📓Explained: 5 Stages of the Big Debt Cycle

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So I’m trying out a new format for the newsletter going forward.

I’ll be sharing my notes and summaries of some of the best podcast I’ve listened to this year.

One of the top ones was Ray Dalio on the All In Podcast, I’m covering that today. So let’s get into it:

Ray Dalio, founder of Bridgewater Associates and one of the world's most successful investors, warns that the United States is approaching a debt crisis similar to those that have destroyed currencies throughout history.

He explains that this isn't just an opinion but a mechanical process that can be measured and predicted.

His urgent message: the U.S. must cut its deficit immediately or face severe currency devaluation that will devastate Americans' wealth and purchasing power.

The Debt Mountain:

• $36.4 trillion in federal debt: To put this in perspective, if you stacked $100 bills, this would reach to the moon and back multiple times. It's more money than the entire U.S. economy produces in a year.

• 125% debt-to-GDP ratio: This means the government owes $1.25 for every $1 the entire economy produces annually. It's like a household owing more than their entire yearly income.

• $1 trillion in annual interest: The government now spends more on interest payments than on national defense. One in every four tax dollars goes just to pay interest - not to reduce the debt, just to service it.

Before we dive in, quick word from “I hate it here”

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The Debt Crisis Mechanics - How Countries Go Broke

The Death Spiral Explained: Think of it like a person using credit cards to pay credit card bills. Here's how it unfolds:

1. Initial Problem: Government spends more than it collects in taxes

2. Borrowing Solution: Issues bonds to cover the gap

3. Interest Burden: Must pay interest on those bonds

4. Vicious Cycle: Needs to borrow more just to pay interest

5. Loss of Confidence: Lenders demand higher interest rates

6. Acceleration: Higher rates mean even more borrowing needed

7. Crisis Point: Nobody wants to lend anymore

Supply/Demand Breakdown:

• Imagine you're trying to sell your house, but suddenly everyone in your neighborhood lists their house too

• Prices crash because there are too many sellers, too few buyers

• Same happens with government bonds - too much supply crashes the price

• When bond prices fall, interest rates rise (they move inversely)

Read the full summary and notes from this podcast:

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That’s it for today

See you next week

Cheers,

Ayush & Aditi