Ray Dalio, co-chairman and founder at Bridgewater Associates, examines the crises is Turkey and Argentina and explains his expectations for the next economic downturn. He speaks with Bloomberg’s Erik Schatzker on “Bloomberg Daybreak: Americas.”
Ray Dalio On Turkey, Argentina’s Local Currency Debt
When a liquidity crisis struck China's Evergrande Group in the summer of 2021, it shook the global markets. Debt payments by China's second-largest property developer by sales were estimated in the hundreds of billions of dollars, and the company missed several payments. Those missed payments led to downgrades by international ratings agencies, but the Chinese Read More
You have a new book out. A template for understanding big debt crises.
And rate. To me the underlying message of this book. Is that history is doomed to repeat itself. Have I got that right.
Yeah the everything happens over and over again for similar cause effect relationships right. So. I mean that that sounds like an. Awfully. Depressing.
Reality. Does it does it does it need to be a depressing reality.
Well I mean it's like any reality. You know you've got to embrace the reality and know how to deal with it. You see there are debt cycles and that cycles provide great opportunities and they provide real problem. So I think it's just like. A progression of disease that progresses and the reason I wrote the book is actually it was just a compendium of research that I wrote mostly before the financial crisis. And it's because I think it's essential. For everybody to understand the sequence of events the logical sequence of events that makes these all the same. So as you know this 48 of them in there they all play out pretty much the same way except they were inflationary and deflationary ones depending on the currency. But basically in 60 pages I just want to convey that template.
So let's talk about one of those two types of debt crises the inflationary depression. Is that what's playing out right now in Turkey in Argentina in emerging markets more broadly. Yeah certainly. And.
This has all played out many times that this is the first time that Argentina has gone through it. It has a habit of going through it. And that's not the first time it's happened anywhere else. So you could follow it. I mean basically the big deal is whether the currency is the nominal the debt is denominated in your own currency or into a foreign currency and when it's denominated in foreign currency like these countries have a lot of dollar denominated debt. Then they have a problem trying to service that dollar denominated debt when the dollar goes out and the money they're earning is in local currency then they don't have enough cash and then they get into that spiral and as a result of that. They have to print more money the currency depreciates and it happens in a very mechanical way. Most of the countries don't have reserve currencies don't have the debt denominated in their own currency. And as a result most of their crisis's are of that sort. And there's that dynamic as to how they complete the cycle. In other words what happens is when the currency goes down in value essentially because of inflation and the like. They wiped out the local currency debt. If you own the local currency debt you're wiped out.
You've evaluated 27 of these non domestic currency crises in the book. So take what's happening today in Argentina Turkey and like I say emerging markets more broadly and compare it if you would to some of the things that we might remember there are some people. Who are old enough to recall the peso crisis of 1994 the Asian currency crisis of 97 or perhaps the Russian debt default 98 or the Argentine default 2001. This looks most like what to you.
Looks like that. It looks like those because the currency depreciation. Then also raises the interest rate differential. And in the process of wiping out the local currency denominated debt because it's essentially monetized the way. The currency becomes cheaper. Well the crisis is our self-correcting mechanisms. So when the currency becomes cheaper then it becomes more the balance of payments improves because they can sell more or they import less. And also they begin to attract capital if they remain a healthy place for people to invest.