Today, my new book "How Nations Go Bankrupt: The Long Cycle" is officially released. This article aims to briefly share the core content of the book. For me, it is most important to convey understanding at this critical moment, so I hope to communicate the core ideas in a very concise manner through this brief, leaving the depth of understanding up to the readers.
My Background
I've been involved in global macro investing for over 50 years, and I've been betting on the government bond market for almost the same amount of time, and I've done it brilliantly. While I was previously secretive about the mechanisms by which major debt crises occur and the principles for dealing with them, I have reached another stage in my life and desire to pass on these understandings to others and help others. This is especially true when I see that the United States and other countries are heading for what amounts to an economic "heart attack." This led me to write How Nations Go Broke: The Big Cycle, a book that comprehensively expounds the mechanisms and principles I use, with a brief overview of the book.
How the Mechanism Works
Debt dynamics operate in the same way for governments, individuals, or companies, with the difference that the central government has a central bank, can print money (which causes the currency to depreciate), and can get money from the people through taxes. So, if you can imagine how the debt dynamics would work if you or the business you run could print money or get money through taxes, you could understand the dynamics. But remember, your goal is to make the whole system work well, not only for yourself, but for all citizens.
To me, the credit/market system is like the circulatory system of the human body, feeding the market and all parts of the economy. If credit is used effectively, it can generate productivity and income that is sufficient to pay off debt and interest, which is healthy. However, if credit is misused, resulting in insufficient income to pay off debt and interest, the debt burden can accumulate like plaque in the veins, squeezing out other expenses. When the amount of debt repayment becomes very large, a debt repayment problem arises, which eventually leads to a debt rollover problem because the debt holder is reluctant to roll it over and wants to sell it. Naturally, this leads to an underdemand and oversupply of debt instruments such as bonds, which in turn leads to:
a) Rising interest rates suppress the market and the economy;
Either b) the central bank "prints money" and purchases debt, which will reduce the value of the currency and push up inflation. Printing money will also artificially lower interest rates, harming the returns for creditors.
Neither approach is ideal. When debt is sold too large and the central bank buys a large amount of bonds but is unable to curb the rise in interest rates, the central bank loses money, affecting its cash flow. If this continues, the central bank's net assets will become negative.
When the situation becomes serious, both the central government and the central bank will borrow to pay interest on debts. The central bank prints money to provide loans due to insufficient demand in the free market, leading to a self-reinforcing spiral of debt/money printing/inflation. In summary, attention should be paid to the following classic indicators:
The ratio of government debt repayment costs to government revenue (similar to the number of patches in a circulatory system);
The ratio of government debt sold to the demand for government debt (similar to plaque rupture leading to a heart attack);
The amount of government debt that the central bank buys by printing money to cover the debt demand gap (similar to the amount of liquidity/credit injected by doctors/central banks to alleviate liquidity shortages, creating more debt, for which the central bank takes risks).
These typically increase gradually over a long period, spanning decades, with debt and debt repayment costs rising relative to income until it becomes unsustainable, because:
Debt repayment costs excessively crowd out other expenditures;
The supply of debt to be purchased is too large relative to the demand, leading to a significant rise in interest rates, severely impacting the market and the economy;
To avoid rising interest rates and deterioration of the market/economy, the central bank printed a large amount of money and purchased government debt to compensate for insufficient demand, resulting in a significant decline in the value of the currency.
In any case, the return on bonds will be poor until money and debt become very cheap enough to attract demand, and/or debt can be repurchased or restructured by the government at a low cost.
This is a brief overview of the great debt cycle.
Because people can measure these factors, it is possible to monitor the occurrence of debt dynamics, making it easy to foresee impending problems. I have used this diagnostic method in investments without making it public, but now I will explain it in detail in the book "How Nations Go Bankrupt: The Big Cycle," as it is too important now to keep secret.
