Clarify the U.S. Big Debt Cycle: Risks, Opportunities, and Thoughts

Huge debts in the United States: Crisis and opportunities coexist

This article is based on Ray Dalio's book "How the Country Gossips", combining personal views, and analyzes risks and opportunities in the long-term debt cycle of the United States, for investment reference only.

Dalio, founder of Bridgewater Fund, is known for accurately predicting major economic events such as the 2008 financial crisis and the European debt crisis.

Traditional debt cycle studies usually focus on credit cycles synchronized with the business cycle (approximately 6 years ± 3 years). However, the underlying and more important is the "big debt cycle", which has far-reaching impact. Since 1700, there have been about 750 currencies or debt markets around the world, and only about 20% of them are left. Even surviving currencies have mostly experienced serious depreciation, which is closely related to the "big debt cycle".

The key difference between a large debt cycle and a small debt cycle is whether the central bank can reverse the debt cycle. In a small debt cycle, the central bank can respond by cutting interest rates and increasing credit. But big debt cycles are much more difficult because debt growth is no longer sustainable. The typical response path is: private sector health → private sector excessive lending, difficult repayment → government assistance, excessive lending → central bank prints money to purchase government debt (the central bank is the lender of last resort).

The large debt cycle usually lasts about 80 years and is divided into five stages:

1. Absolute monetary stage: low interest rates, debt returns are higher than capital costs, and debt expansion.
2. Debt bubble stage: debt expansion, economic prosperity, asset prices (stock markets, real estate, etc.) rise, the private sector is more confident in debt repayment ability and return on assets, and continues to expand debt.
3. Bubbles burst stage: Asset prices have reached the bubble stage, but debt expansion has not stopped.
4. Deleverage stage: Debt default wave burst, asset prices plummeted, total demand shrinks, falling into a debt-deflation cycle, nominal interest rates dropped to zero lower limit, real interest rates increased due to deflation, and debt repayment pressure intensified.
5. Debt crisis stage: The asset bubble and debt bubble burst, the economy faces bankruptcy and debt restructuring, and a new cycle begins.

Each stage, the central bank needs to adopt different monetary policies to maintain debt and economic stability. By observing monetary policy, we can judge the stage of the large debt cycle.

The United States has experienced 12.5 short-term debt cycles since 1945. This year, the U.S. debt interest expenditure is expected to exceed $1 trillion, while the government's total revenue is only $5 trillion, that is, for every $4 charged, one dollar will have to pay the debt interest! If this trend continues, the US government's debt repayment ability will decline, and it may be forced to monetize debts (print money to repay debts), pushing up inflation and causing serious currency depreciation. Therefore, the United States is in the second half of the big debt cycle, approaching the brink of a "bubble burst stage" (Stage 3), and the debt crisis may be approaching.

Review the first large debt long cycle experienced by the United States from 1981 to 2000, and it can be subdivided into several short cycles: (The detailed description of the three short cycles in the original text is omitted here to avoid being too long, but its core conclusions can be retained)

After the 2008 financial crisis, the U.S. unemployment rate reached 10%, global interest rates fell to 0%, and it was impossible to stimulate the economy through interest rate cuts. The Federal Reserve launched the largest debt monetization (QE). At the end of 2021, tightening began to fight inflation, US Treasury interest rates rose, and the US dollar strengthened.

The transmission path of the large debt cycle in the central bank stage:

1. The Federal Reserve expands its balance sheet and monetizes debt (QE).
2. Interest rates rise and the central bank loses.
3. The central bank's net assets were significantly negative, entering a death spiral.
4. Deleverage, debt restructuring and devaluation.
5. Return to balance, establishing a new cycle.

The United States may be between the second and third steps at present. The Fed's response usually has two paths: financial suppression (lower interest rates) and fiscal control (cut down spending or tax increase).

The United States is facing the dilemma of "borrowing new debts to repay old debts" and may be in the dilemma of "never repaying". Ultimately, it is still necessary to solve the problem through financial suppression or control of finance. Although interest rate cuts cannot fundamentally solve the problem, they can temporarily relieve stress.

The timing of interest rate cuts is crucial and requires careful assessment to avoid excessive overdraft expectations.

Investment Opportunities:

1. Gold is a relatively good asset; U.S. bonds, especially long-term bonds, perform poorly.
2. Follow the 10-year U.S. Treasury yield and predict the opportunity to cut interest rates.
3. Bitcoin is still a good choice among risky assets.
4. When the US stock market pulls back, buy technology stocks in batches when the price drops.

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