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  • Writer's picturericcardo

Populism and decision making – glad somebody taught us


Going through the recently released book by Ray Dalio on debt crises, we thought about the importance of analyzing past experiences and possible future scenarios while making decisions. Considering the period we are going through, we were particularly intrigued by the point on populism in Dalio’s book: we perceived the idea that populism, historically, is not an explicit direct result of adverse times like the long-term crises of 1930 and 2008, it is rather a side-effect of the actions implemented in order to exit them -- even though they may be deemed necessary.

As always, the reader can get his own takes by going through the original material that we link at the end of the post; here, we want to emphasize what we believe to be a good way to plan for actions by going through the root-cause of problems in a technical way. That is something we closely relate to the following:

“If I had only one hour to save the world, I would spend 55 minutes defining the problem”

We will base our discussion on countries that after the burst go through deflationary periods; those countries usually have debt denominated in their own currencies, as the book points out.

In general the reactions from central entities to a bubble’s burst are similar to what we just experienced: printing money, purchasing public-debt and lowering rates; they all aim at restoring an inflationary trend and raising assets prices previously lowered by the burst. Everything has to be carried on with certain equilibrium in order not to create new bubbles.

-- Here, we start a more personal take.

It is crucial to understand who the principal beneficiaries of those actions are. In general they are investors and corporations: while investors gain from the appreciation of their assets, corporations can raise money by selling their stocks at higher prices and borrow at lower rates. However, there is no real direct gain for non-investors or workers, therefore wealth gets concentrated and we experience the rise of populism.

Ultimately, governments and central banks want to promote growth but, again, we have to understand who is benefiting from that growth. In the last decade we have been benefiting from growth but, in disproportionate ways apparently. Higher GDP not necessarily translates in higher personal income for everybody and the trend does not easily invert without central intervention.

An example of a tool governments have in order to redistribute the benefit of the growth is taxation; that is a current hot-topic in western countries. Here is the tough part: some may argue governments should raise taxation and redistribute the collected wealth, others may think lower taxation could promote businesses, entrepreneurship and employment even further. The task is made harder also by the distinction between personal, investment and corporate income. Maybe there is a sweet spot in which governments take with force at high levels where the effect is not disturbing and gradually ease, considering also the cost of living and inflation. Arguments like flat-tax that some governments are using, seem to go in the opposite directions but, we know the answer is not immediate.

The answer is not easy to us but, what we were missing before going through Dalio’s book, was someone putting down a technical thought explaining how we got here and why different classes of society may need different things. When we get to the root-cause of problems it is also easier to understand when our solutions are not working as planned. If we have no real clue of the underlying dynamics, we can only wait, see and hope. By going through the technicalities of the problem, we can understand which parameters and indicators to track in order to monitor the effects of our actions.

To conclude, effective decision making starts with the problem.


Link to Dalio's book web-page:


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