Bridgewater reminds us about Italy

It seems that the markets were focused on Spain debt/bank and other issues as of late but forgot about Italy. The media was also focused with tons of articles about Spain while Italy was ignored. According to Bridgewater, Italy will again gain in the competition for the media attention.

It seems that that the main rationale behind the lacking punishment of the Italian debt situation was the LTRO and the thought on mind that the free cash free credits will buy enough Italian bonds to safe the country from a spiraling debt crisis. Bridgewater shows us with one chart that this is wrong and the banks have no free money left to buy bonds neither to buy in the primary nor in the secondary Italian bond market.

We bold their "assumption" because as Bridgewater calculates, the 'dry powder' number is far, far less than conventional wisdom had been expecting. In fact, currently for Italy it is at negative €48 billion in residual LTRO capital. If that is right, and we believe so, Italy will have no way to plug its debt funding needs anymore which means that rates will start rising once again and more turmoil is expected. Now the question left is only whether the ECB will initiate a new LTRO operation or not. It seems quite unlikely to do as now is obvious the previous was failure and was a way to fund deficits through money printing. Also the ECB balance sheet is huge now and the leverage is super-high. We should not forget that the ECB’s Greek bonds values are also under risk which means that very soon not the Italian banks will need emergency cash but the ECB to be recapitalized.

Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.

Ray Dalio on money printing

“There hasn’t been a case in history where they haven’t eventually printed money and devalued their currency”

Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.

Ray Dalio and his fund’s Weimar Hyperinflationary Case Study

World's biggest hedge fund, Bridgewater, published wonderful analysis on deleveraging case studies through the history of the world. As Ray Dalio's analysts note: "the differences between deleveragings depend on the amounts and paces of 1) debt reduction, 2) austerity, 3) transferring wealth from the haves to the have-nots, and 4) debt monetization. Each one of these four paths reduces debt/income ratios, but they have different effects on inflation and growth. Debt reduction (i.e., defaults and restructurings) and austerity are both deflationary and depressing while debt monetization is inflationary and stimulative. Ugly deleveragings get these out of balance while beautiful ones properly balance them. In other words, the key is in getting the mix right." Of these the most interesting one always has been that of the Weimar republic, as it certainly got the mix wrong. Ray Dalio and his colleagues are worried that USA might also get the mix wrong. According to BCG in order to reduce global debt to GDP to a sustainable 180%, which some even find still too high …, the world economies should reduce its debt with $21 trillion! Of this amount, USA must reduce $8.2 trillion and the EZ $6.1 and $6.7 for the rest of the world. And if you wonder how banks will withstand such huge deleveraging, makes no wonder, they will not and that is why CB will continue printing until we get the other outcome: deleverage through inflation (hyperinflation).

According to the case study on Germany hyperinflation, the Reich government was forced to choose between
cash shortage and contraction or money printing. The government chosen the latter and you know the rest. Cash lost 100% of it’s value compared to gold, and all debt disappeared.

 
Starting debt of 913% fell to basically zero. Non-reparations government debt of 133% GDP in 1919 was wiped out by inflation. Gold-based reparation of 780% GDP effectively went into default in the summer of 1922 when reparation payments were halted. We summarize this in the table below and then go through the pieces.

Then there is the question of what happens to gold. In Weimar's case, gold-denominated reparations were simply forgiven. Ray Dalio is worried that no this time gold will first be confiscated. All of it. Only then will the debt be forgiven. In the form of a hyperinflating of trillions in claims, in a coordinated way across all currencies, and relative to a basket of hard assets.

As a conclusion it seems that Ray Dalio and his colleagues in Bridgewater are worried that 1. Well, as the According to the Greek case study shown, this time around not only gold will firstly be confiscated but the savers will be totally destroyed.

Ray Dalio is an American businessman and founder of Bridgewater Associates. Bridgewater Associates has since attracted many clients including pension funds and is currently (as of January 2012) the largest hedge fund in the world with nearly $120 billion under management.