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Analysis Of 48 Historical Debt Crises Suggests U.S. Dollar Will Likely Implode

Analysis Of 48 Historical Debt Crises Suggests U.S. Dollar Will Likely Implode

When Ray Dalio, founder and co-chief investment officer of the world’s biggest hedge fund, went to Washington, D.C. in December 2007 to warn the White House of the coming banking system meltdown, it was perceived as “pretty kooky,” he said.

He turned out to be right. Now he’s concerned about what will happen when the next recession hits, MoneyWeek reported.

The world today looks a lot like the 1930s leading up to World War II, Dalio warned in a Bloomberg interview.


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The founder of Bridgewater Associates, Dalio said the U.S. Dollar could fall by as much as 30 percent in about two years’ time in a sell-off that could leave it looking like the bombed-out Turkish Lira.

He’s not talking about a developing country or emerging economy but the world’s largest economy. He predicts the U.S. will suffer an inflationary depression, Pound Sterling Live reported:

The next big crisis will be caused by an unaffordable build-up of debt in the economy that is exacerbated by a devaluation of the Dollar, which pushes up the cost of servicing an increasingly large pile of foreign currency debt.”

It could be the kind of inflationary debt crisis that Turkey and Argentina went through recently, Dalio said. Those crises were caused “by political meddling in the affairs of the respective central banks … that interference then led to huge falls in the Turkish and Argentine currencies, which then encouraged rapid increases in inflation.”

Dalio analyzed 48 historical debt crises in his recent book, “A Template for Understanding Big Debt Crises.” Dalio distinguishes between inflationary vs deflationary debt crises, but says they end up looking the same.

The U.S. crisis of 2008 and 2009 was deflationary. The next U.S. crisis will be inflationary, he predicts — the kind that normally only occurs in developing nations, because those nations tend to rely on borrowings from overseas. The U.S. relies increasingly on foreign funding due to its widening budget deficit, according to Dalio’s theory, and many analysts think this will weigh on the dollar.

Dalio critics argue that the U.S. economy is strong enough to avoid a debt crisis. Dalio says the current growth spurt is the result of stimulus through government tax cuts, and it will wear off in 18 to 24 months.

Dalio compares the next crisis to the one after the 1930s Wall Street crash — also the deflationary type.

Both eras saw the rise of populism and other types of so-called extremist politics as a reaction to the social injustices that are perceived to have been caused by crises. This raises the specter of even worse political extremism on the horizon, possibly even war. Dalio suggests the current period is actually equivalent to the 1935-45 period which encompassed the Second World War.”

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