Ray Dalio on THE DEBT CYCLES

In these cycles, there are short-term cycles that build up to create a long-term cycle. So, uh, for example, we're used to, uh, what's commonly called the business cycle or the short-term debt cycle, in which there's a recession when economic weakness and low inflation occur. Then, the Central Bank provides credit, which stimulates activity, and then you have the pickup in the good times in the economy. But then it raises inflation and tightness, and so on, and then that great type money, and then you go through the contraction again, and so on.

Since 1945, there have been 12 and a half of those cycles. On average, they're about seven years long, give or take about three years. So if you say, okay, where are we in that cycle? We're in the business cycle. We're about halfway through. We're in the part of the cycle where the tightening of monetary policy to fight inflation begins to cause the cracks, and that's where we are.

Okay, now those add up to a big cycle because debt rises relative to incomes through that. Because everybody wants to hire up, they just keep doing that. So we have a lot of debt assets and debt liabilities. You know, we think of there’s a debt that you owe, but one man’s debt is another man’s assets.

So you have to keep interest rates high enough that it compensates states for inflation for holding it. Because if you don't, nobody's going to then want to lend, and you have a problem. But you have to have interest rates not so high that they crack the economy.

Having a lot of debt assets and a lot of debt liabilities, that balancing act is not easy. And so because we had the imbalance, the central banks of the world had to come in there and be buyers. They had to print money and buy that debt to make a balance at an acceptable interest rate.