assure your economic well-being. Now look at others—other people, businesses, nonprofit organizations, and
governments—realizing that the same is true for them. Now see how we are interconnected and what changes in
conditions might mean for you and others who might affect you. Since the economy is nothing more than all these
entities operating in this way, if you can visualize this well it will help you understand what is happening and what
is likely to happen.
As for what is happening now, the biggest problem that we collectively now have is that for many people,
companies, nonprofit organizations, and governments the incomes are low in relation to the expenses, and the
debts and other liabilities (such as those for pension, healthcare, and insurance) are very large relative to the value
of their assets. It may not seem that way—in fact it often seems the opposite—because there are many people,
companies, nonprofit organizations, and governments that look rich even while they are in the process of going
broke. They look rich because they spend a lot, have plenty of assets, and even have plenty of cash. However, if
you look carefully you will be able to identify those who look rich but are in financial trouble because they have
incomes that are below their expenses and/or liabilities that are greater than their assets so, if you project out what
will likely happen to their finances, you will see that they will have to cut their expenses and sell their assets in
painful ways that will leave them broke. We each need to do those projections of what the future will look like for
our own finances, for others who are relevant to us, and for the world economy.
If anything I said is confusing to you, I urge you to think about it until you get it. So, pencil out what your financial
safety margin looks like (how long will you be financially OK if the worst scenario happens—like you lose your
job and your investment assets fall to be only half as much to account for possible price falls, taxes, and inflation).
Then do that calculation for others, add them up, and then you will have a good picture of the state of the world.
I’ve done that with the help of my partners at Bridgewater and find it invaluable in imagining what is likely to
happen. You can read more of my perspective on this in "The Big Picture.” In a nutshell, the liabilities are
enormous relative to the net incomes and the asset values that are required to meet those obligations.
In summary, those basic financial realities work for all people, companies, nonprofit organizations, and
governments in the same way they work for you and me, with one big, important exception. All countries can
create money and credit out of thin air to give to people to spend or to lend it out. By producing money and
giving it to debtors in need, central banks can prevent the debt crisis dynamic that I just explained. For that reason
I will modify the prior principle to say debt eats equity, money feeds the hunger of debt, and central banks can
produce money. So, it should not be surprising that governments print money when there are debt crises that are
causing debt to eat more equity and causing more economic pain that is politically acceptable.
However, not all money that governments print is of equal value.
The monies (i.e., currencies) that are widely accepted around the world are called reserve currencies. At this
time the world’s dominant reserve currency is the US dollar, which is created by the US central bank, which is the
Federal Reserve; it accounts for about 55% of all international transactions. A much less important currency is the
euro, which is produced by the Eurozone countries’ central bank, the European Central Bank; it accounts for about
25% of all international transactions. The Japanese yen, the Chinese renminbi, and the British pound all are
relatively small reserve currencies now, though the renminbi is growing quickly in importance.
Having a reserve currency is great while it lasts because it gives the country exceptional borrowing and
spending power but also sows the seeds of it ceasing to be a reserve currency, which is a terrible loss. That is
because having a reserve currency allows the country to borrow a lot more than it could otherwise borrow
which leads it to have too much debt that can’t be paid back which requires its central bank to create a lot
of money and credit which devalues the currency so nobody wants to hold the reserve currency as a
storehold of wealth. Countries that have reserve currencies can produce a lot of money and credit/debt
denominated in them, especially when there is a shortage of them such as now. That is what the Fed is now doing.
In contrast countries that don’t have reserve currencies are especially prone to finding themselves in need of these
reserve currencies (e.g., dollars) when a) they have a lot of debt that is owed in the reserve currencies that they
can’t print (e.g., dollars), b) they don’t have much savings in those reserve currencies, and c) their ability to earn
the currencies they need falls off. When countries that don’t have reserve currencies desperately need reserve
currencies to pay their debts that are denominated in reserve currencies and to buy things from sellers who want
them to pay in reserve currencies, their inability to get enough reserve currencies to meet those needs can bankrupt
them. That is where things now stand for a number of countries. It is also where things stand for local governments