Ray Dalio, founder of Bridgewater, stated that when a country's debt burden exceeds what can be managed through tax increases, spending cuts, or normal economic growth, governments typically choose to print money rather than face a default crisis, thereby reducing the real value of debt through currency devaluation.

He does not strictly advocate for a "one-size-fits-all" approach, but emphasizes that the historically most common and politically least resistant method is a combination of monetary expansion, lowering real interest rates, and currency devaluation. Direct cuts to fiscal spending would affect voter interests, tax increases would suppress the economy and investment, and nominal defaults would damage the financial system; therefore, policymakers prefer to spread the losses across the purchasing power of the currency.

Dalio's mechanism is that when government debt is primarily denominated in local currency, the central bank can purchase government bonds that no one else wants or maintain low interest rates, allowing the government to roll over old debt with newly created money. The nominal amount of debt may not decrease, but if wages, prices, and nominal GDP rise faster than the debt interest rate, the real burden of debt relative to economic output will decline.

The costs of this path are borne by bondholders, cash holders, and fixed-income savers. When nominal interest rates are suppressed by policy, inflation rises, or exchange rates weaken, the real returns on bonds may fall below inflation, leading to a decline in purchasing power; Dalio describes this as a "hidden restructuring" that weakens creditor wealth without a public default.

Dalio places this process in the later stage of the "big debt cycle": interest payments on debt begin to squeeze other government budgets, and the government continues to borrow to pay maturing interest and principal; if private investors are unwilling to absorb new government bonds at acceptable rates, central bank purchases of debt will increase, forming a feedback loop of "borrow more - print more - weaker currency."

Historically, combinations of debt, currency devaluation, and financial repression have occurred in the 1930s and 1970s. Dalio believes that the high debt levels of the current major fiat currency system make developed economies more likely to face similar rebalancing pressures; however, when and through what inflationary path this occurs still depends on fiscal policy, central bank independence, economic growth, bond demand, and exchange rate systems, and cannot be determined solely by the scale of debt. finance.yahoo+1

In market mechanisms, bondholders and cash holders effectively provide the government with funds that offer fixed nominal returns, bearing the risk of declining purchasing power during periods of rising inflation or financial repression; the government and nominal debtors benefit from repaying fixed nominal debt with currency that has less value. Funds often flow from long-term fixed-rate government bonds, cash, and low-yield deposits into adjustable-priced equities, real estate, infrastructure, certain commodities, and physical or scarce assets like gold; however, asset prices are also affected by real interest rates, recession, and liquidity tightening, and are not naturally immune.

Source: Public Information