More specifically, it can be seen that the cost of debt and debt repayment rises relative to income, the supply of debt is greater than the demand, the central bank initially stimulates by lowering short-term interest rates, then responds by printing money and buying debt, and eventually the central bank loses money and has negative net worth, the central government and the central bank pay interest on the debt by borrowing, and the central bank monetizes the debt. All of this has led to a government debt crisis, amounting to a "heart attack" of the economy, as restrictions on debt-financed spending block the normal flow of the circulatory system.
At the beginning of the final phase of the large debt cycle, market behavior reflects this dynamic through rising long-term interest rates, depreciation of currencies (especially relative to gold), and shortening the maturity of debt issuance by the central government's treasury due to insufficient demand for long-term debt. Often, later in the process, when the dynamics are at their worst, seemingly extreme measures are taken, such as imposing capital controls and exerting intense pressure on creditors to buy rather than sell debt. My book explains this dynamic more comprehensively through a large number of graphs and data.
Brief Overview of the Current Situation of the US Government
Now, imagine you are running a large enterprise called the United States government. This will help you understand the financial situation of the United States government and the choices made by its leadership.
The total revenue this year is about $5 trillion, while the total expenditure is about $7 trillion, so the budget gap is about $2 trillion. That said, your organization will spend about 40% more than it earns this year. And there is little ability to cut spending, because almost all of the spending is previously committed or necessary. Because your organization has been borrowing too much for a long time, you've accumulated a huge amount of debt—about six times your annual income (about $30 trillion), which equates to about $230,000 per household.
The interest on the debt amounts to about 1 trillion dollars, accounting for about 20% of corporate revenue, which constitutes half of this year's budget shortfall (deficit), and you will need to borrow to fill this gap. However, this 1 trillion dollars is not the total you must pay to creditors, as in addition to interest, you also have to repay the maturing principal, which is about 9 trillion dollars.
You hope that your creditors or other wealthy entities can lend you or lend to other wealthy entities again. Therefore, the cost of debt repayment—in other words, the principal and interest that must be repaid to avoid default—is approximately $100 trillion, which is about 200% of income.
This is the current situation.
So, what will happen next? Let's imagine. No matter how large the deficit is, you have to borrow money to make up for the deficit.
There is much controversy regarding the specific amount of the deficit. Most independent assessment agencies predict that in ten years, debt will reach approximately $50 - 55 trillion, which is about 6.5 - 7 times the revenue (approximately $3 - 5 trillion). Of course, in ten years, if there is no plan to address this situation, the organization will face more pressure to repay its debts, thereby squeezing expenditures, and will also face greater risks: there will not be enough demand for the debt it must sell.
This is the whole picture.
My 3% Three-Part Solution
I firmly believe that the government's financial situation is at a turning point, as if this issue is not addressed now, the debt will accumulate to an unmanageable level, resulting in significant trauma. It is especially important that this operation is carried out when the system is relatively strong, rather than during economic weakness. This is because during economic contraction, the government's borrowing needs will increase significantly.
Based on my analysis, I believe this situation needs to be addressed through what I call the "3% Three-Part Solution." That is, to balance the budget deficit down to 3% of Gross Domestic Product (GDP) through the following three methods:
Reduce expenses,
Increase tax revenue,
Lower interest rates.
All three need to happen at the same time to avoid any one adjustment being too large, because if any one is too large, it can lead to traumatic consequences. These adjustments need to be achieved through good fundamental adjustments, not forced (for example, if the Fed does not naturally lower interest rates, it will be very unfavorable). According to my projections, an increase in spending cuts and tax revenues of about 4% each relative to the current plan and a corresponding reduction in interest rates of about 1 – 1.5% would result in an average reduction in interest expenses of 1 – 2% of GDP over the next decade and spur higher asset prices and buoyant economic activity, resulting in more revenues.
Here are some common questions and my answers
The book goes far beyond what could be covered here, including descriptions of the "overall megacycles" (including debt/monetary/credit cycles, domestic political cycles, external geopolitical cycles, natural behavior, and technological advances) that drive all the major changes in the world, my outlook for the possible future, and some perspectives on investing during these changes. But for now, I'm going to answer some of the questions that are often asked when discussing this book, and invite you to read the full book to learn more.
