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Alternative Market Briefing

Bridgewater’s Ray Dalio bestows global economics master-class

Tuesday, September 18, 2012

Benedicte Gravrand, Opalesque Geneva: When Ray Dalio, founder and co-CIO at Bridgewater Associates, the largest hedge fund firm in the U.S., spoke at the Council on Foreign Relations recently, he reminded the audience he was not born yesterday. The 2008 crisis is just one of many, he says, even if it does not feel that way to those who encounter such an event for the first time in their life. Then he went on to describe "how the economic machine works."

The basis is in the transaction, he explains, a purchase done either with money or with credit, the latter being a liability. He believes demand is better measured in terms of spending rather than the traditional quantity of goods. Credit will count in GDP. Credit is created and this leads to cycles – not through the velocity, but "out of thin air." Buying with earnings and with credit has a positive effect (money spent is money earned) and the cycle becomes self-reinforcing. Debt rises faster than income, but cannot do so forever. Lower interest rates make credit cheaper, so purchasing is easier, and added to cash flow, it produces more wealth.

When you cannot lower interest rates any more, "that part of the cycle ends." This is when deleveraging starts; and when one can no longer rise debt relative to one’s income. This is when the cycle reverses. If debt growth moves from 10% down to 5%, this has a ......................

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