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Ray dalio founder of Bridgewater has warned of the collapse of major Banks and the economic repercussions that would be felt for generations to come so there's its particular situation and the FED coming in and guaranteeing all depositors but it's a common situation it exists pervasively and what is it that I'm talking about that there has been a lot of creation of debt to make investments so for example Banks insurance companies they borrow money at a certain rate and then they go out and they make investments and when those Investments have lower returns go down in value as stocks and bonds have gone down in value or they don't have adequate yields relative to the cost of funding those assets you have everybody losing money and that is a pervasive situation that exists throughout the con the economy the world economy the U.S economy he referred to the collapse of Silicon Valley Bank as the first Domino to fall which could lead to the bubble bursting in both the stock market and real estate Silicon Valley Bank was the 16th largest bank in the United States with assets of 209 billion dollars in December 2022 the bank was particularly known for serving startups and venture-backed firms and 44 of the venture-backed Techno technology and Healthcare initial public offers in 2022 where clients of Silicon Valley Bank the bank saw a massive growth between 2019 and 2022 resulting in significant deposits and assets which it used to buy treasury bonds and other long-term debts however as the Federal Reserve increased interest rates in response to high inflation Silicon Valley Bank's bonds became riskier Investments and the bank's bonds declined in value eventually Silicon Valley Bank lost 18 billion dollars and it became insolvent dalio believes that this is a classic event in the very classic bubble bursting part of the short-term debt cycle the short-term cycle is one of three parts of the economic machine which also includes the productivity curve and the long-term debt cycle productivity growth is relatively constant but debt drives the dramatically different states of the economy according to dalio history has shown that the short-term debt Cycles take place over a 5 to 8 year period and the whole thing collapses in a debt restructuring and debt monetization which typically happens about once every 75 years give or take about 25 years according to dalio history has shown that short-term debt Cycles take place over a five to eight year period the greater usage of debt means consumers and businesses both have a greater ability to spend on goods and services when that spending exceeds the economy's production we begin to see inflation which leads to the central banks raising interest rates to cool off the economy this is what dalio refers to as the self-reinforcing debt contraction and it leads to a cascading effect of dominoes falling until the central banks step in to inject liquidity into the market thus beginning the next cycle however over time this constant cycle of short-term debt cycles and injections of liquidity leads to a long-term debt cycle the long-term debt cycle is characterized by the buildup of debt and liabilities to the point that they are unsustainable and the economy becomes overloaded with debt at this point we see a debt restructuring or debt monetization which is essentially a way for the economy to reset itself and begin anew so when dalio talks about the collapse of Silicon Valley Bank as the first Domino to fall he is essentially saying that we are at the end of the short-term debt cycle and the economy is overdue for a reset this reset could take the form of a recession or even a depression but ultimately it is necessary to clear out the excesses of the short-term cycle and begin Anew while dalio's predictions are always worth paying attention to it is important to remember that no one can predict the future with absolute certainty it is always wise to keep a diversified portfolio and be prepared for any potential economic downturns like and share this video if you got any value from It And subscribe to our channel to be informed of the latest news in the financial space thanks for watching and until next time keep your head high and keep learning talk to you soon
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