After “Beautiful Deleveraging” comes “Beautiful Normalization”


Mohammed El-Erian wrote a nice piece in the FT on monetary normalization in the U.S. ahead of the FOMC’s March meeting – his reference to a “beautiful normalization”, used twice in the article — made me think of Ray Dalio’s “beautiful deleveraging”, the idea that with just enough real growth and moderate inflation (hence, nominal income growth), advanced countries may be able to work out today’s debilitating indebtedness problem.  This 30-minute video explains it. Parenthetically, for those of you who have not seen it, this video is entirely worth watching, where Dalio speaks of two credit (or debt) cycles – one short and one long – built around a long term secular productivity trend. What matters in the long run is, of course, the latter, but credit cycles take on a life of their own, end up dominating the productivity cycles, and almost always get us into trouble — as shown in this by-now classic paper. (Here are a shorter version and a video on the paper.)

In a sense, the two concepts are linked: if the world central banks, notably the Fed, manage to stay the course with El Erian’s beautiful normalization, that also means we’ve probably started Dalio’s beautiful deleveraging.  There is no reason why this should not be possible in fact, barring geopolitics, black swans or “unknown unknowns”.