiful deleveraging. So paradoxically, more and more people knowing about the currency system is something which on aggregate could hurt people a lot. If noone knows about currencies and deleveraging than the population save in dollars, and the Gov taxes those dollars through inflation, deleveraging can happen. If people realize that too late, they will buy Gold by the end of the decade precisely when the Fed can safely start to raise rates again. Last year Gold move was extremely scary, if more and more people had bought more and more Gold and the Gold price had not been contained, it would have been a castrophe. So for the sake of everyone, people should not buy Gold. If everony buys Gold it is game over. So the biggest threat to a beautiful deleveraging is actually Ron Paul. I know it is quite paradoxical.. So have some Gold, have a mark to market loss next year, buy more, hope noone else buy gold and hope the masses wake up very late to the issues so then you can sell your Gold to them.

 

Fri, 08/17/2012 - 14:01 | 2714753 printmoremoney
printmoremoney's picture

Service Fraudulent Debt created by corporate criminals? FU#$K that. Use the bullets on order at the DHS to wipe the slate clean of debts. I represent the slaves they have saddled up, so my opinion might be liked by the 1%. TOO BAD

Fri, 08/17/2012 - 14:03 | 2714759 Cosimo de Medici
Cosimo de Medici's picture

The author is rather confused by Ray Dalio, and in fact created a straw man by beginning his argument by calling Dalio a Keynesian (of the modern type), then directing criticism at Keynesianism.  One might not be impressed with the sort of work Dalio does---though it would be hypocritical of the Lighthouse Investment Management fellow to say as much---but Dalio has been far more right than Mr. Gloy, according to the scorecard people in that industry keep.  Dalio has been successful not because he trades according to how things should pan out, but rather how he thinks things will pan out.  Dalio's "beautiful" deleveraging is not so much a value assessment as a description of how it has progressed so far.  The fact is, despite the combination of money printing, austerity and fiscal stimulus, growth is slightly positive, interest rates are far lower than before both the printing and the deficit jump, and the dollar is higher than it was before the crisis began.  Considering how big the debt bubble was (is), it is "beautiful" that things have gone this far with less damage and dislocation than anyone on Zerohedge would have predicted three years ago.  "Faster than most people think" is, and has been, dead wrong.  Dalio correctly determined how markets would react to the combined efforts of TPTB.  Dalio never said that the deleveraging would proceed without pain, but the pain has been less than just about anyone expected.  That does not mean perfect, it just means (that old standby) "better than expected".  Those who have suffered since the crisis began would have suffered no matter how anyone tried to address the crisis.  Perhaps what has Gloy's panties in a twist is that many who deserved to suffer or pay did not.  That isn't Dalio's fault, however.  Considering how much influence wealth typically buys in modern society, Dalio is surprisingly without connections, being viewed as a bit of a odd bird.  As for Gloy, if he is so prescient---given that his chosen profession is investment manager---how come he's still retail (in a relative sense), and where is his name amongst the list of the Kyle Bass-Paolo Pelligrini-Michael Burry types who caught the Great Crash?

If conditions change---for the better or worse---I'll bet Dalio navigates it much better than Alexander Gloy, who wants to trade what he thinks should be rather than what is.  Not that it is anything to be proud of, but that character trait---the willingness to trade the market rather than the theory or one's personal bias---is what separates the Ray Dalios from the Alexander Gloys.

Fri, 08/17/2012 - 15:05 | 2714956 khakuda
khakuda's picture

You make some good points.  So far, so good as far as the markets are concerned from bonds to stocks to currencies, there is no real stress in the US.  And, as you point out, the economy is growing a bit and there aren't riots in the streets.

The issue it seems to me, is that we shouldn't confuse the current calm with what is going on under the surface.  Defaults are coming for pensioners and bond holders, entitlements will be cut dramatically, taxpayers are going to be paying more, etc.  It won't be beautiful at all.

How can they inflate debt away, yet interest rates magically stay at zero for the world's largest debtor?  Has this ever been done?  That seems tough to pull off and will take many, many years to accomplish.  And let's face it, all the while, Congress and the President keep increasing the debt, there is no real austerity.  The only people paying the price so far have been savers and retirees.

