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hi rob d here from property hub with rugby and today we're talking about some big ideas some important ideas from a big thinker but some ideas that aren't that easy to understand yes ray dalio is a bit of a genius and his ideas are fantastic though they can be a bit hard to digest so in this video we've laid it out in simple terms so that everybody can understand if you haven't heard of him ray dalio is probably one of the most successful investors in the world he runs a multi-billion dollar hedge fund called bridgewater associates and he's also very generously shared a lot of the knowledge that he's built up during his time running a fund he approaches investment by looking at the very big picture he looks at what's going on in the whole world and he looks for patterns for what's happened in the past over time to see how that might repeat in the future and these cycles that he's detected are a major theme in his work so first of all we need to talk about debt cycles rey has done a great job of talking about debt cycles through his video how the economic machine works we'll link to it in the show notes but it's a video we've recommended a few times in the past because it's brilliant but let's describe those debt cycles so first of all the short-term debt cycle this is a business cycle and it repeats on average every eight years sometimes a bit shorter and sometimes a little bit longer but it does repeat these cycles are driven by debt the debt creates expansion expansion creates optimism but then we become over optimistic and then once we've gone too far this turns into contraction and often a recession and that's why roughly every eight years you see a stock market correction and for most people this is pretty easy to understand and absorb because it happens over a relatively short space of time but the bigger deal is the long-term debt cycle the long-term debt cycle is in many ways more important but it's also far more poorly understood the reason for that is it lasts roughly 75 years and so because of the length of it most people only see one complete cycle in their lifetimes so when the end of it comes along and spoiler at the end is pretty messy people are surprised when it happens because they haven't seen it happen before so how does the long-term debt cycle play out we'll talk through all the stages and then we'll make it a bit more real by talking about how those stages are playing out in the current debt cycle so at the start of the long-term debt cycle you've got what's known as hard money this is money that is backed by something physical such as gold what that means is currency is just a representation of a fixed amount of gold that's kept in a vault somewhere so if the government wants to increase the money supply the only way it can do that is to actually physically obtain more gold there's a firm link between the hard asset the gold and the currency there might also be some debt in the economy but those levels of debt are low then at some point they want to increase the money supply governments will get frustrated by the restrictions and they'll want to stimulate their economy but they can't because they can't print money so what do they do well they give up on hard money and they turn to a fiat system which basically means that you can create money out of nothing now sometimes the world will ease into this system money is no longer backed by anything so it's backed by nothing and if you want more money well you can decide to create more money so governments or central banks of those governments can print as much money as they like so they do so the government is happily printing money and also issuing debt that means they get other countries or other individuals to lend them money which is good for the government because it means they can spend more without having to increase taxes eventually these debts get to a level where they can't realistically be paid back so what they do at that point is print even more money and use that money to buy back their own debt so one of the consequences of this is it holds interest rates down and encourages borrowing which then boosts asset prices such as property but this is ineffective in stimulating the real economy to do that they need to print and distribute more money and guess what they do eventually all this money printing creates inflation inflation is a rise in the general prices of goods or another way putting it is a fall in the value of the currency there's more money floating around so each unit of that currency is worth less when you compare it to goods or services that you might want to buy when you get inflation people don't want to hold that currency anymore and they also don't want to hold any debt denominated in that currency why because for all the time that they're holding that currency inflation means that it's becoming worth less in terms of what you can actually do with it inflation makes a currency very unappealing to hold so instead people get out of this currency and hold their money in the currency of another country or in hard assets like gold which as we've seen are not inflationary so all this debt that's been accumulated needs to be restructured or forgiven or let go so everyone can start afresh sounds very nice doesn't it but it's messy and history shows us it's messy and we'll cover what messi could be later in the video but it's important to know that these cycles go back hundreds if not thousands of years and they're even mentioned in the bible ray dalia who has done an incredible job of evidencing this so it's not him just saying it happens he's evidenced it happening time and time again and why does this keep happening well one of the reasons is no single government is in charge for a whole cycle and often governments are in just for a short period of time so they're not incentivized to do anything about this even if they understand it which you may argue not all governments do so they're all the stages but now let's map them on to what's actually played out in real life to make it a bit more real for you let's use the case of the us dollar because the us dollar is the most important currency in the world at the moment and it's also a cycle that appears to have got almost all the way through to the end so the story of the us dollar and the long-term debt cycle this time around starts in 1944.
