This blog is to reiterate the key message from Ray Dalio’s new book A Template
For Understanding Big Debt Crisis. The causal – effect is that “lending naturally creates self-reinforcing upward movements that eventually reverse to create self-reinforcing downward movements that must reverse in turn.”
“Managing debt crises is all about spreading out the pain of the bad debts, and this can almost always be done well if one’s debts are in one’s own currency. The biggest risks are typically not from the debts themselves, but from the failure of policymakers to do the right things due to a lack of knowledge and/or lack of authority. If a nation’s debts are in a foreign currency, much more difficult choices have to be made to handle the situation well—and, in any case, the consequences will be more painful.”
It’s monumentally important to applying his theory or wisdom in the real world. He listed several most defining characteristics of bubbles that can be measured:
1) Prices are high relative to traditional measures
2) Prices are discounting future rapid price appreciation from these high levels
3) There is broad bullish sentiment
4) Purchases are being financed by high leverage
5) Buyers have made exceptionally extended forward purchases (e.g., built inventory, contracted for supplies, etc.) to speculate or to protect themselves against future price gains
6) New buyers (i.e., those who weren’t previously in the market) have entered the market
7) Stimulative monetary policy threatens to inflate the bubble even more (and tight policy to cause its popping)
I found it’s greatly instrumental to debunk the myth of “Chinese real estate bubble”. So, yes, the Chinese government flooded the market with maybe more than abundant money, or to be more specific, superfluous credit. This is one of the powerful tools they use to create the non-stop economical booming miracle in the past 40 years. The real estate asset without property tax is intentionally chosen by the Chinese government as the origin of credit splurge. Thanks to the clever “reservation ratio” banking mechanisms that China borrowed from modern western countries, money is easily, conveniently and legally created from thin air, causing the whole nation in maniac laboring and consuming.
If you see it as a free-market result, you are deadly wrong. It’s created by the government, therefore, it’s not a real market bubble. It can be constricted or ballooned at the hand of the government in a controlled manner. That’s why so many shorters of Chinese real estate never see the burst coming after years and years of bearish chanting.
On the other hand, Ray already publicly declared that the U.S. market is on the 7th inning, close to the popping up of the bubble. The Fed has increased interest rate several times this year, indicating clearly the intention to tighten up the credit/money flow, which usually is the prelude to the next stage of a debt crisis.
However, the key crux that is galling both the U.S. and the Chinese economy is not the lack of understanding or ability to cope with another traditional financial crisis, but a seismic change in terms of productivity.
Debt cycle in short – 7 years or so- or in long – about 80 years does impact our lives tremendously at the moment, but in essence, they don’t drive the economy forward, the real impetus is always true productivity, which is driven by technology.
We are facing a new era, when technology has been through industrial, internet, digital and is now ushering into Artificial intelligence reform, the outcome of this new reform is so disruptive that it’s very probably will lead to 90% of people out of job. Hence, a new financial crisis will not be the same as before (the 1927 great depression and 2008 subprime crisis). It will be in the form of “social injustice” kind of claiming due to the massively growing wealth gap between those who ride the tech waves and those who are falling behind in new technology age.
I suspect the “beautiful deleveraging” that Ray described will be effective anymore in this new potential challenge, “helicopter money” could be the valid solution…