) Question 1: Why do large government debt crises and major debt cycles occur?
The occurrence of large-scale government debt crises and major debt cycles can be easily measured in the following ways:
The ratio of government debt repayment to government revenue has risen to an unacceptable level, thereby squeezing the government's basic expenditures;
the sale of government debt is too large relative to demand, leading to higher interest rates, which in turn leads to a market and economic downturn;
Central banks respond to these situations by lowering interest rates, which decreases the demand for bonds, leading to central banks printing money to purchase government debt, thereby causing currency depreciation.
These typically increase gradually over a long period, spanning decades, until they can no longer continue because:
Debt repayment costs crowd out other expenses;
The supply of debt to be purchased is too large relative to the purchase demand, leading to a significant rise in interest rates, severely impacting the market and the economy;
Or 3) The central bank prints a large amount of money and purchases government debt to compensate for insufficient demand, leading to a significant decline in the value of the currency.
In any case, the return on bonds will be very poor until they become cheap enough to attract demand or the debt is restructured. These can be easily measured, and it can be seen that they are heading towards an impending debt crisis. When the limits on debt financing expenditures occur, a similar economic "heart attack" triggered by debt will emerge.
Throughout history, almost every country has experienced this type of debt cycle, often occurring multiple times, so there are hundreds of historical cases to refer to. In other words, all monetary order collapses, and the debt-cyclical process I described is the reason behind these collapses. This condition goes back to recorded history. This is the process that led to the collapse of all reserve currencies such as the British pound and the guilder before. In my book, I present the last 35 cases.
Question 2: If this process occurs repeatedly, why is the dynamic behind it not widely understood?
You're right, this is really not widely understood. Interestingly, I couldn't find any specific research on how this process happens. I speculate that the reason why this is not widely understood is that in reserve currency countries, this process usually occurs only about once in a lifetime – when their monetary order collapses – whereas in non-reserve currency countries, it is thought that reserve currency countries do not experience such problems. The only reason I found this process was because I saw it happen in my sovereign bond market investments, which led me to look at many similar cases throughout history in order to be able to deal with them properly (for example, I dealt with the 2008 global financial crisis and the 2010-2015 European debt crisis).
Question 3: As we wait for the U.S. debt problem to erupt, how worried should we be about a "heart attack" debt crisis in the U.S.? People have heard a lot about the impending debt crisis that never happened. Is this time any different?
I think we should be very worried, given the circumstances mentioned earlier. I think those who are worried about the debt crisis when the conditions are less severe are right, because if measures can be taken early, such as early warnings to people not to smoke and poor diet, the situation can be avoided from getting so bad. Therefore, I think the reason why this issue has not attracted wider attention is both because people don't know enough about it and because there is a lot of complacency caused by premature warnings. It's like a person who has a lot of plaque in their arteries, eats a lot of fatty foods, and doesn't exercise and says to the doctor, "You warned me that something would go wrong if I didn't change my lifestyle, but I haven't had a heart attack yet." Why should I trust you now? ”
Question 4: What could be the catalysts for today's U.S. debt crisis, when might it occur, and what might the crisis look like?
The catalyst will be the convergence of the various influencing factors mentioned earlier. As for timing, policies and external factors, such as major political changes and wars, can accelerate or delay its occurrence. For example, if the budget deficit were to fall from about 7% of GDP, which I and most people predicted, to about 3%, the risk would be greatly reduced. In the event of a major external shock, the crisis could come much earlier; If not, it may happen much later or not at all (if managed properly). My guess – probably not accurate – is that if the current path is not changed, the crisis will occur within three years, up and down for two years.
Question 5: Do you know of any similar cases where budget deficits were significantly reduced in the manner you described, and yielded good results?
Yes, I know of several cases. My plan will reduce the budget deficit by about 4% of GDP. The most similar case with good results was when the U.S. fiscal deficit cut 5% of GDP between 1991 and 1998. My book also lists similar cases in several countries.
Question 6: Some argue that the U.S. is generally less susceptible to debt-related issues/crises due to the dollar's dominance in the global economy. What do you think those who hold this view have overlooked or underestimated?
