Page 112 - Ray Dalio - Principles

Beginning in 2010, my Bridgewater colleagues and I began to
see the emergence of a debt crisis in Europe. We had looked at
how much debt had to be sold and how much could be bought

for a number of countries and determined that many Southern
European nations were likely to come up short. The resulting
crisis could be as bad as or worse than the one in 2008–09.

As in 1980 and 2008, while our calculations clearly pointed
to a debt crisis ahead, I knew that I could be wrong. Because it
would be a big deal if I was right, I wanted to discuss what I
was seeing with top policymakers both to alert them and to

have them correct me if they saw things differently. I
encountered the same sort of resistance without good
explanations that I had encountered in Washington in 2008,
only this time in Europe. Things were stable at the time, and
though I knew there was no reason to believe they would stay
that way, most of the people I spoke to weren’t ready to listen
to my reasoning. I remember a meeting I had with the head of

the International Monetary Fund when we were still in the
calm before the storm. He doubted my seemingly crazy
conclusions, and he wasn’t interested in going through the
numbers.

Just as U.S. policymakers had before 2008, the Europeans
did not fear what they hadn’t experienced before. Because
things were good at the time and the picture I was painting

was worse than anything they’d experienced in their lifetimes,
they found what I was saying implausible. They also didn’t
possess a granular understanding of who the borrowers and
lenders were and how their abilities to borrow and lend would
change with changing market conditions. Their understandings

of how markets and economies work were oversimplified, like
those of academics. For example, they looked at investors as a
single thing they called “the market,” rather than an amalgam
of different players who bought and sold for different reasons.
When the markets did badly, they wanted to do things that
increased confidence, figuring that if they built confidence the
money would come and the problems would disappear. They
didn’t see that whether they were confident or not, specific

buyers didn’t have enough money and credit to buy all the
debt that had to be sold.