Ray Dalio has a video clip on youtube called “How the Economic Machine Works: In 30 Minutes“. It’s actually 31 minutes long – which is a significant chunk of time. And even if you’d happily while away double that on Candy Crush – that tends to happen in small chunks and snippets. It’s difficult to locate a clear 31 minutes where you could just sit and watch a youtube clip.
I like it because it feels very “pluralist”. There’s not one school of economic thought at play here: it’s a bit Austrian (because it sounds a lot like Austrian Business Cycle theory); it’s a bit Monetarist (because credit); it’s almost Keynesian (because of all the consuming driving everything); and it’s definitely behaviouralist (people are fooled and/or wilfully blind).
How Ray Dalio Sees The World
- We learn stuff.
- We buy stuff.
- One man’s income is another man’s spending.
- You can spend money that you’ve already earned (cash), or money that you hope to earn (credit).
- Extrapolate that, and you have a world of cycles.
- But generally, we ignore (or we’re ignorant of) the cycles until the tide turns against us.
Because we learn stuff, it means that we’re constantly learning new ways to make things, and we’re also discovering new things, so there is a grand ascension toward more awesome.
In economic terms, this is productivity growth:
But we don’t just spend more because we’re more productive. We also spend more because we borrow from our future selves. And borrowing from our future selves means that we’re spending more than we earn; and therefore, at some point, we’re going to have to spend less than we earn in order to pay back the credit. Therefore, you get cycles.
Before we get to the cycles, one more important question because we’re dealing with credit: who really controls it?
And they do so in two ways:
- Interest rates (they increase interest rates to reduce credit and spending and inflation; they decrease interest interest rates to increase credit and spending and be all stimulative); and
- Money creation (when interest rates become ineffective).
Obviously, the interest rate manipulation is the general status quo, and the money creation happens in emergencies.
According to Ray Dalio, this creates, and is also the result of, two types of debt cycle:
The Short Term Debt Cycle:
Where credit expands and contracts with the Central Bank trying to control inflation through interest rates.
The Long Term Debt Cycle:
Where average credit expands over time until it destabilises (like the 1929 crash and the 2008 financial crisis), leading to a giant deleveraging of the economy.
When you put it all together, you get a template for the giant cycles that economies go through.
The next question, then, is how to deal with deleveragings?
The Beautiful Deleveraging
There are only so many ways to address a deleveraging:
- Government austerity – which causes unemployment and deflation.
- Debt-restructuring – which is deflationary because there is still a general reduction of credit.
- Redistribution of wealth – caused by increasing taxes on the wealthy, which can apparently also be deflationary (if not revolutionary)
- Printing Money – which is inflationary, and hyperinflationary if you’re not careful.
So on the one hand, you can deal with the debt burden by spending less – but this can be a vicious cycle of deflation causing unemployment causing more deflation causing more unemployment.
Or you can deal with the debt burden by inflating it away.
Or both. Better to do both. Because the deflationary effects of austerity, restructurings and redistribution can be offset by the larger money supply.
That is: the Central Bank must create enough actual money to replace the credit that is being lost by the other three methods.
This is the beautiful deleveraging: a good balance between monetary and fiscal policy.
I think it’s worth considering.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Rob Carter October 5, 2014 at 11:33
1/ You got it here “So on the one hand, you can deal with the debt burden by spending less – but this can be a vicious cycle of deflation causing unemployment causing more deflation causing more unemployment.”
Keynes covered both as people can’t comprehend he meant Austrian as part of it viz its what you “stimulate” and what you “austerity hit” makes the fix. USA Particularly don’t play 60 wars since WW II save that prostituting for the Press keep the $50 trillion or more in today’s dollars and :Stimulate” with Whitlam Australia 1970’s style of REDS “Regional Employment Development Scheme” a domestic sort of IMF take the saved war cash and catch-up the infrastructure backlog by direct hire from the enemployed and recover part from welfare not paid. by the welfare you then don’t pay. They get more cash and domestic consumption grows more demand and more demand grows more production and investment and employment and trickle up profits. Do not pay contractors like Bechtel, Dillingham, Halliburton, Boeing, Northrop, privatized prisons, privatized hospitals etc. Do your own. End war corp as final Washington and Eisenhower speeches warned they are bloodsucking evil. Profiteers to a dime.
Use under employed Local Government maintenance plant, and technical supervision engineers etc. Give States and Provinces the hand up as IMF does for Nations so well. With strings attached for Austerity/stimulus simultaneously as keynes meaning. they don’t want to read because Milton Freidman and Nixon clique were so evil Keynes killers Nixon-Shockers.Reply
2/ Your earlier 75-100 year wave is incomplete refer Prof. Kondratiev 2 50 year waves of recess then depression, to the 100 year cycle is more astute.
Rob Carter October 5, 2014 at 11:45
I guess you are also interested in the accusation of FED tapes disclosed Cosiness, let me answer all good authorities and investigators stay cozy to find the deal evidence for others we tip to Prosecute Fed FOMC don’t tell staffers that they tip all the other Concerned-Agencies” who have so far recovered $250bn in fines and compo even more so their coziness must have worked and deserve to be here complimented, they have done their only 3 legalized mandatory statutory tasks since 1911 thats 103 great success fixes and still cozy to find sins. They have done naught to themselves be carpeted at POTUS, SCOTUS, or Lizzy Warrens stirring committee..
