<p>I recently started reading Ray Dalio's book regarding BIG DEBT CRISES. He compared there, economy to the monopoly board game. There is something I don't quite follow in this analogy.</p>
<blockquote>
<p>If you understand the game of Monopoly®, you can pretty well
understand how credit cycles work on the level of a whole economy.
Early in the game, people have a lot of cash and only a few
properties, so it pays to convert your cash into property. As the game
progresses and players acquire more and more houses and hotels, more
and more cash is needed to pay the rents that are charged when you
land on a property that has a lot of them. Some players are forced to
sell their property at discounted prices to raise that cash. So early
in the game, &quot;property is king&quot; and later in the game, &quot;cash is king.&quot;
Those who play the game best understand how to hold the right mix of
property and cash as the game progresses.</p>
<p>Now, let's imagine how this Monopoly® game would work if we allowed
the bank to make loans and take deposits. Players would be able to
borrow money to buy property, and, rather than holding their cash
idly, they would deposit it at the bank to earn interest, which in
turn would provide the bank with more money to lend. Let's also
imagine that players in this game could buy and sell properties from
each other on credit (i.e., by promising to pay back the money with
interest at a later date). If Monopoly® were played this way, it would
provide an almost perfect model for the way our economy operates. The
amount of debt-financed spending on hotels would quickly grow to
multiples of the amount of money in existence. Down the road, the
debtors who hold those hotels will become short on the cash they need
to pay their rents and service their debt. The bank will also get into
trouble as their depositors' rising need for cash will cause them to
withdraw it, even as more and Principles For Navigating Big Debt
Crises 11 more debtors are falling behind on their payments.</p>
<p>If nothing is done to intervene, both banks and debtors will go broke
and the economy will contract. Over time, as these cycles of expansion
and contraction repeatedly occur, the conditions are created for a
big, long-term debt crisis.</p>
</blockquote>
<p>As I correctly understand. Short-term debt cycles are created due to Government (central bank) intervention i.e, contraction of credit. To prevent inflation and then lowering the interest rate to stimulate the economy again. It is virtually postponing deleveraging.</p>
<p>In the Monopoly example, however, there is no central bank controlling inflation.  There is no external help of the government to postpone it. So isn't this end up actually being a depression (long-term debt cycle)?
So how it can be:</p>
<blockquote>
<p>Over time, as these cycles of expansion and contraction, occur
repeatedly, the conditions are created for a big, long-term debt
crisis.</p>
</blockquote>
<p>Based on this, it is somehow a short-term debt cycle, not the long term.
If there is no Government controlling for inflation and excess speculation, isn't the credit just going too big to be maintained, and just going to the point where we enter the peak of the long-term debt cycle, and the economy will become deleveraging itself?</p>
<p>Can someone please explain to me where my logic fails?</p>

CC BY-SA 4.0
2021-10-19T21:25:37.667Z
Can you please clarify your question? 1. What do you mean by isn’t this end up actually being a depression (long-term debt cycle)? Depressions large drops in output not a phases of debt cycle. 2. Also, when you talk about credit being too big to be maintained what do you mean by that? What sort of credit you are even talking about? 3. Dalio is not an economist and the arguments in exerts you post here about central bank intervention creating conditions for long term debt crises are not widely accepted by profession
1muflon1
CC BY-SA 4.0
2021-10-19T21:39:40.060Z
Basically what I'm asking is how this analogy fits into his template about credit cycles short and long term. Answer for 1 and 2: Based on his explanation on this, 3 I understand yet want to know what he means to see another point of view.
Maciej Wakowski
<macroeconomics><nonexpert><debt><business-cycles><public-debt>
Debt cycle theory of Ray Dalio
Maciej Wakowski
# Debt cycle theory of Ray Dalio

(Asked by: username_0 on 2021-10-19)

I recently started reading Ray Dalio's book regarding BIG DEBT CRISES. He compared there, economy to the monopoly board game. There is something I don't quite follow in this analogy.

> If you understand the game of Monopoly®, you can pretty well
> understand how credit cycles work on the level of a whole economy.
> Early in the game, people have a lot of cash and only a few
> properties, so it pays to convert your cash into property. As the game
> progresses and players acquire more and more houses and hotels, more
> and more cash is needed to pay the rents that are charged when you
> land on a property that has a lot of them. Some players are forced to
> sell their property at discounted prices to raise that cash. So early
> in the game, "property is king" and later in the game, "cash is king."
> Those who play the game best understand how to hold the right mix of
> property and cash as the game progresses.
>
> Now, let's imagine how this Monopoly® game would work if we allowed
> the bank to make loans and take deposits. Players would be able to
> borrow money to buy property, and, rather than holding their cash
> idly, they would deposit it at the bank to earn interest, which in
> turn would provide the bank with more money to lend. Let's also
> imagine that players in this game could buy and sell properties from
> each other on credit (i.e., by promising to pay back the money with
> interest at a later date). If Monopoly® were played this way, it would
> provide an almost perfect model for the way our economy operates. The
> amount of debt-financed spending on hotels would quickly grow to
> multiples of the amount of money in existence. Down the road, the
> debtors who hold those hotels will become short on the cash they need
> to pay their rents and service their debt. The bank will also get into
> trouble as their depositors' rising need for cash will cause them to
> withdraw it, even as more and Principles For Navigating Big Debt
> Crises 11 more debtors are falling behind on their payments.
>
> If nothing is done to intervene, both banks and debtors will go broke
> and the economy will contract. Over time, as these cycles of expansion
> and contraction repeatedly occur, the conditions are created for a
> big, long-term debt crisis.

As I correctly understand. Short-term debt cycles are created due to Government (central bank) intervention i.e, contraction of credit. To prevent inflation and then lowering the interest rate to stimulate the economy again. It is virtually postponing deleveraging.

In the Monopoly example, however, there is no central bank controlling inflation. There is no external help of the government to postpone it. So isn't this end up actually being a depression (long-term debt cycle)?
So how it can be:

> Over time, as these cycles of expansion and contraction, occur
> repeatedly, the conditions are created for a big, long-term debt
> crisis.

Based on this, it is somehow a short-term debt cycle, not the long term.
If there is no Government controlling for inflation and excess speculation, isn't the credit just going too big to be maintained, and just going to the point where we enter the peak of the long-term debt cycle, and the economy will become deleveraging itself?

Can someone please explain to me where my logic fails?

**Tags:** macroeconomics, nonexpert, debt, business-cycles, public-debt

> **Comments:**
> **username_1**: Can you please clarify your question? 1. What do you mean by isn’t this end up actually being a depression (long-term debt cycle)? Depressions large drops in output not a phases of debt cycle. 2. Also, when you talk about credit being too big to be maintained what do you mean by that? What sort of credit you are even talking about? 3. Dalio is not an economist and the arguments in exerts you post here about central bank intervention creating conditions for long term debt crises are not widely accepted by profession  
> **username_0**: Basically what I'm asking is how this analogy fits into his template about credit cycles short and long term. Answer for 1 and 2: Based on his explanation on this, 3 I understand yet want to know what he means to see another point of view.  

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## 0 answers

