Big Picture: The Boom-Bust Cycle Is Nearing Its End

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by FS

Ray Dalio
Ray Dalio while giving a speech at the 10th anniversary celebration of charity Grameen America. Metropolitan Museum of Art, September 23 2017

We often discuss the aging business cycle and our anticipation of economic troubles in the 2019 to 2020 timeframe for the US and elsewhere.

This time on the Financial Sense’s Big Picture, Jim Puplava discusses Ray Dalio’s new book, “A Template for Understanding Big Debt Crises,” (which is available for free) where he explains how debt creates boom and bust cycles, and where we are today.

For audio, see Big Picture: Big Debt Crises, Past and Future – A Billionaire’s Perspective

Dalio’s Six Stages of Debt Cycles

Dalio boils down deflationary and inflationary debt cycles to a six-stage process.

Stage one is the early part of the cycle, consisting of a boom where the economy is recovering from a recession. This is where debt is being used productively to fund growth.

Stage two is when the bubble begins to form; excitement takes over, where everyone is either borrowing money at cheap rates or overpaying for assets, as we’re doing now.

The third phase marks the top of the cycle. At one point, the cycle is beginning to reverse and the central bank steps in, raising interest rates as they’re doing now.

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The fourth phase is the recession or depression phase where the bust occurs and bear markets emerge in most asset classes.

Stage five Dalio calls “the beautiful deleveraging,” when just the right amount of monetary stimulus is put into place such that it doesn’t create any kind of hyperinflation.

The sixth stage is called “pushing on a string,” which is something central banks try to avoid. Interest rates are down to zero at this point, and central banks have to resort to alternative policies, which they did in the last crisis, such as implementing quantitative easing.

“Most debt crises follow this similar pattern,” Puplava said. “They have acted very similarly throughout human history, from biblical times to the Roman Empire to the present day. Here’s the key point: They’re all related to the giving and buying of credit, because credit creates additional buying power. As debt builds, the question becomes whether that debt is used for productive purposes. … It often goes into speculation and consumption, and that’s where you get into the crisis stage.”


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Trigger Conditions and Planning Ahead

We’re probably close to the seventh inning in this cycle, Puplava added, which is an opinion shared by Ray Dalio. We would probably be in the ninth inning had it not been for the massive fiscal stimulus in the form of tax cuts and additional government spending by President Trump.

The most important thing now is to have a plan in place, Puplava noted, because calling a top to this cycle will prove difficult, if not entirely impossible, even for the most astute observers.

“In our view, possibly by late 2019, but most likely by 2020, the cycle will come to an end,” Puplava said. “Downturns and bear markets will begin before you know you’re in a recession. They’ll begin before you know you’re in a bear market… You should be developing your exit plan. Do it now and don’t think you’re smart enough to wait until the bottom of the ninth inning. I know very few people that are.”


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