How The Economic Machine Works by Ray Dalio

How The Economic Machine Works is a video made by Ray Dalio, Founder of Bridgewater Associates. With this simple model, he summarized the complex operation of the economy. He said that although the economy seems complicated, it works mechanically and simply.

How The Economic Machine Works demonstrates that, starting from the most specific part of the economy—transactions, it pointed out the importance of credit, the short-term debt cycle, the long-term debt cycle, inflation, and the recovery process of the economy.

Here is the summary of some of the main content in the video.

Transaction:
The transaction is a simple thing. It is the buyer giving money (or credit) to the seller and the seller giving goods, services, or financial assets to the buyer in exchange. An economy is simply the sum of the transactions that make up it.

Credit and why Credit is so important :
Credit is generated by the belief that the borrower can pay in the future. As soon as created, the Credit immediately turns into a debt. Debt is both the lender's property and the borrower's payable.

Why is Credit so important? When a borrower receives Credit, he can increase his spending. Spending leads the economy because one's spending is the other's income. When you spend more, people will earn more; when you get more, you can increase your Credit. As such, that will lead to economic growth.

The short-term debt cycle
When you need to spend more than your income, you will borrow Credit to pay. In the future, you will spend less going to reimburse it. Thus Credit creates cycles.

When Credit is readily available, the economy expands. When Credit is not readily available, the economy will shrink. Note how this cycle is controlled primarily by the central bank. This short-term debt cycle lasts 5 to 8 years and happens over and over.

The long-term debt cycle
People tend to borrow more debt and spend more instead of repaying debt. That is the nature of man. When this happens over time, the debt grows faster than income, creating a long-term debt cycle.

Demand for repayment increases faster than wages, forcing people to spend less. Because one person's expenditure is someone else's income, the income decreases, making people less creditworthy, and causing borrowing to go down. Repayments continue to rise, causing spending to fall further, and the cycle reverses.

Four ways to decrease the debt burden
* Businesses and governments cut their spending
* Restructure the debt
* Wealth redistribution
* The central bank prints new money.

Timestamp of video
0:00 – intro
0:35 – Transaction
3:30 – Credit
5:05 – the important of credit
6:05 – The Cycle
9:10 – Credit vs. money
12:00 – the short term debt cycle
12:30 – the inflation vs.deflation
14:35 – the long term debt cycle
16:50 – deleveraging

Thanks for watching!