If they believe this, they ignore the understanding of the mechanism and the lessons of history. More specifically, they should look at history and understand why all previous reserve currencies are no longer reserve currencies. In simple terms, money and debt must be effective stores of wealth, otherwise they will be devalued and discarded. The dynamics I have described explain how reserve money loses its effectiveness as a store of wealth.
Question 7: Japan—its debt-to-GDP ratio reaches 215%, the highest among all developed economies—is often cited as a typical example of the argument that "a country can sustain high levels of debt without experiencing a debt crisis." Why can't Japan's experience provide you with comfort?
The Japanese case exemplifies the problems I have described and will continue to be an example of them, and it also validates my theory in practice. More specifically, Japanese bonds and debt have been poor investments due to the Japanese government's over-indebtedness. To compensate for the lack of demand for Japanese debt assets at low interest rates, the Bank of Japan printed heavily and bought large amounts of government debt, which resulted in Japanese bondholders losing 45% of their debt against the dollar and 60% against gold since 2013. Since 2013, costs for Japanese workers have fallen by 58% relative to U.S. workers. I have an entire chapter in my book devoted to the situation in Japan, which explains this in depth.
Question 8: From a financial perspective, which regions in the world appear particularly tricky that people might underestimate?
Most countries have similar debt and deficit issues. The UK, the EU, China, and Japan are no exceptions. This is why I expect that most countries will undergo a similar process of debt and currency devaluation adjustment, which is also the reason I anticipate that non-government issued currencies, such as gold and Bitcoin, will perform relatively well.
Question 9: How should investors respond to this risk/what should their future positioning be?
Everyone's financial situation is different, but as a general recommendation, I recommend diversifying into asset classes and countries that have strong P&L and balance sheets and no major internal and external geopolitical conflicts, while reducing the allocation to debt assets such as bonds, and adding to gold and a small amount of Bitcoin. Investing a small amount of money in gold reduces portfolio risk, and I think it will also improve portfolio returns.
Finally, the views expressed here are solely my personal opinions and do not necessarily represent the views of Bridgewater Associates.
The content is for reference only, not a solicitation or offer. No investment, tax, or legal advice provided. See Disclaimer for more risks disclosure.
Bridgewater founder Dalio: How countries go bankrupt
Article Author: Ray Dalio
Article compiled by: Block unicorn
Introduction
Today, my new book "How Nations Go Bankrupt: The Long Cycle" is officially released. This article aims to briefly share the core content of the book. For me, it is most important to convey understanding at this critical moment, so I hope to communicate the core ideas in a very concise manner through this brief, leaving the depth of understanding up to the readers.
My Background
I've been involved in global macro investing for over 50 years, and I've been betting on the government bond market for almost the same amount of time, and I've done it brilliantly. While I was previously secretive about the mechanisms by which major debt crises occur and the principles for dealing with them, I have reached another stage in my life and desire to pass on these understandings to others and help others. This is especially true when I see that the United States and other countries are heading for what amounts to an economic "heart attack." This led me to write How Nations Go Broke: The Big Cycle, a book that comprehensively expounds the mechanisms and principles I use, with a brief overview of the book.
How the Mechanism Works
Debt dynamics operate in the same way for governments, individuals, or companies, with the difference that the central government has a central bank, can print money (which causes the currency to depreciate), and can get money from the people through taxes. So, if you can imagine how the debt dynamics would work if you or the business you run could print money or get money through taxes, you could understand the dynamics. But remember, your goal is to make the whole system work well, not only for yourself, but for all citizens.
To me, the credit/market system is like the circulatory system of the human body, feeding the market and all parts of the economy. If credit is used effectively, it can generate productivity and income that is sufficient to pay off debt and interest, which is healthy. However, if credit is misused, resulting in insufficient income to pay off debt and interest, the debt burden can accumulate like plaque in the veins, squeezing out other expenses. When the amount of debt repayment becomes very large, a debt repayment problem arises, which eventually leads to a debt rollover problem because the debt holder is reluctant to roll it over and wants to sell it. Naturally, this leads to an underdemand and oversupply of debt instruments such as bonds, which in turn leads to:
a) Rising interest rates suppress the market and the economy;
Either b) the central bank "prints money" and purchases debt, which will reduce the value of the currency and push up inflation. Printing money will also artificially lower interest rates, harming the returns for creditors.
