[quote=FlyerInHi]CAr, I’m curious what theories and prescriptions of Dalio’s you agree with.
Of his 4 ways of handling a beautiful deveraging I think you like transfer of wealth the most. Still the elephant in the room is printing money, according to Dialo.[/quote]
What’s best in his video, IMO, is the acknowledgement of short-term and long-term debt cycles, and how the peak of the long-term cycles will have severe impacts on the economy for many years afterward.
Of the 4 ways that deleveraging occurs (and he says that they all occur to some extent in every deleveraging event), I favor the deflationary forces, particularly default and the redistribution of wealth back to those from whom it was taken. That’s because the peak of a long-term debt cycle usually marks the maximum income/wealth gap between the rich and everyone else. Historically, economies and societies have worked best when the wealth/income gap was kept to fairly low levels.
Debt makes the rich grow richer because debt is mostly used for consumption and asset price speculation. Both of these grow the wealth of the richest people in the economy because the rich take a portion of all consumption (profits, financial/transaction fees, interest on debt used to purchase goods and services, etc.), and the wealthiest people own the greatest portion of assets, so when asset prices go up, their relative wealth goes up. When you have leverage and a fractional reserve banking system, the rich will almost always benefit most.
By allowing defaults to occur, asset prices tend to go down faster than wages, so workers and others on fixed incomes (the vast majority of those in the bottom half of the economy) gain purchasing power at the expense of the very wealthy. This shrinks the wealth/income gap while also reducing the debt burden of those who tend to have the most debt (relative to income).
It should go without saying that spending does indeed need to be reduced. We need to stop financing consumption with debt. There might be some exceptions like very large purchases (houses and cars), or for medical care, but other than that, people should using savings for consumption. Even for large purchases, every effort should be made to keep debt as close to zero as possible, IMO.
It’s okay to print money, but if the printing occurs in the way it does in the video, it does not reduce the overall debt burden because the Fed is buying new government debt, so for every dollar that the Fed is printing to buy govt debt, the govt increases its debt burden by one dollar (plus interest!). IMHO, this money printing must be offset by higher taxes on those who are most able to afford it; otherwise, the debt will increase at a faster rate. Of course, there are multipliers and fractional reserve lending; but for every dollar additional lent, there is less and less “real” money to back it up.
Also, how that money is printed and how it is used will determine if the relative wealth/income gaps will be maintained or not. The way it’s been done the past few years, the focus has been on asset price reflation (to insane, bubble levels) as opposed to spending this money almost entirely on infrastructure and R&D (I favor R&D in energy and healthcare). With this more productive type of spending, we could reap benefits as a society for many years to come. Instead, we have been left with reflated bubbles and a very high debt load that we will not likely be able to pay off.
But at least the wealthy have maintained — and grown — the wealth/income gap, which was the goal all along. So, bonus points for a job well done in that respect, I suppose. 🙁
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I would like to point out that of his three suggestions at the end, #2 [paraphrasing]” “Don’t let income rise faster than productivity because it will make you less competitive,” is a bit silly. In the past ~30 years, incomes for the vast majority of workers have gone down in real terms while productivity has increased greatly. This is NOT the cause of our current economic malaise. I always look at purchasing power as opposed to nominal or “inflation-adjusted” (by CPI) numbers because they don’t tell the story accurately. If you look at purchasing power, the income of workers has gone down drastically over the past few decades.
Also, he says that debt should not increase faster than income, but since we have a fractional reserve banking system and debt-based monetary system where interest accrues every moment of every day, I’m not sure if this is possible (am I missing something here?).
