What I learned from “Principles for Navigating Big Debt Crisis” by Ray Dalio

As regular subscribers will know, I recently recommended reading Ray Dalio’s book, “Principles For Navigating Big Debt Crisis“. Dalio outlines Bridgewater’s research on more than 50 debt crisis that have occurred over the past 100 years, drawing together the remarkable similarities. It provides a consistent playbook for how crisis play out, how policymakers respond (who often make the same mistakes) and what it means for investors. This article pulls together some of the main insights I took away from the book (emboldened text mine).

Dalio notes that debt crisis typically occur “because debt and debt service costs rise faster than the incomes that are needed to service them, causing a deleveraging.”

Important to note that debt cycles are not limited to the business cycle. Debt can gradually build up so that, “each short-term cyclical high and each short-term cyclical low is higher in its debt-to-income ratio than the one before it.” According to Dalio this is just human nature. People have a natural inclination to borrow and spend more instead of paying debt back. “As a result, over long periods of time, debts rise faster than incomes. This creates the long-term debt cycle.”

Debt cycles are nothing new.