Ray Dalio: Money, Credit, Debt and Economic Activity

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Smith1776
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Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Smith1776 » Tue Jun 30, 2020 7:46 am

This may have been posted somewhere on the forum previously. I can't get over how great this Ray Dalio essay is on the short and long-term debt cycles. In terms of how it relates to the PP, Dalio essentially argues that the reason why investors like the Knuckleheads don't value gold is because they see the economic machine and its cycles too up close. There's a natural inclination to project the recent past into the future indefinitely. However, the deeper you look into the past, the further you can see into the future. Rather than simply looking at 40 years of portfolio visualizer data, Dalio goes through centuries of global economic history. Gold becomes an absolute necessity in a portfolio as one realizes that these long-term debt cycles exist.

If one were to simply look at the investment world through a U.S.-centric lens with a particular focus on the past few decades, you'd naturally turn into a Knucklehead. If you're more prudent and look at deep history and global data, you'd naturally gravitate to more of a PP type of strategy.

https://www.linkedin.com/pulse/money-cr ... ray-dalio/

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Remember that there is always a limited amount of goods and services because the amount is constrained by the ability to produce. Also remember that in our example of paper money being claims on “hard money,” there is a limited amount of that “hard money” (e.g., the gold on deposit), while the amount of paper money (e.g., the claims on that hard money) and debt (the claims on that paper money) is constantly growing. And, as that amount of paper money claims grows relative to the amount of hard money in the bank and goods and services in the economy, the risk increases that the holders of those debt assets may not be able to redeem them for the amounts of hard money or goods and services that they expect to be able to exchange them for.
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Hal » Tue Jun 30, 2020 10:53 am

Quite liked that essay.

Another concept that caught my attention was that of "Freegold".
Wonder if following Dalio's history, we could go to a system where Gold is used for savings, but fiat is used for transactions ?

https://www.bullionstar.com/blogs/bulli ... -freegold/

https://www.youtube.com/watch?v=IKPRJKG9o4w
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by technovelist » Wed Jul 01, 2020 3:53 pm

Hal wrote:
Tue Jun 30, 2020 10:53 am
Quite liked that essay.

Another concept that caught my attention was that of "Freegold".
Wonder if following Dalio's history, we could go to a system where Gold is used for savings, but fiat is used for transactions ?

https://www.bullionstar.com/blogs/bulli ... -freegold/

https://www.youtube.com/watch?v=IKPRJKG9o4w
The question is why anyone would want the fiat when they know that it can be reproduced indefinitely.
Of course I don't expect everyone to pay their bills with physical gold coins or bars because even the smallest practical coin is too big for many everyday purchases. However, verifiable claims ("tokens") representing any amount of gold, even a tiny amount, would work fine.
Another nod to the most beautiful equation: e + 1 = 0
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Smith1776 » Wed Jul 01, 2020 4:20 pm

Another thought on how investors like the Knuckleheads just don't "get" gold.

I have noticed there's a very strong tendency for some investors to over-mathematize the investment process. In particular, the Knuckleheads forum literally doesn't allow the discussion of politics. By not allowing any kind of discourse regarding the government and its machinations, one would have a difficult time understanding the need for gold as per Dalio's paper. One would further likely end up using the quantitative hammer on every possible investment nail, not realizing other tools and forms of analysis being both available and important.
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Hal » Thu Jul 02, 2020 5:17 am

technovelist wrote:
Wed Jul 01, 2020 3:53 pm
Hal wrote:
Tue Jun 30, 2020 10:53 am
Quite liked that essay.

Another concept that caught my attention was that of "Freegold".
Wonder if following Dalio's history, we could go to a system where Gold is used for savings, but fiat is used for transactions ?

https://www.bullionstar.com/blogs/bulli ... -freegold/

https://www.youtube.com/watch?v=IKPRJKG9o4w
The question is why anyone would want the fiat when they know that it can be reproduced indefinitely.
Of course I don't expect everyone to pay their bills with physical gold coins or bars because even the smallest practical coin is too big for many everyday purchases. However, verifiable claims ("tokens") representing any amount of gold, even a tiny amount, would work fine.
I think using Gold tokens would work fine and from my own point of view I would be getting rid of the fiat like a "hot potato".
The author of the YouTube video, suggests that having debts denominated in fiat is preferable as it would avoid deflation.

