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Big Debt Crises Paperback – November 1, 2018
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About the Author
Ray Dalio is the founder, Co-Chief Investment Officer and Co-Chairman of Bridgewater Associates. Bridgewater is a global asset manager and leader in institutional portfolio management as well as the largest hedge fund in the world. Under Ray s guidance, Bridgewater has developed a distinctive culture, an idea-meritocracy that produces meaningful work and meaningful relationships through radical truth and radical transparency that is the foundation of the firm s success. Since starting Bridgewater out of his two-bedroom apartment in New York in 1975, Ray has grown the firm into the largest hedge fund in the world, the 5th most important company in the U.S. according to Fortune Magazine, and has led it to make more money for clients than any other hedge fund since its inception, according to LCH Investments. For his innovative work as well as being a valued advisor to many global policy makers, Ray has also been called the Steve Jobs of Investing by CIO Magazine and Wired Magazine, and been named one of TIME Magazine s 100 Most Influential People. Over the past three decades, he wrote down his decision-making criteria and has recently passed along his principles and tools through his book, Principles: Life & Work, a New York Times #1 Bestseller and Amazon #1 Business Book of 2017.
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Many looks at the Wall Street as an evil entity, but I believe the financial market can be utilized to create financial freedom for individuals. But first, we must make an effort to understand the game as Warren Buffett said - "Risk comes from not knowing what you're doing."
This is a must-read to understand the world we live in today. I'm grateful that Ray and his team had put a very complex world of finance into simple languages I can understand and offer a comprehensive review of how we got here today.
Furthermore, as opposed to other doom-and-gloom recent writings, this book is not selling anything. It is simply presenting facts. It's up to you to draw your own conclusions as far as what you should do to protect yourself in the event of a crisis. My takeaway was that the only way to truly insulate yourself is to buy tangible assets. Myself, I will opt for putting most of my money in property, instead of gold or other such assets. The reason is simple. Everyone needs a place to live. Gold is not going to help me feed my family, but a house will help me shelter them in case of bad times. In case of good times, it will generate income.
The only criticism I have is that Dalio is a little bit too enamored with the Fed (and central banking in general). I agree that they did an excellent job to avert a depression. However, bailing out banks set a dangerous precedent, because as long as there is the widely held belief that the government will always be there to absorb bad debt, these people will keep doing it. Yes, the Fed saved the economy, but in reality, they just kicked the can down the road and continued contributing to a broken financial system. maybe they should have just let the system collapse and let the market enter a natural depression.
To Dalio policy makers have to ignore, at least initially, the problem of moral hazard. That is bailing out the ones who were in up to their eyeballs in making the crisis. He was fully supportive of the banker bailout program which in his opinion and my opinion was necessary to save the system. Where I would differ is that once a crisis has past the critical phase, those responsible have to be held to account. One of the reasons why there is so much populism on the right and the left is that no major banker in the U.S. went to jail. That was unlike the savings and loan scandals of the late 1980s and the dot.com frauds of the late 1990s. Our pagan society needs ritual sacrifices to cleanse the system.
Where his book is most valuable is his discussion of the three major debt crises of the past 100 years: Weimar Germany 1918-24, the Great Depression 1928-1937 and the recent Great Financial Crisis of 2007-2011. He goes through each of those crises in great detail and in many cases on a nearly day-by-day basis. In the case of the recent crisis he includes his contemporaneous Bridgewater Daily Observations publication to get his thinking in real time. By doing this he puts you into the shoes of investors and policy makers as they scramble to make sense as to what is going on. In the case of the German hyper-inflation he notes that given all of the constraints that might have been the least bad alternative policy to follow.
Dalio credits the work of Bernanke, Paulson and Geithner in preventing the U.S. in falling into a second great depression after the failure of Lehman Brothers. However letting Lehman go in hindsight looks like a big mistake. However as I have written elsewhere letting Lehman go was analogous to killing the chicken to scare the monkey. He also credits the smooth hand-off between the Bush and Obama administrations which contrasted to the lack of a hand-off between Hoover and Roosevelt in 1933.
I have several quibbles with the book. In the Weimar inflation he rightly notes that the assassination of highly respected finance minister Walter Rathenau made it more difficult for Germany to renegotiate reparations payments, but he ignores the untimely death of foreign minister Gustav Stressemann in 1929 who might have been able to ease Germany’s external debt problem. He further ignores the untimely death of New York Fed president Benjamin Strong in 1928, who in Milton Freidman’s view might have saved the U.S. from the worst of the depression. Dalio, although he mentions it, under-rates the Treasury’s gold sterilization policy in the mid-1930s that triggered the 1937 relapse into depression.
Dalio also ignores the role of Bridgewater during the crisis. After all Bridgewater was part of the problem in that it was very likely they were shorting mortgages, high yield debt, equities, and bank stocks while being long treasuries, the U.S. dollar and gold. How else could Bridgewater have made money in 2008? Lastly the book is too long, but read the three case studies with great care which are magnificent.