How economic machines works by Ray Dalio YT
First the simple part of the economy translation
people governments Business all involve in this
transition
Money goods services Finalcial assets
are being traded by people government Business
with the help of money eradit
the biggest buyer the seller of this translation
is the government which consist of 2 parts
Central bank central government
It controls the amount of the
collect faxes money eradit in the economy
spendsmoney 97 does it by influencing interes
rate printing new money
thus it's the most important
factor for radit in economy
whatiseradit as like buyers sellers go to the market
so do lenders borrowers
lenders wanna make more money from the money theyhas
borrowers wanna buy something which they cannot
afford
Principle
interest
Brrowers
lenders
when interest rates are high it's difficult to do
this translation
Remember Spending drives the economy oneperson's
spending is another person's income thus move incresing
spending increasing in income
this simple self reinforcement leads to self
economic growth that's why we have cycles
over time we learn that accumulated into our living
standadrs but it isn't true in short run it matters in
long run but radit matters most in the short run
this is because productivity growth doesn't flaetuatenue
runs75 100years
for most people it's invisible cause they see them too
close dayby day week by week
Let's do some thoughtexperiment Let's imagine a world on
this way I can only increase
ifhave cycles
Bank
adit isn't necerybad which only create cycles it'sbad
when it finances bad transfiction which can't be paid back
later
borowerings creates cycles if cycle is going up it
eventually needs to come down this leads into the short
term debt cycle cause increase in spending is create
by era dit a
repo rate re raporate
when the amount offendingtinconnegnow faster
than the production of goods prices rise It's called
Inflation the central bank doesn't want too much
inflation seeing prices rise it raises interest rates
when people spends less pricesgo down it causes
Deflation
when economic activity decreases we call it
Ression
when ression become too severe inflation is no
longer a problem the central bank lower the interest rate
to cause everything to pickup again we see another
expansition
In short term debt cycle only happen when lenders
borrowers participate
the short term debt cycle typically
get controlled by central banks lasts
5 8 years happens over over
again in Decades But notice the
bottom top of each cycle finnish
with more growth in previous
cycle
why
because people push it instead of payingback previous debt
they take new debt cause they things think things are
going great due to this over the long run periods of
time debt rises faster than income creating the long
term debt cycle
Despite people are indebted lenders even more
freely extend eradit why people things are going great
even though debt burden continues to raise fasten
income also raises so as long as income continue to
raise the Debt Burden stays managable
at the same time asset value
Soar or TN people buy asset
with more more borrowing money
casaing increasing asset price
people feel wealthy so even with the accumilation with
the lots of debt raising income asset values help
borrowers remain eradit worthy for along time
but it cannot go forever for decades
cause debt repaymentgrowing faster than income forcing
people to cut back on their spending
Since one person's spending is another
persons income forcing people to cut back on their spend
Since one person's spending is another
person's income it begains to go down which makes people
less creditworthy causing borrowing togo down which
makes spending drops even further
the cycle revise itself
7
longterm debtpeg Now economy needs
o deleveraging
outspending income fall eradit disappere asset price
drop
Bank getstock market
squeezesocial crashes
bing.aethoIRyer tertifaises
Less burrowing Less spending Less income
Less eradit Less wealth
this is the same as reeission but the difference here
is interest rate has already of
the difference between deleveraging a
recessionis in de leveringing the debt burden has gotten
to big can't be relief by lowering interest rate
Now How can an economy be deleverged
cut spending reduce wealth
debt Re distribution
Print Money
cut spending doesn't work cause one person's spending
is another income
for instance you go to a bar when you buy a beer
put it in a bar tab you promise to repay the
bartender your promise become a asset to bartender
ifyou don't keep your promise the asset isn't worth anyth
many lenders don't want their asset toget disappree
agree to debt me stacking means they paid back lesson
in a longer time frame after all its better to have
something than nothing cause it means they don'tget
paid much it takes time to get repaid somehow
a contract is broken in a way
even though debt disapper it
causes income asset value to disappear faster
So the debt burden continue to get worse
all this causes problem to central government
unemployment lower interest rate means collect
fewer taxes
at the same time it needs to increases
it's spending because unemployment has raisen dueto
inadequate savings need finnalcial support to government
Now this government have to create
stimulusplans increase their spending to make up for
their decrease in the economy
This is the game of budget deficit you hear in
newso
u
spend
earn
Now to make up the budget deficit government need
more money How money are gonna come from
raise tax
y borrow money
cause income is low
unemployment is high
now who are the money come from
The Rich towards rich from poor Rich
leave country if possible
if this contineus the social
disorder can break out this lead to hitlar come into
e warinf Depessionon
now people need money who can give money
the central bank why
cause what people thought money is actually
credit unlike all previous ways what people thought
money printing is inflationary
By Buying asset with new printed money it helps
asset value to go up people more eradit worthy
However this ienly help who have finalcial asset
Icentral bank an only print money but only can
buy financial asset on the other side central
government buygoods services to put money to
people
now this 2 hasto work together
By buying government bonds the central bank
essentiallylends money to the government allowing it to me
a deficit increase spending on goods services
through it's stimulus programs unemployment
benefits
This increase people's income as well as
government debt
Printing new money
cut
spending
wealth
redistribution
reduce debt
u
n
inflationary
Deflationary
r