Anyways..... the theory made it into the Incrementun report
https://ingoldwetrust.report/wp-content ... old_EN.pdf
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by technovelist » Thu Jul 02, 2020 8:25 am

Hal wrote:
Thu Jul 02, 2020 5:17 am
technovelist wrote:
Wed Jul 01, 2020 3:53 pm
Hal wrote:
Tue Jun 30, 2020 10:53 am
Quite liked that essay.

Another concept that caught my attention was that of "Freegold".
Wonder if following Dalio's history, we could go to a system where Gold is used for savings, but fiat is used for transactions ?

https://www.bullionstar.com/blogs/bulli ... -freegold/

https://www.youtube.com/watch?v=IKPRJKG9o4w
The question is why anyone would want the fiat when they know that it can be reproduced indefinitely.
Of course I don't expect everyone to pay their bills with physical gold coins or bars because even the smallest practical coin is too big for many everyday purchases. However, verifiable claims ("tokens") representing any amount of gold, even a tiny amount, would work fine.
I think using Gold tokens would work fine and from my own point of view I would be getting rid of the fiat like a "hot potato".
The author of the YouTube video, suggests that having debts denominated in fiat is preferable as it would avoid deflation.

Anyways..... the theory made it into the Incrementun report
https://ingoldwetrust.report/wp-content ... old_EN.pdf
Yes, the problem is that everyone who is sensible would shun fiat if they had an alternative. Why would it have any value then?
Another nod to the most beautiful equation: e + 1 = 0
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Hal » Thu Jul 02, 2020 9:16 am

technovelist wrote:
Thu Jul 02, 2020 8:25 am
Hal wrote:
Thu Jul 02, 2020 5:17 am
technovelist wrote:
Wed Jul 01, 2020 3:53 pm
Hal wrote:
Tue Jun 30, 2020 10:53 am
Quite liked that essay.

Another concept that caught my attention was that of "Freegold".
Wonder if following Dalio's history, we could go to a system where Gold is used for savings, but fiat is used for transactions ?

https://www.bullionstar.com/blogs/bulli ... -freegold/

https://www.youtube.com/watch?v=IKPRJKG9o4w
The question is why anyone would want the fiat when they know that it can be reproduced indefinitely.
Of course I don't expect everyone to pay their bills with physical gold coins or bars because even the smallest practical coin is too big for many everyday purchases. However, verifiable claims ("tokens") representing any amount of gold, even a tiny amount, would work fine.
I think using Gold tokens would work fine and from my own point of view I would be getting rid of the fiat like a "hot potato".
The author of the YouTube video, suggests that having debts denominated in fiat is preferable as it would avoid deflation.

Anyways..... the theory made it into the Incrementun report
https://ingoldwetrust.report/wp-content ... old_EN.pdf
Yes, the problem is that everyone who is sensible would shun fiat if they had an alternative. Why would it have any value then?
Hmm... Fiat would only have value if it provided a ''real" return. Don't see that happening any time soon. Also would need some to pay your taxes.
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Smith1776 » Thu Jul 02, 2020 5:31 pm

Hal wrote:
Thu Jul 02, 2020 5:17 am

I think using Gold tokens would work fine and from my own point of view I would be getting rid of the fiat like a "hot potato".
The author of the YouTube video, suggests that having debts denominated in fiat is preferable as it would avoid deflation.

Anyways..... the theory made it into the Incrementun report
https://ingoldwetrust.report/wp-content ... old_EN.pdf
That paper reads like a gold-centred mystery novel! Who is Another? Who is Friend of Another? Who is Friend of Friend of Another?

Can I be Friend of Friend of Friend of Another? Maybe I already am. ???
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Hal » Thu Jul 02, 2020 6:07 pm

Smith1776 wrote:
Thu Jul 02, 2020 5:31 pm
Hal wrote:
Thu Jul 02, 2020 5:17 am

I think using Gold tokens would work fine and from my own point of view I would be getting rid of the fiat like a "hot potato".
The author of the YouTube video, suggests that having debts denominated in fiat is preferable as it would avoid deflation.

Anyways..... the theory made it into the Incrementun report
https://ingoldwetrust.report/wp-content ... old_EN.pdf
That paper reads like a gold-centred mystery novel! Who is Another? Who is Friend of Another? Who is Friend of Friend of Another?

