Thursday, February 12, 2009

Well Said Sir

Please read Ray Dalio's interview in this week's Baron's here. It's probably the best interview on what is unfolding in the financial crisis that I've read...maybe ever. Of course, one of the reasons I like it so much is that I agree with him and hold a lot of gold. If you disagree, then at least read it for the devil's advocacy points. Money quote (of many):

Basically what happens is that after a period of time, economies go through a long-term debt cycle -- a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren't adequate to service the debt. The incomes aren't adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.