Like a drunk stumbling through a maze in the dark

Sometimes I despair when I listen to what passes for political debate read what passes for political journalism. We are mired in the worst economy since the Great Depression, yet neither party has the vision or courage to address the grave problems that we face. Instead, they cling to their talking points and tired nostrums.

Tax the rich!
Reagan! Tax cuts!

This piece in the New Yorker suggests that the problems we face are deep-seated and novel (at least for this generation).

Mastering the Machine
How Ray Dalio built the world’s richest and strangest hedge fund

Dalio was one of those who saw disaster earlier than most:

Searching for historical precedents, Bridgewater put together detailed histories of previous credit crises, going back to Weimar Germany. The firm’s researchers also went through the public accounts of nearly all the major financial institutions in the world and constructed estimates of how much money they stood to lose from bad debts. The figure they came up with was eight hundred and thirty-nine billion dollars. Armed with this information, Dalio visited the Treasury Department in December, 2007, and met with some of Treasury Secretary Henry Paulson’s staff. Nobody took much notice of what he said, but he went on to the White House, where he presented his numbers to some senior economic staffers. “Ray laid out the argument that the losses he foresaw in the banking system were astronomical,” a former Bush Administration official who attended the White House meeting recalled. “Everybody else was talking about liquidity. Ray was talking about solvency.”


His warnings ignored in Washington, Dalio issued more jeremiads to his clients. “If the economy goes down, it will not be a typical recession,” his newsletter said in January, 2008. Rather, it would be a disaster in which “the financial deleveraging causes a financial crisis that causes an economic crisis. . . . This continues until there is a reflation, a currency devaluation and government guarantees of the efficacy of key financial intermediaries.” As the crisis deepened, Dalio continued to assess it far more accurately than many senior policymakers did. When the government allowed Lehman Brothers to collapse, he despaired. “So, now we sit and wait to see if they have some hidden trick up their sleeves, or if they really are as reckless as they seem,” the newsletter said on September 15, 2008.

What's worrisome is that he is convinced that the current problems are not going away any time soon:

This spring, he told me that economic growth in the United States and Europe was set to slow again. This was partly because some emergency policy measures, such as the Obama Administration’s stimulus package, would soon come to an end; partly because of the chronic indebtedness that continues to weigh on these regions; and partly because China and other developing countries would be forced to take drastic policy actions to bring down inflation. Now that the slowdown appears to have arrived, Dalio thinks it will be prolonged. “We are still in a deleveraging period,” he said. “We will be in a deleveraging period for ten years or more.”


Dalio believes that some heavily indebted countries, including the United States, will eventually opt for printing money as a way to deal with their debts, which will lead to a collapse in their currency and in their bond markets. “There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency,” he said. Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said.

If leverage got us into this mess, then it makes sense explore ways in which we can avoid such problems in the future. Simon Johns suggests reforming the tax code which now favors debt over equity.

Could Tax Reform Make the Financial System Safer?