I'm writing this in response to a Barron's piece about Ray Dalio. I'm writing this because I'm puzzled about the 3 strategies for deleveraging that I heard about over the years. To me, there is only one strategy. (I'm not sure if the Barron's article is behind their paywall. If so, you can also find a snipplet quoted at Frank Voisin's blog.)
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In the distant land of Asgard, the currency unit was "cans of sardines". And sardine hunting was Asgard's major economical activity.
One day, an entrepreneur called Loki visited the Central Bank of Sardines. He wanted to borrow 1/2 of the nation's sardine reserve, which had been accumulated as a preparation for the next ice age. He had this grand vision. He wanted to use the proceeding to employ many engineers and scientists to create an automatic sardine harvesting machine.
Loki eventually got his loan. But on his way back to his office, he bumped into a gigantic green monster and all the sardines were lost.
Now, after this incidence, Asgard didn't have enough sardines for the nation to go through the ice age. What could they do? What were the options?
Could they "inflat" their way out? They could repackage each can with only 70% of original volume of sardines, and they could repeat doing this every year. That inflated the number of cans. But, it didn't address Asgardians' hunger... 30% less sardines was 30% stomach unfilled.
Could they go on austerity?
Well, I think austerity = hunger.
It's apparent that the only sensible option was to ramp up their sardine hunting or improve the yield (by really inventing a harvest machine!) to make up for the lost.
This means they had to grow, to improve their productivity.
Did inflation have a place? Probably. If Asgard labour and goods were cheaper, they could probably sell more stuff to other nations and thus accelerated the build up of their sardine reserve.
Did austerity have a place? Probably. For one thing, sardines (i.e. money) should not flow through Loki's hands anymore. In other words, austerity should be applied selective at the places where waste would occur.
But, without growth, austerity and inflation were useless.
* * *
I don't have any rigorous economic theory to back up my story. I am pretty sure you can poke holes in this "analysis". I am looking forward to comments on the fallacies of my reasoning.
(Don't ask me why "Asgard" and "sardine". I just had these random thoughts in my head while I was writing this.)