Bridgewater on an ugly inflationary deleveraging

“It takes an awful lot of printing to convert the naturally deflationary forces of a deleveraging into a highly inflationary deleveraging. It rarely happens, but when it does, it happens in a classic manner that is worth noting. In all deleveragings (both deflationary and inflationary) the average maturity of debt is shortened as the risks of either default or inflation rise. As buyers of bonds have less demand for them, central banks lengthen the maturities of their purchases, increasing debt monetization. At first that is beneficial, though it is a modest negative for the currency. If taken too far so that it is out of balance with the deflationary forces of austerity and debt restructuring, it will drive lenders out of the currency and out of longer-duration bonds, which will require the central bank to tighten to stem that flow. This is when bond vigilantes are in control and the central bank has little or no maneuverability. You can tell when that phase occurs because the yield curve steepens with long rates rising. The collapse of the currency pushes inflation, nominal growth and interest rates up, and the currency down, in a self-reinforcing spiral. Bonds and stocks perform terribly in this ugly inflationary environment, particularly in real terms, because the currency in which their cash flows are denominated collapses and inflation rises more than discounted. The collapse in the currency produces high returns in storeholds of wealth like gold, which rise is value in local currency terms, reflecting the decline of the value of the currency in gold terms.”