Neither approach is ideal. When debt is sold too large and the central bank buys a large amount of bonds but is unable to curb the rise in interest rates, the central bank loses money, affecting its cash flow. If this continues, the central bank's net assets will become negative.
When the situation becomes serious, both the central government and the central bank will borrow to pay interest on debts. The central bank prints money to provide loans due to insufficient demand in the free market, leading to a self-reinforcing spiral of debt/money printing/inflation. In summary, attention should be paid to the following classic indicators:
These typically increase gradually over a long period, spanning decades, with debt and debt repayment costs rising relative to income until it becomes unsustainable, because:
Debt repayment costs excessively crowd out other expenditures;
The supply of debt to be purchased is too large relative to the demand, leading to a significant rise in interest rates, severely impacting the market and the economy;
To avoid rising interest rates and deterioration of the market/economy, the central bank printed a large amount of money and purchased government debt to compensate for insufficient demand, resulting in a significant decline in the value of the currency.
In any case, the return on bonds will be poor until money and debt become very cheap enough to attract demand, and/or debt can be repurchased or restructured by the government at a low cost.
This is a brief overview of the great debt cycle.
Because people can measure these factors, it is possible to monitor the occurrence of debt dynamics, making it easy to foresee impending problems. I have used this diagnostic method in investments without making it public, but now I will explain it in detail in the book "How Nations Go Bankrupt: The Big Cycle," as it is too important now to keep secret.
More specifically, it can be seen that the cost of debt and debt repayment rises relative to income, the supply of debt is greater than the demand, the central bank initially stimulates by lowering short-term interest rates, then responds by printing money and buying debt, and eventually the central bank loses money and has negative net worth, the central government and the central bank pay interest on the debt by borrowing, and the central bank monetizes the debt. All of this has led to a government debt crisis, amounting to a "heart attack" of the economy, as restrictions on debt-financed spending block the normal flow of the circulatory system.
At the beginning of the final phase of the large debt cycle, market behavior reflects this dynamic through rising long-term interest rates, depreciation of currencies (especially relative to gold), and shortening the maturity of debt issuance by the central government's treasury due to insufficient demand for long-term debt. Often, later in the process, when the dynamics are at their worst, seemingly extreme measures are taken, such as imposing capital controls and exerting intense pressure on creditors to buy rather than sell debt. My book explains this dynamic more comprehensively through a large number of graphs and data.
Brief Overview of the Current Situation of the US Government
Now, imagine you are running a large enterprise called the United States government. This will help you understand the financial situation of the United States government and the choices made by its leadership.
The total revenue this year is about $5 trillion, while the total expenditure is about $7 trillion, so the budget gap is about $2 trillion. That said, your organization will spend about 40% more than it earns this year. And there is little ability to cut spending, because almost all of the spending is previously committed or necessary. Because your organization has been borrowing too much for a long time, you've accumulated a huge amount of debt—about six times your annual income (about $30 trillion), which equates to about $230,000 per household.
The interest on the debt amounts to about 1 trillion dollars, accounting for about 20% of corporate revenue, which constitutes half of this year's budget shortfall (deficit), and you will need to borrow to fill this gap. However, this 1 trillion dollars is not the total you must pay to creditors, as in addition to interest, you also have to repay the maturing principal, which is about 9 trillion dollars.
You hope that your creditors or other wealthy entities can lend you or lend to other wealthy entities again. Therefore, the cost of debt repayment—in other words, the principal and interest that must be repaid to avoid default—is approximately $100 trillion, which is about 200% of income.
This is the current situation.
So, what will happen next? Let's imagine. No matter how large the deficit is, you have to borrow money to make up for the deficit.