Fri, 08/17/2012 - 14:23 | 2714789 WhiteNight123129
WhiteNight123129's picture

Two flawed assumption, first the central bank is in the business of lowering teh cost of debt for the Gov in exchange on a monopoly over money. That is the only reason a central bank exists. Read spaulding, the architect of the Greenback and the champion of central bank, the trade is the following, the bank of England was granted a monopoly over money (feeding on population) in exchange the Bank of England would fund the King which otherwise would have to borrow at 40%, that is the case since the funding of the crusades. The central bank is there to fund wars, period .The Bank of England monopoly over money is a disguised form of taxation on the population, the Banking system under a central bank system keeps a portion of this tax, and the rest is funneled to the govs resulting in below market interest rates. A central bank is the most effective taxation system that government have invented.  

Second the assumption that the roll-over will happen at a higher rate, we have been since 2009 in manipulated bong yields, the longer the debt markets are manipulated, the easier it is to manipulate those. In other words, if the Fed can keep cheating interest rates it gets easier to cheat if that means that they pay rates below inflation. So if the debt has not gone down in nominal terms it does not matter as long as the nominal GDP goes up. In real terms both the GDP and the debt go down, but the debt goes down faster. The first tricky part is the prospect for a war which comes and throws this fixed nominal debt versus ~nominal increase in GDP~ into trouble and a war with Iran would increase nominal debt, while forcing prices up due to friction, hoarding and all sort of war premium on commodities (initially the USD could go up though). So on the face of it inflation would eat up the debt, but it might shrink disposable income faster, so the debt goes down fast in real terms but the economy goes down even faster...

Now the tricky part comes from the disposal income, if we have a price shock due to climate, shortages and so forth, the tax revenues mechanically decreases, so if disposable income shrinks that is a problem, because again GDP falls faster in real term than debt. Wage inflation would actually be welcome. When you see wage inflation, it is the dangerous portion of the Gold bull cycle, because it makes tax revenues stronger, specially if it start to follow cost of living. The other indicator is wholesale prices versus retail, when retail margins and wage inflation both expand, it is dangerous for Gold because it indicates that tax revenues are going better. During the Greenback period, the Gold peaked while the wholesale prices pierce through retail margins and retail margin were decimated, and Gold started to go down while wages started to track cost of commodities. The unfortunate reality is that we are not helped by supply issues in oil and soft commodities, which are real factor and not only nominal factors.

So this beautiful deleveraging is probably happening, but an external shock of combined China crash, or Iran war + Euro disorderly exit could throw this deleveraging out of wack. That could bring the hyperinflation in that case. Now the deleveraging means stagflation toward the end of the beautiful deleveraging. At that point the Fed says it starts to see signs of inflation (while the inflation was already there the whole time), it will be a period were wage inflation start to occur, the mass run after teh commodities and Gold, but since Fed admits inflation that means ~guys get out of commodities~ we have gutted enough the currencies and the nominal GDP has been enough inflated while the nominal debt is flat, so now I am going to raise rate aggressively because I can afford it now. They will do that in years and then get out of Gold!! When Fed admist inflation, game over with Gold and commodities...

 

 

 

Fri, 08/17/2012 - 16:11 | 2715184 blindman
blindman's picture

nice link,
"the c.b. is there to fund wars."
i think i get it and good point.
end the fed ! stop the mindless murdering
lifestyle i say.

Fri, 08/17/2012 - 14:53 | 2714916 blindman
blindman's picture

dalio is a welfare prince.
let me stop there.

Fri, 08/17/2012 - 15:02 | 2714948 WhiteNight123129
WhiteNight123129's picture

Probably but how does it make his analysis wrong?

