Ray Dalio On Why Depressions Happen and What It Means | Exploring Markets

Ray Dalio On Why Depressions Happen and What It Means

One of Ray Dalio's masterpieces is titled, “Template for Understanding.” There are countless wisdoms within this document. One section seems to have paramount importance today. That is when he begins to speak about why depressions happen what causes them. Think about how this might relate to today, or even past crashes you've witnessed:
"In deflationary depressions/deleveragings, monetary policy is typically ineffective in creating credit because interest rates hit 0% and can’t be lowered further, so other, less effective ways of increasing money are followed. Credit growth is difficult to stimulate because borrowers remain over-indebted, making sensible lending impossible. In inflationary deleveragings, monetary policy is ineffective in creating credit because increased money growth goes into other currencies and inflation hedge assets because investors fear that their lending will be paid back with money of depreciated value." - Ray Dalio
He goes on to say:
"The long-term debt cycle top occurs when 1) debt and debt service levels are high relative to incomes and/or 2) monetary policy doesn’t produce credit growth. From that point on, debt can’t rise relative to incomes, net worth and money supply. That is when deleveraging – i.e. bringing down these debt ratios – begins. All deleveragings start because there is a shortage of money relative to debtors’ needs for it. This leads to large numbers of businesses, households and financial institutions defaulting on their debts and cutting costs, which leads to higher unemployment and other problems." - Ray Dalio