There is much controversy regarding the specific amount of the deficit. Most independent assessment agencies predict that in ten years, debt will reach approximately $50 - 55 trillion, which is about 6.5 - 7 times the revenue (approximately $3 - 5 trillion). Of course, in ten years, if there is no plan to address this situation, the organization will face more pressure to repay its debts, thereby squeezing expenditures, and will also face greater risks: there will not be enough demand for the debt it must sell.
This is the whole picture.
My 3% Three-Part Solution
I firmly believe that the government's financial situation is at a turning point, as if this issue is not addressed now, the debt will accumulate to an unmanageable level, resulting in significant trauma. It is especially important that this operation is carried out when the system is relatively strong, rather than during economic weakness. This is because during economic contraction, the government's borrowing needs will increase significantly.
Based on my analysis, I believe this situation needs to be addressed through what I call the "3% Three-Part Solution." That is, to balance the budget deficit down to 3% of Gross Domestic Product (GDP) through the following three methods:
Reduce expenses,
Increase tax revenue,
Lower interest rates.
All three need to happen at the same time to avoid any one adjustment being too large, because if any one is too large, it can lead to traumatic consequences. These adjustments need to be achieved through good fundamental adjustments, not forced (for example, if the Fed does not naturally lower interest rates, it will be very unfavorable). According to my projections, an increase in spending cuts and tax revenues of about 4% each relative to the current plan and a corresponding reduction in interest rates of about 1 – 1.5% would result in an average reduction in interest expenses of 1 – 2% of GDP over the next decade and spur higher asset prices and buoyant economic activity, resulting in more revenues.
Here are some common questions and my answers
The book goes far beyond what could be covered here, including descriptions of the "overall megacycles" (including debt/monetary/credit cycles, domestic political cycles, external geopolitical cycles, natural behavior, and technological advances) that drive all the major changes in the world, my outlook for the possible future, and some perspectives on investing during these changes. But for now, I'm going to answer some of the questions that are often asked when discussing this book, and invite you to read the full book to learn more.
) Question 1: Why do large government debt crises and major debt cycles occur?
The occurrence of large-scale government debt crises and major debt cycles can be easily measured in the following ways:
The ratio of government debt repayment to government revenue has risen to an unacceptable level, thereby squeezing the government's basic expenditures;
the sale of government debt is too large relative to demand, leading to higher interest rates, which in turn leads to a market and economic downturn;
Central banks respond to these situations by lowering interest rates, which decreases the demand for bonds, leading to central banks printing money to purchase government debt, thereby causing currency depreciation.
These typically increase gradually over a long period, spanning decades, until they can no longer continue because:
Debt repayment costs crowd out other expenses;
The supply of debt to be purchased is too large relative to the purchase demand, leading to a significant rise in interest rates, severely impacting the market and the economy;
Or 3) The central bank prints a large amount of money and purchases government debt to compensate for insufficient demand, leading to a significant decline in the value of the currency.
In any case, the return on bonds will be very poor until they become cheap enough to attract demand or the debt is restructured. These can be easily measured, and it can be seen that they are heading towards an impending debt crisis. When the limits on debt financing expenditures occur, a similar economic "heart attack" triggered by debt will emerge.
Throughout history, almost every country has experienced this type of debt cycle, often occurring multiple times, so there are hundreds of historical cases to refer to. In other words, all monetary order collapses, and the debt-cyclical process I described is the reason behind these collapses. This condition goes back to recorded history. This is the process that led to the collapse of all reserve currencies such as the British pound and the guilder before. In my book, I present the last 35 cases.
Question 2: If this process occurs repeatedly, why is the dynamic behind it not widely understood?
You're right, this is really not widely understood. Interestingly, I couldn't find any specific research on how this process happens. I speculate that the reason why this is not widely understood is that in reserve currency countries, this process usually occurs only about once in a lifetime – when their monetary order collapses – whereas in non-reserve currency countries, it is thought that reserve currency countries do not experience such problems. The only reason I found this process was because I saw it happen in my sovereign bond market investments, which led me to look at many similar cases throughout history in order to be able to deal with them properly (for example, I dealt with the 2008 global financial crisis and the 2010-2015 European debt crisis).
