Sunday, March 05, 2017

Economics 101 for the rest of us

Warren Buffet and Carl Icahn are familiar investors.  Fewer people may know Ray Dalio.  Mr. Dalio founded an investment firm 40 years ago called Bridgewater Associates.  With $160 billion under management, Bridgewater runs one of the largest hedge funds in the world.
Bridgewater founder Ray Dalio, Bridgewater website

I recently discovered (after about 3 million other people) a thirty minute YouTube video that Mr. Dalio produced to explain fundamentals of what he refers to as the economic machine

This video, which he narrates, has been translated into several languages and viewed over 3,200,000 times.  The content begins slowly with financial concepts that could be embraced by most eighth graders, but progresses to explain the primary levers that policy-makers use to manage and stimulate the economy.  You can find it here.  

There are numerous lessons cleverly and clearly explained here.  Example: I hadn't appreciated why economists seem obsessed with Wage Growth until I watched this simple animated video.  (The importance of wage growth has less to do with the oft-used and sometimes politically-charged phrase, "income inequality" and more to do with the masses ability to consume and thus deflate credit bubbles).

Also, you may come away thinking differently about the notion of Credit, which Mr. Dalio asserts, "...is the most important part of the economy and probably the least understood".  Finally, what Mr. Dalio refers to as a "beautiful deleveraging" is the type of soft landing we all pray for to avert the "social disorder" some of us (like me) have worried about for years.  The antidote, according to Mr. Dalio, is for policy makers to apply the correct mix and emphasis to each of the four economic forces illustrated below. 

YouTube video, "HOW THE ECONOMIC MACHINE WORKS" by Ray Dalio
Spending cuts, are generally what people think of when they hear about "austerity" measures exercised by government, individuals and businesses, to lower spending on goods and services.  The image second from the left refers to a combination of debt defaults and debt restructuring by and between banks, businesses and individuals.  Wealth redistribution occurs primarily through higher taxation on upper income Americans.  Finally, the money-printing image refers to Federal Reserve purchases of government bonds and other financial assets ($2T since the Great Recession).
So what's the correct mix and emphasis of lever-pulling required for a soft landing?  Perhaps a more prescriptive video from Mr. Dalio, to address that question will appear on this same platform at http://www.economicprinciples.org.