in 1944 there's a conference at bretton woods a very famous event where various powers got together at the end of the second world war to decide on a path forward and at that conference they decided that the us dollar would become the world's reserve currency being a reserve currency means that other countries central banks decided to hold a large amount of dollars as a common unit of exchange between each other which makes it the world's most important currency and at that point the u.s dollar was fully backed by gold reserves exactly like we talked about when we were going through the stages each dollar represented a fixed amount of gold the government actually had in their vaults then by 1971 they were fed up of this system and the link to gold was broken so they created the fiat system which allowed u.s federal reserve to print as much money as it wanted and many other countries followed suit now it's worth saying that in 1971 it didn't just immediately stop it was being wound up for many years before that but the final link to gold was broken by president nixon in 71.
now it's the end of what many people refer to as the gold standard so as we've already seen when this link is broken that means that the government can then print as much money issue as much debt as they want to and they did if you go look at the chart of us government debt levels over the last say 100 years it's astonishing before the 1970s you can hardly see any the chart looks like there's nothing there then between the 1970s and today it absolutely explodes that could only happen because they'd come off the gold standard and that link with gold was broken then once that had happened every successive government allowed that debt pile to get bigger and bigger eventually as a result of this borrowing inflation and interest rates went close to zero in 2008.
now the reason they cut interest rates is to stimulate demand because low interest rates creates cheap debt and debt as we've talked about can stimulate the economy and this will include consumer debt also in 2008 they were forced to print money often referred to as qe quantitative easing and with that money buy financial assets to keep going but this has a consequence yes the government buying up financial assets was great for asset prices anyone who already owned assets saw the value of those go up and up but then that brings us to this year when coronavirus hit a huge shock to the economy both on the demand side and the supply side and understandably that caused a downturn in the economy at that point what could the government do well they couldn't reduce interest rates by much because they were already so low they could keep on printing money to buy assets which they'd already been doing but they did even more of that but none of that helped the real economy it helped people who owned assets but didn't help normal people who'd been affected by the pandemic so they then had to print even more money and give it directly to people who need it you sometimes see this called helicopter money because it's like someone's going up a helicopter and just dropping money down on everyone so in the uk we've seen this in the form of various policies like the furlough scheme and eat out to help out in the u.s this went even further and the us government literally sent a check to almost every taxpayer in total it added up to two trillion dollars printed by the government and then sent directly out to individuals so that's where we are today so what next well if you follow the template we gave you before next will be a continuation of asset prices going up but also severe inflation because of all this money that's been created and then people eventually deciding that they don't trust the us dollar or dollar denominated debt any more because it's simply just not worth anything anymore and then that could be part of america's global dominance ending so up to modern day so far we've followed the 75-year debt cycle almost to the letter so what's next well it sounds pretty traumatic but potentially a new world order yeah what ray says is that when you get to the end of a long-term debt cycle there's such a big shakeout it ends with the world looking fundamentally different the currency that the world uses the way economies are organized the countries that have dominance that all changes at the end of a cycle we talked about the current cycle starting in 1944 when the us dollar became the world's reserve currency and that was the start of a period of major u.s ascendancy and domination over the world prior to that it was the uk the uk was the major world power going back even further in time it was the dutch the country that has the most world power changes over time we're very used to it being the us but because it has been in our lifetimes but it's not always been that way and it won't always be that way in future so here's a quote from rodale describing how global power changes over time and this is all linked into the cycle that we've talked about he says broadly speaking we can look at these rises and declines as happening in three phases first the ascent phase which is characterized by the gathering of competitive advantages second the top phase which is characterized by sustaining the strength but eventually sowing the seeds for the loss of those competitive advantages that were behind the ascent and thirdly the decline phase which is characterized by self-reinforcing declines in all these strengths so why does this decline happen well people get lazy or maybe complacent the country that became the world superpower got there for a reason it wasn't just by chance or look but people get comfy they get relaxed about their current situation productivity levels fall other countries look on envious of what the world superpower has and work hard to achieve that status wages increase so it's often more expensive for that country to make stuff and a large wealth gap will open and people can begin to turn on each other and when that