Question 3: As we wait for the U.S. debt problem to erupt, how worried should we be about a "heart attack" debt crisis in the U.S.? People have heard a lot about the impending debt crisis that never happened. Is this time any different?
I think we should be very worried, given the circumstances mentioned earlier. I think those who are worried about the debt crisis when the conditions are less severe are right, because if measures can be taken early, such as early warnings to people not to smoke and poor diet, the situation can be avoided from getting so bad. Therefore, I think the reason why this issue has not attracted wider attention is both because people don't know enough about it and because there is a lot of complacency caused by premature warnings. It's like a person who has a lot of plaque in their arteries, eats a lot of fatty foods, and doesn't exercise and says to the doctor, "You warned me that something would go wrong if I didn't change my lifestyle, but I haven't had a heart attack yet." Why should I trust you now? ”
Question 4: What could be the catalysts for today's U.S. debt crisis, when might it occur, and what might the crisis look like?
The catalyst will be the convergence of the various influencing factors mentioned earlier. As for timing, policies and external factors, such as major political changes and wars, can accelerate or delay its occurrence. For example, if the budget deficit were to fall from about 7% of GDP, which I and most people predicted, to about 3%, the risk would be greatly reduced. In the event of a major external shock, the crisis could come much earlier; If not, it may happen much later or not at all (if managed properly). My guess – probably not accurate – is that if the current path is not changed, the crisis will occur within three years, up and down for two years.
Question 5: Do you know of any similar cases where budget deficits were significantly reduced in the manner you described, and yielded good results?
Yes, I know of several cases. My plan will reduce the budget deficit by about 4% of GDP. The most similar case with good results was when the U.S. fiscal deficit cut 5% of GDP between 1991 and 1998. My book also lists similar cases in several countries.
Question 6: Some argue that the U.S. is generally less susceptible to debt-related issues/crises due to the dollar's dominance in the global economy. What do you think those who hold this view have overlooked or underestimated?
If they believe this, they ignore the understanding of the mechanism and the lessons of history. More specifically, they should look at history and understand why all previous reserve currencies are no longer reserve currencies. In simple terms, money and debt must be effective stores of wealth, otherwise they will be devalued and discarded. The dynamics I have described explain how reserve money loses its effectiveness as a store of wealth.
Question 7: Japan—its debt-to-GDP ratio reaches 215%, the highest among all developed economies—is often cited as a typical example of the argument that "a country can sustain high levels of debt without experiencing a debt crisis." Why can't Japan's experience provide you with comfort?
The Japanese case exemplifies the problems I have described and will continue to be an example of them, and it also validates my theory in practice. More specifically, Japanese bonds and debt have been poor investments due to the Japanese government's over-indebtedness. To compensate for the lack of demand for Japanese debt assets at low interest rates, the Bank of Japan printed heavily and bought large amounts of government debt, which resulted in Japanese bondholders losing 45% of their debt against the dollar and 60% against gold since 2013. Since 2013, costs for Japanese workers have fallen by 58% relative to U.S. workers. I have an entire chapter in my book devoted to the situation in Japan, which explains this in depth.
Question 8: From a financial perspective, which regions in the world appear particularly tricky that people might underestimate?
Most countries have similar debt and deficit issues. The UK, the EU, China, and Japan are no exceptions. This is why I expect that most countries will undergo a similar process of debt and currency devaluation adjustment, which is also the reason I anticipate that non-government issued currencies, such as gold and Bitcoin, will perform relatively well.
Question 9: How should investors respond to this risk/what should their future positioning be?
Everyone's financial situation is different, but as a general recommendation, I recommend diversifying into asset classes and countries that have strong P&L and balance sheets and no major internal and external geopolitical conflicts, while reducing the allocation to debt assets such as bonds, and adding to gold and a small amount of Bitcoin. Investing a small amount of money in gold reduces portfolio risk, and I think it will also improve portfolio returns.
Finally, the views expressed here are solely my personal opinions and do not necessarily represent the views of Bridgewater Associates.