New York (HedgeCo.Net) - The founder of hedge fund investment firm Bridgewater Associates and one of Time magazine’s 100 most influential people in the world in 2012, has put together a video explaining economics, “How The Economic Machine Works.”
ValueWalk has transcribed the 30 minute video, which includes interesting but simple tidbits such as, “The economy works like a simple machine but many people don’t understand it or they don’t agree on how it works, and this has led to a lot of needless economic suffering.”
“I feel a deep sense of responsibility to share my simple but practical economic template. Though it’s unconventional, it has helped me to anticipate and to side step the global financial crisis and it has worked well for me for over 30 years. Let’s begin. Though the economy might seem complex, it works in a simple mechanical way, it’s made up of a few simple parts and a lot of simple transactions that are repeated over and over again a zillion times.” Dalio says.
BridgeWater embraces a corporate culture that encourages transparency and the elimination of the decision making hierarchy, and in 2011 was the world’s largest hedge fund company with $122 billion in assets under management.
On credit, Dalio said, “Productivity matters most in the long run, but credit matters most in the short run. This is because productivity growth doesn’t fluctuate much, so it’s not a big driver of economic swings, debt is, because it allows us to consume more than we produce when we acquire it and it forces us to consume less than we produce when we have to pay it back.”
“Debt swings occur in two big cycles. One takes about five to eight years and the other takes about 75 to a hundred years, while most people feel the swings, they typically don’t see them as cycles because they see them too up close, day by day, week by week. In this chapter, we’re going to step back and look at these three big forces and how they interact to make up our experiences. As mentioned, swings around the line are not due to how much innovation or hard work there is, they’re primarily due to ho much credit there is. Let’s for a second imagine an economy without credit, in this economy, the only way I can increase my spending is to increase my income which requires me to be more productive and do more work. Increase productivity is the only way for growth. Since my spending is another person’s income, the economy grows every time I or anyone else is more productive. If we follow the transactions and play this out, we see a progression like the productivity growth line but because we borrow, we have cycles. This isn’t due to any laws or regulations, it’s due to human nature and the way that credit works. Think of borrowing as simply a way of pulling spending forward. In order to buy something you can’t afford, you need to spend more than you make. To do this, you essentially need to borrow from your future self. In doing so, you create a time in the future that you need to spend less than you make in order to pay it back, it very quickly resembles a cycle. Basically, anytime you borrow you create a cycle. This is as true for an individual as it is for the economy.”
Watch the whole video:
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