Money, Credit, and Debt – COVID-19 Inspired

Below is my excerpt accompanied with main takeaways from the study published by Ray Dalio – an American billionaire hedge fund manager and economist, on April 23, 2020. (LinkedIn post)

We shouldn’t rely on governments to protect us financially

We should expect most governments to abuse their privileged positions as the creators and users of money and credit.

All countries can print money to give to people to spend or to lend it out.  However, not all money that governments print is of equal value.  

You cannot create more wealth simply by printing more money and creating credit. To create more wealth, one has to be more productive. The relationship between the creation of money and credit and the creation of wealth (actual goods and services) is often confused yet it is the biggest driver of economic cycles. 

Money and credit are stimulative when it’s given out and depressing when it has to be paid back. When the economy is growing too quickly and the government wants to slow it down, they make less money and credit available, causing both to become more expensive. When there is too little growth and central bankers want to stimulate the economy, they make money and credit cheap and plentiful, which encourages people to borrow and invest and/or spend.

The short-term cycles of ups and downs typically last about eight years. These short-term debt cycles add up to long-term debt cycles that typically last about 50 to 75 years. The last big long-term debt cycle, which is the one that we are now in, was designed in 1944 in Bretton Woods, New Hampshire, and was put in place in 1945 when World War II ended. However, these long-term debt cycles take about a lifetime to transpire, unlike the short-term debt cycles that we all experience a number of times in our lifetimes so most people understand better.  When it comes to the long-term debt cycle most people, including most economists, don’t recognize or acknowledge its existence because, to see a number of them in order to understand the mechanics of how they work, one has to look at them operating in a number of countries over many hundreds of years in order to get a good sample size. 

When it is widely perceived that the money and the debt assets that promise to receive money are not good storeholds of wealth, the long-term debt cycle is at its end, and a restructuring of the monetary system has to occur. 

When countries were at war and there was no trust in the intentions or abilities to pay, they could still pay in gold. So gold (and to a lesser extent silver) could be used as both a safe medium of exchange and a safe storehold of wealth.  

A person puts money in a Bank in exchange for interest (profit) -> Bank lends that person’s money to somebody else in exchange for a higher interest (profit) -> Those who borrow the money from the Bank like it because it gives them buying power that they didn’t have. Everyone is happy. 

Trouble approaches when either there isn’t enough income to survive one’s debts or the amount of the claims (i.e., debt assets) that people are holding in the expectation that they can sell them to get money to buy goods and services increases faster than the number of goods and services by an amount that makes the conversion from that debt asset (e.g., that bond) implausible.  

Think of debt as negative earnings and a negative asset that eats up earnings (because earnings have to go to pay it) and eat up other assets (because other assets have to be sold to get the money to pay the debt). When incomes and the values of one’s assets fall, there is a need to cut expenditures and sell off assets to raise the needed cash (to pay the debt). 

When that’s not enough, the following happens:

  1. Debt restructurings where debts and debt burdens are reduced, which is problematic for both the debtor and the creditor because one person’s debts are another’s assets 
  2. Central bank printing money and the central government handing out money and credit to fill in the holes in incomes and balance sheets (which is what is happening now).  It occurs when holders of debt don’t believe that they are going to get adequate returns from it.

When people go to Banks and take the money they invested (for interest) out of it to buy goods and services, the bank has two choices:

  1. Allow that flow of money out of the debt asset (raise interest rates and cause the debt and economic problems to worsen).
  2. Print money. 

An important difference between money and debt. Money is what settles claims—i.e., one pays one’s bills and one is done. Debt is a promise to deliver money.

This Already Happened Before… Several Times

In 1971, on the evening of August 15, when President Nixon spoke to the nation and told the world that the dollar would no longer be tied to gold. This led to stock prices rising. On Sunday evening March 5 President Franklin Roosevelt gave essentially the same speech doing essentially the same thing which yielded essentially the same result over the following months (a devaluation, a big stock market rally, and big gains in the gold price). That happened many times before in many countries, including essentially the same proclamations by the heads of state.  

The coronavirus triggered economic and market downturns around the world, which created holes in incomes and balance sheets, especially for indebted entities that had incomes that suffered from the downturn.

When credit cycles reach their limit, the following events take place:

  • Interest Rates fall down. When there isn’t much room to stimulate by lowering interest rates (or printing money and buying financial assets) the greater the likelihood that there will be a monetary inflation accompanied by economic weakness. Stimulating money and credit growth by lowering interest rates is the first-choice monetary policy of central banks.
  • The government prints more money and creates additional debt. It is both the logical and the classic response for central governments and their central banks to create a lot of debt and print money that will be spent on goods, services, and investment assets to keep the economy moving. That is what was done during the 2008 debt crisis when interest rates could no longer be lowered because they had already hit 0%. As explained that was also done in response to the 1929-32 debt crisis when interest rates had been driven to 0%.  This creating of the debt and money is now happening in amounts that are greater than at any time since World War II. The European Central Bank, the Bank of Japan, and—to a lesser extent—the People’s Bank of China made similar moves.
  • People will shift their wealth into other things. Current money printing increases the chances that money will be printed too aggressively and not used productively so people will stop using it as a storehold of wealth and. They also often move their wealth to other storeholds of wealth like gold, certain types of stocks, and/or somewhere else (like another country that is not having these problems). 
  • People will seek to sell their debt assets and/or borrow money to get into debt that they can pay back with cheap money. 

Such periods of reflation either stimulate another money and credit expansion that finances another economic expansion (which is good for stocks) or devalue money so that it produces monetary inflation (which is good for inflation-hedge assets such as gold). 

  • Economic stress caused by large wealth and values gaps, will lead to higher taxes and fighting between the rich and the poor. The rich move to hard assets and other currencies and other countries. Those countries that are suffering from this flight from their debt, their currency, and their country will want to stop it. Expect governments to try to make it harder to invest in assets like gold (e.g., via outlawing gold transactions and ownership), foreign currencies (via eliminating the ability to transact in them), and foreign countries (via establishing foreign exchange controls to prevent the money from leaving the country).

When there is a large wealth gap, big debt problems, and an economic contraction, there is often fighting within countries and between countries over wealth and power. Also this will lead to domestic and international political changes. 

  • The governments will go back to some form of hard currency (e.g., gold or a hard reserve currency) to rebuild people’s faith in the value of money as a storehold of wealth.
  • People will start selling their assets. To deal with that monetary inflation crisis and break the inflation, the supply of money will get tightened, which will drive interest rates to the highest level “since Jesus Christ”.  Debtors will have to pay much more in debt service at the same time as their incomes and assets fall in value. This will squeeze the debtors and require them to sell assets.

We shouldn’t rely on governments to protect us financially

We should expect most governments to abuse their privileged positions as the creators and users of money and credit.


  1. Debt buyer (United States). (2017). Retrieved 26 April 2020, from 
  2. Chapter 2: Money, Credit, and Debt. (2020). Retrieved 26 April 2020, from 
  3. Understanding Devaluation, the Causes, and the Downsides. (2020). Retrieved 26 April 2020, from