Can I be Friend of Friend of Friend of Another? Maybe I already am. ???
Another/Friend of Another https://www.usagold.com/goldtrail/archi ... ther4.html

Friend of Friend of Another. http://fofoa.blogspot.com

Friends of Hal
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by flyingpylon » Thu Jul 02, 2020 7:06 pm

Hal wrote:
Thu Jul 02, 2020 6:07 pm
Another/Friend of Another https://www.usagold.com/goldtrail/archi ... ther4.html

Friend of Friend of Another. http://fofoa.blogspot.com
The mother of all rabbit holes...
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by Smith1776 » Fri Jul 03, 2020 7:53 am

So, I was perusing through the hallowed ground of the original HB PP thread. I came across a post from one of the more prominent Bogleheads named Rick Ferri, whose comments are very relevant to this discussion here.

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Failed gold speculation aside (which was tongue in cheek by the sounds of it), Rick Ferri is the perfect example of the kind of myopia that Ray Dalio refers to in his papers. The part where Ferri says "The nation can only come off the gold standard once. It does not happen twice. Good luck!" is particularly telling. Some thoughts.

As Dalio remarks, too many people see the economy too up close, day by day, week by week. Even financial professionals might look at a the better part of a single century. But even then it's usually only their home country. Dalio shows why Ferri is wrong in his statement. As illustrated by the chart in my OP, societies tend to shift from 1) hard money, to 2) claims on hard money, and 3) fiat money in a fairly predictable pattern. This is usually driven by the long-term debt cycle. We are currently living in the Type 3 system of fiat money typical of the latter stages of this debt cycle. Gold is essential as an asset to hold as the paper currency inevitably gives way to another hard money system to regain confidence. That is a conclusion you can prudently come to after studying hundreds of years of economic data rather than a few decades in portfolio visualizer. So much for the value of his "5 books, dozens of articles, and thousands of correlation studies."

As an aside, a country can go off the gold standard an indefinite number of times. So he's clearly wrong there. Dalio's paper clearly shows that returns to gold standards happen very regularly in history.

Interestingly, I noticed that Ferri, in his other writings, has committed another sin that Dalio touches upon which is confusing financial modelling with reality. In a discussion regarding Treasury bonds he once called them "damn safe". Um, no. We use short-term Treasury bills as a proxy for a risk free asset, but that is more out of convenience and pragmatism rather than them being truly riskless. In Dalio's paper he once again poignantly remarks that people's confidence in assets like T-bills tends to be highest right when they are riskiest. Because at that point the last failure of paper assets is a distant memory.

A good investment portfolio should be truly permanent. Ray Dalio isn't Harry Browne, but it's clear that they have thinking that dovetails together. For those who have not read the paper I linked in the OP (or the related papers by Dalio), I suggest you do. His work really drives home the fact that you come to different and more informed conclusions by looking at the broad scope of global history going deep into time rather than just the CRSP tapes going back to 1926. If you were to do the latter you'd end up with a Three Fund Portfolio. ::)

P.S. I didn't say "Knucklehead" in this post because I was talking about an individual rather than a group. Keep it classy.

P.P.S. Why give more credence to the word of one financial professional like Dalio over the word of another like Ferri? Simple. When one guy is analyzing centuries of global data in a holistic way, and the other guy is sitting with his face 2 inches from the movie screen (too up close), it's easy to see why.
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Re: Ray Dalio: Money, Credit, Debt and Economic Activity

Post by technovelist » Fri Jul 03, 2020 10:25 am

Smith1776 wrote:
Fri Jul 03, 2020 7:53 am
So, I was perusing through the hallowed ground of the original HB PP thread. I came across a post from one of the more prominent Bogleheads named Rick Ferri, whose comments are very relevant to this discussion here.
That speculation comment qualifies as one of the worst economic predictions in modern history.

Not the worst, of course; that honor must go to this famous Paul Krugman debacle:

"It really does now look like President Donald J. Trump, and markets are plunging. When might we expect them to recover?

Frankly, I find it hard to care much, even though this is my specialty. The disaster for America and the world has so many aspects that the economic ramifications are way down my list of things to fear.

Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never."

http://archive.vn/2vwzP
Another nod to the most beautiful equation: e + 1 = 0
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