The Machine by Ray Dalio, page-2

@vic_wattle

This is a great video clip that explains in simple words the role of credit in the economy and its interplay with monetary policy. Thanks for sharing it.

The only thing I would add to it is that finding the right balance between monetary and fiscal policy in the context of a “beautiful deleveraging” (to borrow Dalio’s words) is naturally conducive to the idea of negative real yields we have previously discussed.

When Dalio talks about the four ways of reducing debt, categorising them into “deflationary” (spending cuts, debt restructuring, wealth taxes) and “inflationary” (money printing), what the inflationary side really means is that debt has to compound at a negative rate in real terms (i.e. negative real yields) as a result of monetary/fiscal policy.

Then the deflationary side can be used too, as long as it doesn’t affect GDP growth too negatively. For, in the end, the goal is to reduce debt relative to the size of the overall economy.

Cheers