Ray Dalio reverses course on his beautiful deleveraging thesis

10/2/2013

Faithful readers will know I have been poking fun at Dalio's analysis since I came across his "beautiful deleveraging" meme.
"Bridgewater reports in its most recent big picture summary, the "beautiful deleveraging" is now far less likely.
Via Zerohedge

My last shot at Dalio was in a reply to a comment from Brent in this post.
I would note the very first graph of the Bonddad post shows total HH liabilities have declined about 8% from their peak and flat lined for the last year or more (eyeball estimate). Doesn't look like a sufficient nor smooth deleveraging when compared with the HH debt to GDP declines 3 times larger (in the next slide) I stick to my story. The poor went bankrupt, the rich got richer
and the (beautiful) deleveraging is not uniform across the income distribution which bodes poorly for stabilizing aggregate demand.

5 Comments

Brent Buckner

10/3/2013 02:29:34 am

c.f. What Morgan Stanley labels "successful deleveraging":
http://www.businessinsider.com/deleveraging-us-versus-europe-2013-9

Karl Pinno

10/3/2013 07:57:25 am

Yes but there are limitations in the comparison. The ECB cannot buy the bad bank assets from the European banks, much of the Eurozone is in recession precisely because of the Euro, Europe still has not adopted a banking union or a transfer union. Europe has less flexible labour markets and fixed exchange regime. In other words the system in Europe is much more constrained. Europe has traditionally had a higher level of its financing done through banks than capital markets. Results are therefore to be expected.

The question is whether the US, the most flexible large economy in the world, the least regulated large economy in the world, the most integrated large economy in the world, owner of the world's reserve currency, with its unprecedented Fed intervention and support will get to a place where the economy can grow faster than the private and public debt accumulation. The answer appears to be no.
If the US cannot get off its debt treadmill what hope does Europe, Japan, and China have in reform? What level of economic crisis will be needed to bring about the level of economic reforms that would prevent an entire collapse of the system.

This is what you said last week: "Second, given what various 20th and 21st century electorates have tolerated/voted for/voted against, I am not sanguine that after the onset of a depression the U.S. would reasonably reform."

God help us all if that is true. But we are five years after the great recession without substantive constraints on the financial system, no personal or corporate tax reform, no meaningful compensation for those hurt by globalization, lowest labour force participation since the 1980s, median wages having fallen in each of those five years. That's the global high watermark that American "capitalism" has brought us. Not a meritocracy but increasingly a stratified class society that resembles more the world of Downtown Abbey than the world of Horatio Alger and Zig Ziglar. It is tough to strike a note of optimism about a country, where the GOP which in one form or another represents 50% of the electorate thinks it is OK to shut down government and threaten to refuse to pay expenditures it already approved.

So I agree with both your sentiments, Europe is worse off financially than the US, and the prospects for reform in the US are bleak, as even Ray Dalio has now acknowledged (that the US deleveraging debt growing at 6%+ a year with GDP growing 2%- a year with the Fed buying 1/15 of GDP a year) is an unsustainable trajectory.

Saying that Europe's glide path is more unsustainable than the US is cold comfort. Europe is going to hit the ground from 5,000 feet without a parachute 20 seconds before the US. Both with DOA.

This is precisely why I have been so persistently pessimistic on my blog, my only wonder is what the broader market has seen as the case for optimism.

I have never seen a convincing case for lasting sustainable turnaround. If you have one send it.

Brent Buckner

10/3/2013 09:18:17 am

I merely intended to provide one version of a chart of the total U.S. economy deleveraging, noting that such was what Morgan Stanley deemed "successful", as an addition to your link to Dalio and his notion of "beautiful" being less likely. I did not intend to draw attention to Morgan Stanley's comparison of the U.S. with Europe.

Karl Pinno

10/3/2013 12:55:46 pm

Thanks Brent,
You have been a source of much of the good material I provide on this site, you have also shown me many of the websites from which I source my posts. Aside from that, our "debates" at minimum refine my opinion, often change them, and it is good that you are someone who forces me to reconcile or confront the inconsistencies in my opinions (and admit when I am wrong). I cherish this quality of our relationship, it was something I had with my friend Glenn who I lost last week.
Sorry for my being too thinned skinned. Thanks for continuing to contribute despite the occasional landmine I set off.

Best
Karl

Brent Buckner

10/3/2013 10:24:03 pm

Thanks for your valuable correspondence (amongst many other things). I know that my terseness lends itself to people reading in, sometimes not in accordance with my actual thoughts, and so try to revisit when required.

We'll just keep plugging along, bundles of varying strengths and weaknesses such as we are!

Ray Dalio reverses course on his beautiful deleveraging thesis

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