Ray Dalio on How Deleveragings Work (PDF Link)

Ray Dalio at Hedge Fund Industry Awards (video)
Ray Dalio, founder of Bridgewater Associates, the largest hedge fund in the world with $120 billion under management, explained to you how the economic machine works in a research report (pdf) and on Bloomberg TV last year. Now I see he has a research report out on how deleveragings work (pdf from February). Read the intro below. I remember he said recently that the U.S. was going through a "beautiful deleverging" at the moment. Fiscal tightening could change that.

"An In-Depth Look at Deleveragings
Ray Dalio
February, 2012

The purpose of this paper is to show the compositions of past deleveragings and, through this process, to convey in-depth, how the deleveraging process works.

The deleveraging process reduces debt/income ratios. When debt burdens become too large, deleveragings must happen. These deleveragings can be well managed or badly managed. Some have been very ugly (causing great economic pain, social upheaval and sometimes wars, while failing to bring down the debt income ratio), while others have been quite beautiful (causing orderly adjustments to healthy production-consumption balances in debt/income ratios). In this study, we are going to review the mechanics of deleveragings by showing how a number of past deleveragings transpired in order to convey that some are ugly and some are beautiful. What you will see is that beautiful deleveragings are well balanced and ugly ones are badly imbalanced. The differences between how deleveragings are resolved depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots and 4) debt monetization. What we are saying is that beautiful ones balance these well and ugly ones don’t and what we will show below is how.

Before we examine these, we will review the typical deleveraging process." (continue reading)

More from Ray Dalio in 2011:

  • Ray Dalio on Charlie Rose: We Have a Public and Private Sector Debt Issue, Deleveraging, Tapped Out Stimulus (DV)
  • Ray Dalio On Diversified Uncorrelated Bets and How The Machine Works (DV)
  • Ray Dalio's 2009 Hedge Fund Award Speech On Bridgewater, Uncorrelated Alpha and Beta (DV)
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