Applying My Debt Template to Now to Try to See What's Ahead

From Ray Dalio's LinkedIn blog

Sep 17, 2018

To reiterate where we stand now, a) the short-term debt cycles (also called business cycles) of most developed countries are in the 6th or 7th innings so they are not near their contraction phases. These expansions typically go on about 7-8 years (plus or minus a few years) with the longer ones coming when there is a lot of slack due to the last contraction being a deep one and when growth has been slow. Since the last one was deep, growth has been relatively slow, and debt growth is not high relative to income growth, and since capacity constraints that now exist are not leading to dangerously high inflation and fast tightening, it looks to me that we have a couple more years left in this cycle's expansion. At the same time b) the long term debt cycles of most developed countries are in their very late stages and their abilities to manage the obligations will be difficult. I say that because the total debt and non-debt (e.g. pension and health care) obligations are large/growing and the ability of central banks to reverse a contraction is limited (because interest rates don't have much room to be lowered and because the ability to squeeze more growth from "quantitative easing" is limited). For these reasons and because of the size of the wealth/opportunity gap that exists, I am more concerned about the outlook for a couple years out than for the near term. I hope that the template that I explained in the first 64 pages of my template will help you figure things out for yourself. Of course, one has to run the numbers to get as accurate as possible in applying that template to form a good outlook.

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