RGVC well I see you slack investigators asking such questions:- David Merkel, like Mauldin, Justin Fox, Carmen Segara, Sen. Elizabeth Warren & dozens of other interested non-lawyers. What can’t you read Law? The Fed Governing Act 1913, as amended 1927, 1933 and since still has their Board task with 12 member FOMC and they have just the original 3 Statutory objectives. The mandatory rules ~ Th e U.S. Congress established this from 1933 for 20 years and in 1927 was extended indefinitely unless Congress changed it or they did some seriously illegal thing etc,. with the three key objectives (the 3 statutorial tasks) for monetary policy
i. Maximum employment,
ii. stable prices,
iii. moderate long-term interest rates
In the mandatory rules ~ RGVC sees only see the 3 above, I see no single rule or even side-comment mention as to how they should do that job best:- do you?
Well here’s the answer nothing says they can’t be cozy (even accept gifts) with or from their member banks. OK to stay cozy as CIA & NSA well know and likewise all inquiry agencies, authorities, Private Eyes as well know the best way to know the facts is to stay cozy with the crooks (Which every bank and Capitalist that ever was is a little crooked or more) great they have done their job well thanks and shut up Senate, Congress, POTUS & SCOTUS know this so they shut up on the noise makers. Lets look at the FOMC Modus Operando they forgot to tell staff whistleblowing tape recording Carmen Segara:-
1. For the i. Maximum employment, RGVC if I were them under oath I would answer we have tried our best, we have no power to halt Automation stealing 3mn jobs in the past 17 years or 50mn jobs since WW II (In prorate population growth terms. What we have done is assure the maximum funds stability are insured by SRD’s in our control, we can’t assure they tell truly what that should be. That’s the responsibility of other Agencies. And we understand they have acted on our quiet tip-offs by UK first then USA “Concerned Agencies” following to wit near $250bn received from offending banks:- They have all settled charges with proper authorities leaving nothing for FOMC to recommend for SCOTUS prosecutions. Viz.,
The Concerned Agencies ~ There may well be Dozens will sue banks Frauds & new laws ACF (Accounting Control Frauds) wil. In time be amended/muddled for suitable Fines and/or compensations as the said appropriate agency decide (They are not under FOMC management or oversight) they are Government Regulators like us at FOMC & FED. Only the agency FED/FOMC are the ones so close to Banks now they just don’t prosecute, or control anything, but their own pays. ~ Exactly as John-Mauldin/Jim-Fox/Carmen-Segarra/Elizabeth-Warren and dozens of others are on about. Our job is done and done well to see $250bn recovered since 2007 Bear Stearns first case started the action.
For information the Concerned Agencies are :-
Ø (FSA) ~ UK ~ Financial Services Authority ~…en.wikipedia.org/wiki/F inancial_Services_Authority ~ The Financial Services Authority (FSA) was a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom between 2001
Ø (FINRA) ~ USA ~ Financial Industry Regulatory Authority en.wikipedia.org/wiki/Financial_Industry_Regulatory_Authority In the United States, the Financial Industry Regulatory Authority, Inc. (FINRA) is a private corporation that acts as a self-regulatory organization (SRO).
Ø (FHFA) ~ USA ~ Federal Housing Finance Agency ~ ..en.wikipedia.org/wiki/Federal_Housing_Finance_Agency The Federal Housing Finance Agency (FHFA) is an independent federal agency created as the successor regulatory agency resulting from the statutory merger of the …
Ø (SEC) ~ USA Securities and Exchange Commission ~ en.wikipedia.org/wiki/U.S._Securities_and_Exchange_CommissionThe U.S. Securities and Exchange Commission (SEC) is an agency of the United States federal government. It holds primary responsibility for enforcing the federal …
Ø (FERC) ~ USA Federal Energy Regulatory Commission ~ en.wikipedia.org/wiki/FERC ~ The Federal Energy Regulatory Commission (FERC) is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates …[no RGVC isn’t crazy the frauds can be prosecuted by such other agencies and Private or Corporate Citizens ~ Specially as is being debated by Elizabeth Warren & FED’s Whistleblowers etc. Viz., In July 2013 US energy regulator the Federal Energy Regulatory Commission (FERC) ordered Barclays to pay £299m fine penalty for attempting to manipulate electricity market in the US. The fine by FERC relates to allegations in December 2008 Gold price manipulation ~ In May 2014 the Financial Conduct Authority fined the bank £26 million over systems and controls failures, and conflict of interest in relation to the bank and its customers in connection to
Ø (FCA) ~ UK ~ Financial Conduct Authority – http://www.fca.org.uk Website of the Financial Conduct Authority. Information for consumers and regulated firms.
2. For Fed/FOMC the mandatory task is the ii stable prices, Again as the mandatory rule ~ RGVC for one doesn’t one see single rule or even side-comment mentions, how they should do that job best. So I would answer We can’t tell other government agencies to prevent automation/mechanization when their entitled judgment is there will be no damage to employment because it reduces cost and hence production/consumption at lower prices that the rising wage minimums would allow. Sure we see out 1911, 27,33, and later governments are foolish to believe this lie, and also fail to see their 2 conflicting Statutory binds they have FOMS and FED in, VIZ., Maximum employment -V- stable price which conflict on the method of stable prices in a wage rise if Maximum employment is to be preserved by us.,
3. For tye final mandatory & Statutory for iii moderate long-term interest rates the mandatory rules ~ we don’s see a single rule or even side-comment mention as to how we should do that job best would be the answer were I RGVC the one under oath. In any case we do just that as our main corrective influence alongside the interest free money we are ordered by POTUS, SCOTUS, & Congress to vary we merely advise them as to how our 12 investigators see necessity from time to time. NB: One of the concerned Agences for the Bank defrauded Electricity Suppliers was FERC who recovered from Barclays £299m fine penalty for attempting to manipulate electricity market in the USA.
QED Case dismissed rules Judge RGVC.Reply