Dom Steil

On Debt Cycles

Some notes from Ray Dalio’s How to Navigate Debt Crisis discussing framework, historical cases and in general currency and capital markets.

Dalio’s principles – 2 types of economic debt cycles – deflationary depression and inflationary depression credit and debt become assets and liabilities simply inter-connected stacks and denominated within each countries currency currency devaluations like china lead to an increase in inflation, exports (makes it cheaper to purchase from as opposed to other countries) leads to inflation of the currency as it is devalued

credit markets tighten when interest rates are already lowered and money is continued to be printed flight assets and hard assets like gold and bitcoin become more attractive as capital flight takes place the tariffs imposed on the chinese imports have been responded with by devaluing their currency this is also increases the value of debt to debt denominated in that country’s currency

when there is debt denominated in another country’s currency it is much more difficult to navigate because they cannot print more.

october 2019, mnuchin says government will have to print more june 2020 bitcoin halving is happening other assets in the crypto space could weaken compared to bitcoin if it runs china devalued currency is being sold for gold and bitcoin.

lending is decreasing and lenders become more risk averse which leads to debt service repayments become more difficult. as debt service repayments decrease, credit-worthiness become more of a factor for net new loans. the credit that is available in the currency decreases, therefore there is a lack of income to service existing debt payments.

weimar debt crisis was one of hyper-inflation, capital flight and inability to make reparation payments related to WW1. Re-alignment to gold backed franks. in late 1920’s the margin loans for stock purchasing led to lenders and borrowers profiting on stocks. in 2003-2009 the mortgage loans for home purchasing led to lenders and borrowers profiting on housing due to low credit or subprime loans + derivatives on the subprime loans. in 2010-2020 the startup loans (special purpose vehicales) for equity purchasing led to lenders and borrowers profiting on private valuations, m&a, IPOs.

tech startups subsidized by multiple rounds of venture capital investment has fueled latest growth. lenders were VCs / borrowers were startups. higher up the chain could actually be more systemic lender’s were LPs (university endowments, funds of funds) / borrowers were VC’s.

10 yr 30 yr yields go negative. German, US, Outstanding debt payments in the market 16 Trillion in Negative yield Debt

Returns from the investment in the token are the returned to LPs.

the devaluation of the chinese yuan and the dollar becoming more of a inflationary asset. China has increased it’s middle class bringing close to 500 million people out of poverty over the last couple decades. More visibility into Credit. Publisize credit ratings. Reputationq economy. Economic production in Shenzen and Shanghai.

Flight asset via Real-Estate, Gold, Crypto-currencies the student loans for degree / income purchasing led to lenders and borrowers profiting on college tuition. the colleges leveraged the money to pour endowment funds as LPs into Venture Capital Funds which ultimately provided capital to startups which hired employees with college degrees. however, while the cost of college tuition rised astronomically, the wages stayed relatively the same over the 20 year period. college campuses are the largest centers for bitcoin mining due to the subsidized energy costs associated with room and board.

Effectively three different debt cycles (currently)

LP -> VC debt cycle VC -> Startup debt cycle University -> Student debt cycle

other possible bubbles, crypto-currency LPs subsidizing development of protocols that lack.

3 Types of Currency Fiat based State Governed Currency IMF, Bank of London. USD Corporate basket currency – Libra Crypto-currencies – Bitcoin, Ethereum

Currency scope ie cafe in sf doesnt except euros, vice versa cafe in barcelona doesnt except us dollars. digital realm / digital worlds / digital ecosystems can self organize around tokenized incentives.

Lenders and Borrowers still remain Lenders can be protocol committees for funds that are subsidizing development by granting milestone based token/fiat grants to teams for development of features on their protocol Borrowers can work in sprints, capitalize, allocate time and in return earn. digital subsidies through crypto networks creating a shelling point and incentive development of open source work. The money still needs to come from somewhere. early investors have lower strike price on tokens while providing capital for developments and fund for ecosystem grants. Borrowers are owners of open-source tokenized protocol that offer tokens. Lenders invest in the token.

The biggest factor again becomes the debt denominated in one’s currency, in this case the dollar, navigating and creating policy to address an imbalance in credit/debt is more manageable.