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Long Term Debt Cycle / Central Bank Role

I just read this article (https://zerotwoone.substack.com/p/building-blocks-of-an-economy), which seems to be drawn from some of Ray Dalio's work, and there were a couple of points that I felt didn't make sense to me and was hoping to get your take on.

"So even with the accumulation of debt, rising incomes and asset values help borrowers remain creditworthy for a long time. But this obviously can not continue forever." - Why not? The piece says that over time, debt repayments start growing faster than incomes, forcing a cutback in spending, but doesn't that presuppose a sudden unwillingness to continue extending credit (i.e., rolling the debt)? On its face, the idea that you can' t just perpetually roll debt seems intuitively correct, but mechanically I'm not actually quite sure why that has to be the case? Is the argument here based on an implicit assumption that underwriting standards will deteriorate, such that when underlying productivity doesn't grow at a fast enough rate, lenders will suddenly get spooked, and that will drive the pullback in lending? In practice, over a long enough time frame, it seems reasonable to assume that an extrinsic shock of some sort will jostle the system enough to cause the pullback, but from a theoretical perspective I'm just struggling with why it "has" to be the case in a vacuum. If Debt / Income ratios stay pretty stable, couldn't you continue this pattern indefinitely (again, in a vacuum)?

"Inevitably, the central bank prints new money — out of thin air — and uses it to buy financial assets and government bonds. . . . By printing money, the Central Bank can make up for the disappearance of credit with an increase in the amount of money. In order to turn things around, the Central Bank needs to not only pump up income growth but get the rate of income growth higher than the rate of interest on the accumulated debt." - If I understand things correctly, isn't this a mischaracterization? The central bank buying financial assets and government bonds just trades one asset for another, but if someone didn't have an asset in the first place, it's not as if the central bank is suddenly providing them with a means to increase their consumption. My gut is that what the article is saying actually would apply if we were talking about fiscal stimulus, but in the central bank context is not valid.

It is highly likely that I'm misinterpreting some or many things, but would greatly appreciate your thoughts on the above / any other thoughts you might have about the argument laid out in this article. Thanks!

Hi @overandout

A lot of this article seems to be based on the myth that debt gets repaid in the aggregate. This is the primary reason why people think debt extension can't continue in perpetuity. What they're missing of course is the fact that liabilities are only one half of a balance sheet. So when you extend liabilities you also extend assets. The extent to which this is "sustainable" depends on many factors like inflation, resource production, etc. But if you're producing assets for which there is demand then there's no reason why financial assets/liabilities can't grow in perpetuity. In fact, it would be good for them to grow in perpetuity as long as they're supported by real resources.

Does that answer your question?

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Okay, so it sounds like they are in fact misconstruing things by ignoring the possibility of debt staying stable relative to "income" (i.e., aggregate productivity). It doesn't mean that you still couldn't have cycles because of declining lending standards coupled with some sort of exogenous shock, but in the abstract that isn't a necessary condition. Thanks!