Lesson: Debt tends to accumulate in long-term cycles. Excessive debt pulls future growth into the present, causing a boom, which is often followed by a bust (deleveraging).
Example: Ray Dalio’s model shows how GDP grows steadily over time, but debt causes short-term growth fluctuations (booms and busts).
Lesson: The U.S. has a high debt-to-GDP ratio, creating economic fragility. This was exacerbated during the COVID-19 pandemic when stimulus packages increased public debt.
Example: As of 2019, total U.S. debt was about 350% of GDP, and non-financial debt was around 250%.
Lesson: Governments and central banks aim to narrow the debt-to-GDP or debt-to-money-supply ratio by either reducing debt or increasing GDP/money supply.
Example: During the Great Depression, the U.S. reduced debt relative to GDP by printing money and devaluing the dollar relative to gold.
Lesson: Short-term debt cycles occur every 5-10 years and are characterized by business expansion followed by over-leveraging and a recession that leads to deleveraging.
Example: Corporate debt as a percentage of GDP has increased in each cycle since the 1980s, with interest rates lowered in each recession.
Lesson: In response to the COVID-19 pandemic, the U.S. increased its money supply rapidly through stimulus and Quantitative Easing (QE), reducing the debt-to-money-supply ratio.
Example: The U.S. money supply jumped from $15.3 trillion to over $18 trillion in a few months in 2020.
Lesson: While QE may not directly cause consumer price inflation, it can inflate asset prices (e.g., stocks, bonds, real estate) by increasing liquidity in financial markets.
Example: From 2008 to 2014, QE increased asset prices while consumer price inflation remained low.
Lesson: QE, while often blamed for wealth concentration, is not the primary cause. Countries that conducted more QE have lower wealth concentration than the U.S.
Example: Japan's QE as a percentage of GDP is higher, yet Japan experiences less wealth inequality than the U.S.