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I'm reading Ray Dalio's "An In-Depth Look at Deleveragings", and at one point he's talking about central banks providing liquidity and credit support, and he states:

"This produces relief and, if done in the right amounts, allows a deleveraging to occur with positive growth. The right amounts are those that a) neutralize what would otherwise be a deflationary credit market collapse and b) get the nominal growth rate marginally above the interest rate to tolerably spread out the deleveraging process."

I'm not sure I understand point b here. Could someone explain the interplay between nominal growth rate and nominal interest rate, and how they affect the deleveraging process?

Thanks!

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I have not read the text in question (other than the quote), but I would guess that his logic runs as follows. If we are discussing the government, one common analytical concept is the primary fiscal balance - the fiscal deficit excluding interest payments. If the primary fiscal balance is zero, the change in government debt will equal interest costs. The assumption is that a primary balance of zero is in some sense neutral (that assumption could be questioned), nominal debt levels will grow at the nominal rate of interest (since the government needs to borrow to cover the interest payment).

If we then look at the debt/GDP ratio, we see that is the nominal interest rate is the same as the nominal growth rate of GDP, the ratio will be unchanged under that circumstance. However, if the nominal interest rate is less than nominal GDP, the ratio would fall.

However, it is unclear to me why growth rates being “marginally above”interest rates makes anything other than a marginal difference. That might be better explained elsewhere in his text.

There is a literature on the concept of fiscal sustainability, where the relationship between growth rates and interest rates is covered in nore depth. Trying to summarise that theory appears to be beyond the scope of this particular question, but that is a key word you could use to search for more details.

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b) get the nominal growth rate marginally above the interest rate to tolerably spread out the deleveraging process.

I will share what I understood with you. Maybe someone can clarify if I am right or not.

If nominal growth rate > interest rate it means (since it says "marginally") it will help people to gradually deleverage theirselves, since while they are growing, the interests do not grow in the same proportion (but lower). The potential consequence is an elimination of debt (deleverage) in the long term.

Maybe it helps.

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