Ray Dalio's Perfect Explanation of Economic Cycles, Deleveraging, and Credit | Exploring Markets

Ray Dalio's Perfect Explanation of Economic Cycles, Deleveraging, and Credit

Ray Dalio has a fantastic piece of work called the, “Template for Understanding.” While it's a great read, one portion really stands out. He explains the business cycle with one example of Monopoly. Specifically how booms and busts form through leveraging and deleveraging:
"If you understand the game of Monopoly®, you can pretty well understand credit and economic cycles. Early in the game of Monopoly®, people have a lot of cash and few hotels, and it pays to convert cash into hotels. Those who have more hotels make more money. Seeing this, people tend to convert as much cash as possible into property in order to profit from making other players give them cash. So as the game progresses, more hotels are acquired, which creates more need for cash (to pay the bills of landing on someone else’s property with lots of hotels on it) at the same time as many folks have run down their cash to buy hotels. When they are caught needing cash, they are forced to sell their hotels at discounted prices. So early in the game, “property is king” and later in the game, “cash is king.” Those who are best at playing the game understand how to hold the right mix of property and cash, as this right mix changes." - Ray Dalio