Bridgewater Associates founder: The most important principle when thinking about massive government debt and deficits.

The most hidden, and therefore most favored, and most commonly used way for government policymakers to deal with debt overhangs is to lower real interest rates and real exchange rates. This article is based on an article by Ray Dalio and was compiled, compiled and written by Block unicorn. (Synopsis: Bridgewater Dalio New Article: See through the five indicators of the current economy, the art of trading and the power behind it) (Background supplement: Bridgewater Dalio warns the world that what is more terrible than a recession is the "collapse of money and world order", and now is the tipping point) The most hidden, and therefore favored, and most commonly used way for government policymakers to deal with debt overhangs is to lower real interest rates and real exchange rates. The principle is as follows: When a country has too much debt, lowering interest rates and depreciating debt-denominated currencies is the preferred path most likely to be taken by government policymakers, so it pays to bet that this happens. As I write this, we know that large deficits and significant increases in government debt and debt service spending are expected in the future. (You can find these materials in my books, including my new book, How States Go Bankrupt: The Great Cycle; I also shared last week why I think the U.S. political system can't control the debt problem.) We know that the cost of debt servicing (interest and principal payments) will grow rapidly, squeezing other spending, and we also know that in the most optimistic scenario, the likelihood of an increase in debt demand matching the supply of debt that needs to be sold is extremely low. In How the State Went Bankrupt, I elaborated on what I thought it all meant and described the mechanisms behind my thinking. Others have also stress-tested this, and for now almost completely agree that the picture I paint is accurate. Of course, that doesn't mean I can't go wrong. You need to judge for yourself what might be true. I'm just offering my reflections to everyone to evaluate. My Principles As I explain, based on my experience and research over the past 50 years of investing, I have developed and documented some principles that help me predict events in order to bet successfully. I am now at a stage in my life where I want to pass on these principles to others to help. In addition, I think that to understand what is happening and what could happen, you need to understand how the mechanism works, so I also try to explain my understanding of the mechanism behind the principle. Here are a few additional principles and an explanation of how I think the mechanism works. I believe the following principles are correct and beneficial: The most hidden, and therefore preferred, and therefore most commonly used way for government policymakers to deal with debt glut is to lower real interest rates and real exchange rates. While lowering interest rates and currency exchange rates to deal with too much debt and its problems can provide relief in the short term, it reduces the need for money and debt and creates long-term problems because it reduces the return on holding money/debt and thus the value of debt as a store of wealth. Over time, this usually leads to an increase in debt, as lower real interest rates are stimulative, exacerbating the problem. All in all, interest rates and currency exchange rates tend to be depressed when there is too much debt. Is this good or bad for the state of the economy? Both tend to be good and popular in the short term, but harmful in the long run, leading to more serious problems. Lowering the real interest rate and the real currency exchange rate is... It is beneficial in the short term because it is stimulating and tends to push up asset prices...... ... But in the medium and long term it is harmful because: a) it enables those who hold these assets to obtain lower real returns (due to currency depreciation and lower yields), b) it leads to higher inflation, c) it leads to greater debt. In any case, this is clearly not immune to the painful consequences of overspending and deep debt. Here's how it works: When interest rates fall, borrowers (debtors) benefit because this lowers the cost of debt servicing and makes it cheaper to borrow and buy, pushing up the price of investment assets and stimulating growth. That's why almost everyone is comfortable with lower interest rates in the short term. But at the same time, these price increases mask the undesirable consequences of lowering interest rates to undesirable levels, to the detriment of lenders and creditors alike. These are all true, because lowering interest rates (especially real interest rates), including central banks pushing down bond yields, pushes up the price of bonds and most other assets, leading to lower future returns (e.g., bond prices rise when interest rates fall into negative territory). This also leads to more debt, which in turn creates a bigger debt problem in the future. As a result, the return on debt assets held by the lender/creditor decreases, resulting in more debt. Lower real interest rates also tend to reduce the real value of money because it makes money/credit yields lower relative to alternatives in other countries. Let me explain why lowering currency exchange rates is the preferred and most common way for government policymakers to deal with excess debt. There are two reasons why lower currency exchange rates are favored by government policymakers and appear advantageous when explained to voters: 1) Lower currency exchange rates make domestic goods and services cheaper relative to those of countries where currencies appreciate, thereby stimulating economic activity and driving asset prices up (especially in nominal terms), and... 2) … It makes it easier to repay debts in a way that is more painful for foreigners holding debt assets than for their own citizens. This is because another "hard money" approach would require tighter monetary and credit policies, which would lead to high real interest rates, which in turn would depress spending, often meaning painful service cuts and/or tax increases, as well as stricter lending conditions that citizens are reluctant to accept. In contrast, as I will explain below, lower monetary interest rates are a "hidden" way to pay off debts because most people don't realize that their wealth is decreasing. From a depreciating currency perspective, a lower currency exchange rate usually also increases the value of foreign assets. For example, if the dollar depreciates by 20%, U.S. investors can pay foreigners holding dollar-denominated debt in currencies that reduce their value by 20% (i.e., foreigners holding debt assets will suffer a 20% monetary loss). The less obvious but real harm of weaker currencies is that those who hold weaker currencies have a decrease in purchasing power and borrowing power – a decrease in purchasing power because of a decrease in the purchasing power of their money, and a decline in borrowing power because buyers of debt assets are unwilling to buy debt assets denominated in a currency of declining value (i.e., assets that promise to receive money) or the money itself. It is not obvious because most people in countries where currencies are depreciating (e.g., Americans who use dollars) do not see their purchasing power and wealth decline because they measure the value of assets in their own currency, which creates the illusion that the value of assets is appreciating, even though the value of the currency in which their assets are denominated is falling. For example, if the dollar falls by 20%, U.S. investors will not directly see a loss of purchasing power in foreign goods and services if they only focus on the rise in the value of their holdings in dollars. However, it will be obvious and painful for foreigners holding dollar-denominated debt. As they become increasingly concerned about this situation, they will sell (sell) debt-denominated currencies and/or debt assets, resulting in further currency and/or debt weakness. In conclusion, looking at things only through the lens of national currencies clearly creates a distorted perspective. For example, if the price of something, such as gold, increases by 20% in dollar terms, we would consider the price of that thing to rise, not the dollar to fall. The fact that most people hold this distorted perspective makes these ways of dealing with excessive debt "secretive" and politically more acceptable than other alternatives. This look...