How the Economic Machine Works by Ray Dalio

Currently, I am reading Money Master the Game by Tony Robbins and it is a fantastic book(I’m excited to keep reading and be able to provide you with a book review in the coming days). In chapter 4, he is discussing asset allocation and interviews many top money managers.

One of the money managers Tony interviews in MONEY is Ray Dalio, Chairman and Chief Investment Officer of Bridgewater Associates, a hedge fund which has $160 billion in assets under management. Bridgewater Associates has two main funds, the Pure Alpha fund and the All Weather fund, both of which have made investors very happy over the past 25 years (so happy that Bridgewater had to stop taking on new clients as they became too big).

Ray Dalio

Ray Dalio is becoming a role model of mine. He is constantly asking himself, “What don’t I know, and what should I do about it?”and looking to find the answers. Ray Dalio put together a presentation on the economy: How the Economic Machine Works, and it was very beneficial for my understanding of, well, how the economy works. I want to share it with you; I have attached the YouTube video later down in the post. First, a picture of Tony Robbins and some key points and takeaways.

Main Points from the Video

Some key points and takeaways to watch out for in the video:

There are three things that drive the economic machine:
- Productivity Growth
- The Short-Term Debt Cycle
- The Long-Term Debt Cycle
A market is all buyers and sellers of a certain market
The economy is the sum of all transactions in all markets
The central bank of a government control credit.
- The central bank can modify interest rates and print money.
- Credit is the most important part of the economy.
The cycle of economic growth is as follows:
- Income -> Borrowing -> Spending -> Productivity -> Income
Productivity matters most in the long term
Credit matters most in the short term
Short-term credit cycles last 5-8 years, while long-term credit cycles last 75-100 years
Anytime you borrow, you create a cycle
Spending drives pricing,
- If spending increases and prices rise, inflation occurs and the central bank can step in raise interest rates.
- If spending decreases and prices fall, deflation occurs and the central bank can lower interest rates or print money.
Debt burden is very important to be aware of when assessing the health of an economy.
- If debt burden is high, individuals or corporations will have to divert income to debt repayment which will result in less spending, which will result in less income for others, which will result in less wealth, which will result in less credit, which will lead to less income, and so on and so forth.
  - If prices decrease and deflation occurs as a result, this is what is commonly referred to as a “depression”.
After a “depression” starts, deleveraging occurs, i.e. debt burden reduction.
- There are a few ways to accomplish this:
  - Cut Spending – this will lead to less income and possibly bring on deflation
  - Reduce Debt – through defaults or restructuring, will possibly bring on deflation
  - Redistribute Wealth – leads to less growth and stability, will possibly bring on deflation.
  - Print Money – Use new money to buy assets, this will only help those who hold assets and will possibly bring on inflation.
It is a central bank’s job to balance deflation and inflation.
- Spending is what matters most in inflation
3 Rules of Thumb
- Don’t have debt rise faster than income
  - Debt will crush you
- Don’t have income rise faster than productivity
  - You will become less competitive
- Do all you can to raise productivity
  - Productivity is what matters most in the long run