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Book Review #74 – A Template For Understanding Big Debt Crisis by Ray Dalio

If you haven’t read Ray Dalio’s book titled “Principles for navigating big debt crisis,” then you may not understand some perspective in relation to big debts. However, if you have gone through the book from scratch to finish, you will most likely better understand the big debt crisis, which is entirely different from what you felt you knew in the past.

The topic, a Template for Understanding Big Debt Crises, might not necessarily change your perception of things, but it promises to deepen it. Nothing is as discomforting as being in serious financial debt. The first thing one should know is that once you have managed to spread out the cost of such debts, then invariably, you can finally have a breath of fresh air knowing that the crisis can be managed.

When people talk about being in debt, it isn’t limited to an individual or a firm, as a country can still be in a financial crisis, which is debt as well. Danilo’s advice can be better appreciated by a country that is currently experiencing financial debt in its own given currency.

For instance, the United States was able to pull through from a crisis in better shape than other nations basically because they had some privileges which weren’t possible for other countries. The privilege granted here was then being given the license to print the world’s reserve currency. Countries with zero control over their own currencies were greatly affected—countries located in the eurozone like Cyprus, Greece, and a couple of others.

As we would have it, Dalio somehow predicted that such countries that had no control over their currencies were most likely to suffer for long periods. Those periods were going to lead to economic pain.

Dalio’s approach was a bit straightforward, even though it wasn’t the normal theoretical economics, which many would have expected. He made it quite simple without going overboard with his explanation. This is a signature skill that has made Dalio one of the most respected and followed pundits in relation to the financial markets.

So, the question that should linger in everyone’s mind is, what makes a debt crisis occur?

What makes a debt crisis occur? 

First of all, debt is really not a good thing to be proud of, no matter how good one tries to spin it. Debt rises because its service cost springs up quicker than the incomes required to service them, leading to deleveraging.

However, the central bank can indeed work something out to reduce the debt rate. One of the major moves would be for them to reduce nominal interest rates. Moreover, it would interest the masses in knowing that normal short-term debt cycles, such as that of the business cycle, invariably add up till it turns into a long-term debt cycle. This would span on until the expansion in debt ceases to exist.

Moving ahead, we shall have a discussion on two of the major types of depression, which are deflationary depression and inflationary depression. But before we talk about those two types, it is of utmost importance to refresh our minds on money.

The first thing one is expected to know about money is that it is a medium of exchange, and it is also a way of storing wealth. As a result, it is under the guidance of two masters. The first one is those who aim to get a hold of it for life necessities and are determined to put in the work till their dreams or ambitions are met. Also, the second one is those who have converted those monies to a rewarding value.

So, back to the types of depression.

  • Deflationary Depression

This is when the policymakers are a bit proactive with the current happenings by having the interest rates lowered. However, should the interest rate get to zero percent, it would then mean that the economy cannot be stimulated in an effective way. As you would know, the deflationary depression is mostly possible in nations where most of the debt was carried out in local currency.

  • Inflationary Depressions

This is somewhat opposite to that of the deflationary depression. This usually occurs in countries or nations that rely on capital interest flows; for that reason, they have increased their debt in foreign currency near impossible to be monetized.

As the foreign capital flows reduce, credit creation reverts into credit contraction. In addition to the inflationary depression, you would get to find out that the capital withdrawal reduces the currency declining, leading up to a state of what is called inflation.

When talking about depression, Dalio mentioned that it isn’t about going on and encouraging people to be fearless, as these things are borne out of practice. This is why the more the debts incurred, the harder it becomes to offset it. Moreover, it is simply logical as people who are expecting repayments and all they keep getting in return are excuses; what would likely be the economic activity? It is undoubtedly going to dwindle.

Moreover, in everything which has a problem lies a solution. This, for a fact, is why policymakers are always going to print. This is likely going to be the last resort. However, the effects of such acts are relatively yet unknown.

Managing Depressions

There are four categories that reduce debt burdens, and they are:

1) Austerity 

Although, this type of method just feels like the appropriate thing to do. Policymakers try out austerity as they feel it is important to keep those actively involved in the mess with some much-needed information. By doing so, they are leaving them to their fate to bear the consequences.

2) Debt Restructuring

It is vital for the future flow of money to go through debt restructuring. By removing or wiping away debt, there would likely now be a return to prosperity. What is expected from the policymakers is to ensure parity or stability is restored in an economic and social sense.

3) Money Printing

Normally, what is expected is to print more money to offset the debt. However, it isn’t quite simple as that. Here one, the burden lies on the central bank and the central government to protect some institutions from limiting or reducing their loss. Moreover, there are laws and politics, which reduce the speed of executing such a method. In addition, the government tries to limit any form of being biased by making available money to essential banks, as well as making available money to non-bank entities, which they see as vital to the economy.

4) Wealth Transfers

Normally, in countries where they are experiencing severe hardship, the less-privileged are likely going to bear the burden as they would be impacted more. If the government decides to share taxes between the rich and poor equally, there will likely be conflict. However, the rich people are going to have to shoulder most of the responsibilities as it was their greed that landed the nation where they are. But, for the sustainability and maintenance of such a country, it is advisable to have increased taxation to bring in more revenue.

Wrapping It Up

As detailed and educative as this book is, it would be much of a surprise if it ends up at central bankers, investors, and even regulators’ desk.

Reviewed by;

Tonny Rutakirwa,


Tonniez Group Holdings,

Serving since 28th December 2008.


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