happens you will see populist governments come into power something that we can relate to today now the country that is currently the world superpower usually has the world's reserve currency as well meaning the one that the rest of the world tends to use for international trade between themselves and as we've said at the moment that's the us dollar when a country has their currency being used as the world's reserve currency it makes it very easy to borrow from the rest of the world because people want that currency they need it for trade and when it becomes very easy to borrow from the rest of the world the government tends to do that a lot of it and there's a tendency for that borrowing to fuel over consumption and over expansion so being in the position of having the reserve currency makes the country stronger in the short term it's a real advantage but actually weaker in the long term because it creates this over consumption and over expansion so the us dollar could lose its status as the reserve currency if it has runaway inflation or a painful debt restructuring losing the reserve currency status normally follows decline rather than causing it but it's all part of the loss of dominance by that world superpower and we're seeing it play out now the us is declining and new powers and mainly china are rising with the ambition to take its place so you don't need to have been paying particularly close attention to global affairs over the last decade or so to be aware that these things are happening we can see all the signs of this playing out and a period of us dominance coming to an end but an important question is how far through the cycle are we how close are we to the end where the transfer of power takes place while dalia says the stats seem to suggest that the us is roughly 75 through that cycle plus or minus 10 so the cycle isn't over the messy end and the transfer of world power that results from that isn't inevitable but he does say that when you go back and look at history and he's looked at many examples of this from the past that once you're this far through it is very difficult to turn things around so the bit you've all been waiting for what does all this mean for us so what does it mean if all this does indeed play out as ray believes it well what should we as investors do about it well the first thing to note is that it does affect all of us we've been talking about the us but what happens in the us affects the whole world including very much the uk the messy process of the uk losing its dominance if that happens will affect everyone now a big and important question is when when will this happen because if you thought this would happen tomorrow what would you do well you'd probably just decide to keep everything you've got in cash because if it's in cash and everything else starts melting down then you're not at risk so keeping your cash safe may sound like the safe thing to do but if it doesn't happen tomorrow and it takes say another 10 years to play out well then you're going to miss out on a decade of asset price growth and your cash will become worth less over those 10 years because of inflation so you'll be going into the crash in a much worse position than if you'd been investing so when will it happen well ray doesn't believe it will happen tomorrow and nor do we as we've already heard we're roughly 75 through the current cycle which if you base a cycle on being 75 years well then we're 15 years plus away so that's a long time that you can accumulate wealth and get yourself into a much better position for this coming crash so that's what ray believes and if you agree then what should you do well rather than just holding cash you should invest and invest specifically in assets that are scarce and likely to hold their value as things play out so as inflation kicks in and as currencies depreciate or perhaps eventually even fail these assets need to hold their value or ideally actually grow in value now maybe we're biased perhaps the clue is in the name property hub but we believe property fits well in this scenario because it meets the definition of a scarce asset there's only so much property there's only so much land and there's not going to be any more and property has real world utility people will always be willing to pay for quality property because you could use it to live in or work in or store things in there are other stores of value like gold but property is unique because people are always going to need it whatever else is going on so if you own a property with debt normally a mortgage you'll also benefit from inflation because inflation reduces the real value of your debt you benefit from having your debt inflated away just like governments do now if the concept of inflation being a good thing and helping you become wealthier is a new concept to you and i'm sure for many people watching this it will be then don't worry we've got a video that will help you not only understand this concept but then help you take advantage of it it's called how property will make you rich in the long term we'll link to it in the description below but make sure that's your next watch now of course this is just one viewpoint property isn't the only investment that could be suitable for you and even though ray dalio is extremely knowledgeable and experienced that doesn't mean his predictions are guaranteed to come true so make sure this video is just the start of your research and not the end ray dalio great mind great thoughts and hopefully that video has helped you understand what he's trying to get across to so many of us if you've made it this far you definitely want to subscribe so you don't miss out on videos like this yeah and you don't want to miss the next video that we suggest you watch which is our interview with robert kiyosaki the author of rich dad poor dad he's got some big thoughts about the future as well so check that one out to see what he has to say
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