Fri, 08/17/2012 - 15:38 | 2715060 blindman
blindman's picture

there is more but i'll start here.
"..Restructuring the debt means creditors get paid less or get paid over a longer time frame or at a lower interest rate; somehow a contract is broken in a way that reduces debt. But debt restructurings also are deflationary and negative for growth. One man's debts are another man's assets, and when debts are written down to relieve the debtor of the burden, it has a negative effect on wealth. That causes credit to decline." r.d.
.
with the words " contract is broken ". these
contracts that created the money supply that
fueled the inflation of asset prices (destroying
the economy ) were fraudulently induced and
were essentially fraudulent contracts and securities created from them. this was and is the
basis of the status quo for the sake of keeping
the game going. the game that he plays welfare
prince supported by trillions in federal handouts
to cover up massive fraud. that is not beautiful
or sustainable and probably not even redeemable.
that is the first thing.
i think restructuring is a broader subject than
he suggests. it should include eliminating
welfare princes from preaching bullshit economics
to the great unwashed such as my self. this isn't
a game to most people. ya know ...
.
and this little bit ..
.
" Dalio: The key is to keep nominal interest rates below the nominal growth rate in the economy, without printing so much money that they cause an inflationary spiral. The way to do that is to be printing money at the same time there is austerity and debt restructurings going on. "
.
in a mathematical macro model this could make sense.
in the real world it means stealing from the
people to enrich your fucking cousins. also
saved and spared welfare princes of the highest
order and for generations, ongoing
.
we can't have the fraudulent, criminal, bankrupt
gangsters lose money, can we?

Fri, 08/17/2012 - 16:06 | 2715160 blindman
blindman's picture

so currency is money according to mr. dalio?
in a fiat system. credit is not, it is debt.
ok. then why is it beautiful to hand over the
peoples money for the banks fraudulent debt
securities? because it makes certain people
billionaires who can then continue to destroy
the potential proper functioning of the
government and legal systems in the "advanced"
economies. also it relieves them of having to do
any honest work which fails to pay a living wage
in an "advanced" economy.
.
Guest Post: When the Weakest Critical Part Fails, the Machine Breaks Down
http://www.zerohedge.com/news/guest-post-when-weakest-critical-part-fail...

Fri, 08/17/2012 - 16:16 | 2715205 Stockmonger
Stockmonger's picture

We're in a Goldilocks deleveraging!

Fri, 08/17/2012 - 16:19 | 2715216 Treeplanter
Treeplanter's picture

Is there a Druid in the house?  Magic is all we have left.  We must ask the  old gods where all the hidden gold is.  We may have to drain every lake in Europe.

Fri, 08/17/2012 - 16:57 | 2715354 Excursionist
Excursionist's picture

Gotta love the straw man Alex Gloy of Lighthouse Investment Management puts forth to support 80% of his argument in this post:  Dalio is a Keynesian.

Pray tell, based on what evidence does such a claim hold up?

Fri, 08/17/2012 - 17:04 | 2715376 blindman
blindman's picture

he believes that currency is money and
the growth chart inclines with 2-3% inflation
per year is normal and desirable and good,
therefore he must be a keynesian. otherwise the whole thing fails miser - ably as we are witnessing.
granted, i may be very wrong but a cursory look here tells me i'm not. some day i'll read it all...
How the Economic Machine Works
A Template for Understanding What is Happening Now
Ray Dalio
Created October 31, 2008 | Updated March, 2012
https://www.bwater.com/Uploads/FileManager/research/how-the-economic-mac...

Fri, 08/17/2012 - 17:09 | 2715386 Aquaman
Aquaman's picture

The question he asks is does it make sense.  However, the only question that matters is: is that what is happening.  The markets would suggest that is what is happening.  Of course it doesn't make sense.....and yet here we are at S&P 1420. 

Fri, 08/17/2012 - 20:43 | 2715835 ATG
ATG's picture

Sorry Ray, printing money does not decrease debt, it increases it, as every Money and Banking student knows.

The +33% increase in TNX in a month adds that much more debt service billed to US government taxpayers and subtracted from the economy.

And it goes to the owners of the Central Banks who really don't need it except to expand their control over others.

(Ok, everything over Fed expenses and leveraged 6% dividends with 100+% ROI's is rebated to the Treasury.)

We'd be better off if we adopted Ron Paul's idea of the Fed writing off its debt for Jubilee relief.

A closer look at the US Debt by Sector graph shows the only sectors deleveraging are State and Local Governments and their revenues from the contracting Household Sector borrowing and paying less in sales and property taxes.

Before CT Selectmen give Bridgewater any more tax holidays, they might consider what exactly they produce beside wealth transfer to themselves at the economy's expense with some local rent and luxury purchases.

It is always revelatory to listen to investment managers dissemble and rationalize, especially if they are successful removing value from productive sectors... 

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