Via Business Insider:
As part of his mission to explain how the economy works, Dalio has put together a neat, new 30-minute animated video called "How the Economic Machine Works," where Dalio narrates his big-picture view of the economy.
"I feel a deep sense of responsibility to share my simple but practical economic template," Dalio says. "Though it's unconventional, it's helped me to anticipate and sidestep the financial crisis, and it has worked well for me for over 30 years.”
Points:
- Forces that drive the economy.
- Productivity growth.
- Short term debt cycle.
- Long term debt cycle.
- Transactions. Buyer exchanges cash or credit with seller for goods and services.
- Cash + credit = total spending. Total spending drives the economy.
- Total spending / total quantity sold = price.
- Market. Buyers and sellers making transactions for same thing, e.g., wheat, gold, autos, etc.
- All the markets = the economy.
- Biggest buyer = government = central government + central bank.
- Credit. Most important part of economy and least understood because biggest and most volatile.
- Debt. When credit is created.
- Creditworthy borrower = ability to repay + collateral.
- Bad when it finances overconsumption that can’t be paid back.
- Good when it leads to increased income to pay back debt.
- Cycles.
- Productivity matters in the long run.
- Credit matters in the short run.
- Short term debt cycle = 5-8 years.
- Long term debt cycle.
- Leveraging = 50+ years.
- Depression = 2-3 years.
- Reflation = 7-10 years.
- Deleveraging is not recession. Debt burden has become too large to relieve by lowering interest rates. Borrowers and lenders start to realize debt is too large to be paid back. Remedies contain own risks:
- Cut spending.
- Reduce debt through default and restructuring.
- Redistribute wealth from haves to have-nots.
- Print money.
- Rules of thumb.
- Don’t let debt rise faster than income.
- Don’t let income rise faster than productivity.
- Do everything to raise productivity.
