In the 1980 presidential election Jimmy Carter, who was perceived as a nice but weak liberal Democrat, was voted
out and Ronald Reagan, who was perceived as a homebody conservative whom Americans expected would be
stronger and impose disciplines where they were needed, was elected. Leading countries at the time (reflected in
the G7 that consisted of the US, UK, Germany, Japan, France, Italy, and Canada—which reflects how different the
world power balance was 40 years ago versus today) made analogous moves in electing conservatives to bring
discipline to their inflationary chaos. On January 20, 1981, the same day Reagan was inaugurated as president, the
Iranians released the hostages. Early in their terms, both Reagan in the US and Margaret Thatcher in the UK had
landmark fights with labor unions.
Economics and politics have swings between the left and the right in varying extremes as the excesses of each
become intolerable and the memories of the problems of the other fade. It’s like fashion—the width of ties and
the lengths of skirts. When there is great popularity of one extreme, one should expect that it won’t be too
long before there will be a comparable move in the opposite direction.
The move to monetary tightness broke the backs of debtors and curtailed borrowing, which drove the world
economy into its worst downturn since the Great Depression. In seeing the stock market, the economy, and the
prices of inflation-hedge assets plunging, the Federal Reserve slowly started to cut interest rates, but the markets
continued to decline. Then Mexico defaulted on its debt in August 1982. Interestingly, on the day that Mexico
defaulted on its debt (August 23, 1982), the US stock market rallied, which was a straw in the wind that I missed.
What happened next created another jarringly painful learning experience for me. While I was able to anticipate
the debt crisis, which was profitable for me, it also led me to realize that the banks that had lent that money
wouldn’t get paid, which led me a) to anticipate a debt-default-triggered depression that never came, b) to lose a
lot of money betting on it, and c) to be very publicly wrong. As a result of my personal losses and losses of clients,
I had to let everyone in my fledgling Bridgewater Associates go and was so broke I had to borrow $4,000 from my
dad to help pay for my family’s bills. At the same time this painful experience was one of the best things that ever
happened to me because it changed my whole approach to decision making. It gave me the fear of being wrong
and the humility I needed to balance with my audacity without killing my audacity. It led me to make Bridgewater
as an idea meritocracy in which I brought in the smartest independent thinkers I could find to argue with me,
which resulted in our doing great over the next 40+ years. I still carry that fear of being wrong, which is why I am
doing this research, why I want the greatest thinkers in the world to challenge my thinking and to stress test it, and
why I am passing this research to you for you to take or leave as you see fit.
Why was I wrong in 1982, and what did I learn that would be an important principle for the future? What I had
missed and learned from this experience was that when debts are in the currencies that central banks have the
ability to print and restructure, debt crises can be well-managed, so they are not systemically threatening.
Because the Federal Reserve could provide the banks that made the loans that weren’t being paid back with
money, they didn’t have a cash flow problem, and because the American accounting system didn’t require the
banks to account for these bad debts as losses, there was no big problem that couldn’t be worked out. I also learned
that the value of assets is the reciprocal of the value of money and credit (i.e., the cheaper money and credit
are, the more expensive asset prices are) and the value of money is the reciprocal of the quantity of it in
existence, so when central banks are producing a lot of money and credit and making it cheaper, it is wise to
be more aggressive in owning assets.
The Disinflationary and Booming 1980s
In the 1980s there was a stock market and economic boom that was accompanied by falling inflation and falling
interest rates in the United States at the same time as there were inflationary depressions in the debt-burdened
emerging economies that didn’t have a central bank to bail them out. The debt-restructuring process progressed
slowly from 1982 until 1989 when an agreement called the Brady Bond agreement, named after Nicholas Brady,
who was the US Treasury Secretary at the time, was created and started to bring to an end to “the lost decade” in
these countries (as agreements were reached with different countries through the early ’90s). This whole 1971-91
up-and-down debt cycle, which profoundly affected just about everyone in the world, was the result of the
US going off the gold standard, the inflation that resulted from it, and having to break the back of the
inflation through tight money policies that led to the strength in the dollar and dramatic fall in inflation. In
the markets that big cycle showed up via a) the soaring of inflation and inflation-hedge assets and bear