"Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.
And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change."
... and there's a self-reinforcing process in which your debt rises in relationship to your income.
I haven't had my coffee yet and the world is still looking fuzzy to me, so I'm probably just being dense.
But does this not make sense to anyone else? Why would my income to debt ratio change because I've spent my borrowed money somewhere?
I must be misunderstanding this argument, is he saying that as people spend more we all end up making more, and then we all end up borrowing more on what we've made? That would make sense (though in reality what happens is that most people's incomes stay level and the proceeds are funneled to investors - this is largely the reason that the top 5% fall into a more top-heavy Pareto distribution of wealth whereas everyone else is exponentially distributed, but I digress...), but that still shouldn't increase proportional debt, unless I'm missing a key part of this argument.
Most of what he says doesn't make sense to me. I think he's a blowhard protecting his job at a hedge fund and trying to drum up business, but what do I know? My prediction: his hedge fund will tank within 120 days.
Every time I've borrowed $10,000 I've paid it back with interest. Apparently in the circles he lives in, nobody pays loans off. That could be a problem.
There are bits of truth in there, e.g., "Europe`s reached its debt limits." , "you reach a point where you can`t anymore[sic] get more debt", "So we`re in a deleveraging". Well, blow me down! What insight! Where do I sign on to be a hedge-fund manager? This guy can be replaced by an 8-ball:
http://web.ics.purdue.edu/~ssanty/cgi-bin/eightball.cgi
IMO most of it is horsepuckey PR. "We`ve had 50, 75-year cycles..." - WTF? Kondratiev waves? Hey, buddy, I've got an astrologer who can pick stocks!
You can pay your loans off but still increase your debt by taking out new loans. In the case of most governments, this is usually how they pay off the old loans.
"So when we deal with Goldman Sachs or when we deal with banks and when we deal with Europe I think you can break the world into two parts, there`s the debtor-developed world which has reached its debt limits and is going through a deleveraging."
Banks and nations, like other entities, are usually required to pay their debts or they go bankrupt (note the word itself, http://www.worldwidewords.org/weirdwords/ww-ban1.htm ) . Of course they're leveraged.
The questions are "What does Dalio tell us that we don't already know?" "Of what use are his explanations?" and most importantly, "Why is this man appearing on Charlie Rose saying things we already know?"
I think he's saying that when you borrow money, it stimulates the economy and increases people's incomes. That allows people to borrow even more money. Which stimulates the economy and increases people's incomes even more. It's a feedback loop and we saw it break in 2008.
An example is people "using their homes as ATMs" during the housing boom. Easy credit drove up the prices of homes, people used the increase in net wroth to take home equity loans, other general debts, or buy investment properties, which in turn drove up the price of homes even more.
I think this is a very concise way of putting it. This is essentially why I don't think further stimulus or monetary policy tweaking is going to help us.
We have gotten drunk on overspending. Drinking more won't remove the hangover. We just have to sober up and wait.
What is described here, I think is just a symptom of the inability of a primary focus on profits to generate true value, leading to an overly uneven wealth distribution, which in turn leads to an overall economic stallout.
What about the person who earned $100k and loaned $10k, leaving them with $90k?
"Fractional reserve" doesn't help here because if I'm spending the borrowed money, it isn't being kept in the bank by either the lender or the borrower.
Comments
TL;DR:
"Imagine you earned $100,000 a year and you didn`t have any debt. You can go to a bank and borrow $10,000 a year. You can spend, therefore, $110 a year. When you spend $110,000 a year, somebody else earns $110,000 and they can go to a bank and there`s a self-reinforcing process in which your debt rises in relationship to your income.
And that goes on for a long time and that goes on for 50 or 75 years through history. We`ve had 50, 75-year cycles and then you reach a point where you can`t anymore get more debt and the process starts to change."
... and there's a self-reinforcing process in which your debt rises in relationship to your income.
I haven't had my coffee yet and the world is still looking fuzzy to me, so I'm probably just being dense.
But does this not make sense to anyone else? Why would my income to debt ratio change because I've spent my borrowed money somewhere?
I must be misunderstanding this argument, is he saying that as people spend more we all end up making more, and then we all end up borrowing more on what we've made? That would make sense (though in reality what happens is that most people's incomes stay level and the proceeds are funneled to investors - this is largely the reason that the top 5% fall into a more top-heavy Pareto distribution of wealth whereas everyone else is exponentially distributed, but I digress...), but that still shouldn't increase proportional debt, unless I'm missing a key part of this argument.
"But does this not make sense to anyone else? "
Most of what he says doesn't make sense to me. I think he's a blowhard protecting his job at a hedge fund and trying to drum up business, but what do I know? My prediction: his hedge fund will tank within 120 days.
Every time I've borrowed $10,000 I've paid it back with interest. Apparently in the circles he lives in, nobody pays loans off. That could be a problem.
There are bits of truth in there, e.g., "Europe`s reached its debt limits." , "you reach a point where you can`t anymore[sic] get more debt", "So we`re in a deleveraging". Well, blow me down! What insight! Where do I sign on to be a hedge-fund manager? This guy can be replaced by an 8-ball: http://web.ics.purdue.edu/~ssanty/cgi-bin/eightball.cgi
IMO most of it is horsepuckey PR. "We`ve had 50, 75-year cycles..." - WTF? Kondratiev waves? Hey, buddy, I've got an astrologer who can pick stocks!
You can pay your loans off but still increase your debt by taking out new loans. In the case of most governments, this is usually how they pay off the old loans.
He's talking about the debt of banks and nations.
"So when we deal with Goldman Sachs or when we deal with banks and when we deal with Europe I think you can break the world into two parts, there`s the debtor-developed world which has reached its debt limits and is going through a deleveraging."
Banks and nations, like other entities, are usually required to pay their debts or they go bankrupt (note the word itself, http://www.worldwidewords.org/weirdwords/ww-ban1.htm ) . Of course they're leveraged.
The questions are "What does Dalio tell us that we don't already know?" "Of what use are his explanations?" and most importantly, "Why is this man appearing on Charlie Rose saying things we already know?"
Just because the answer to the question is logical and unsurprising doesn't mean it's not the answer to the question.
I think you should read more about how the world works before you say dumb things like this
I think he's saying that when you borrow money, it stimulates the economy and increases people's incomes. That allows people to borrow even more money. Which stimulates the economy and increases people's incomes even more. It's a feedback loop and we saw it break in 2008.
An example is people "using their homes as ATMs" during the housing boom. Easy credit drove up the prices of homes, people used the increase in net wroth to take home equity loans, other general debts, or buy investment properties, which in turn drove up the price of homes even more.
I think this is a very concise way of putting it. This is essentially why I don't think further stimulus or monetary policy tweaking is going to help us.
We have gotten drunk on overspending. Drinking more won't remove the hangover. We just have to sober up and wait.
Every time I hear the inebriation metaphor applied to monetary policy, it makes me want a drink.
What is described here, I think is just a symptom of the inability of a primary focus on profits to generate true value, leading to an overly uneven wealth distribution, which in turn leads to an overall economic stallout.
What about the person who earned $100k and loaned $10k, leaving them with $90k?
"Fractional reserve" doesn't help here because if I'm spending the borrowed money, it isn't being kept in the bank by either the lender or the borrower.