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Notes on "How The Economic Machine Works" by Ray Dalio

10/17/2018

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  • The economy:
    • Productivity growth
    • Short-term debt cycle
      • Expansion
        • Spending increases and prices start rising (inflation)
      • Central bank rises interest rates
      • Borrowing becomes more expensive
      • Spending slows
      • Incomes drop
      • Deflation
      • Recession
      • Lower interest rates
    • Long-term debt cycle
      • Asset values sore
      • People feel wealthy
      • Rising incomes
      • Debt burdens increase and starts growing faster than income
      • Spending slows
      • Debt burdens become too big
      • Deleveraging
        • Cut spending
        • Asset prices drop
        • Stock market drops
      • Solution
        • Cut spending
        • Reduce debt
          • Debt restructuring
        • Redistribute wealth
          • Tax the wealthy
        • Print money
          • Inflationary
          • Buys financial assets and government bonds
          • Drives up asset prices
          • Avoid printing too much money
      • Balance inflationary and deflationary
  • Transactions:
    • Every time you buy something
  • Total amount of spending drives the economy
  • Market: all the buyers and all the sellers
  • Total spending / total quantity = the economy
  • The biggest buyer is the government
  • Central government: collects taxes and spends money
  • Central bank: controls the amount of money and credit in the economy
    • Printing new money
    • Adjusting interest rates
  • Credit: the biggest and most volatile part of the economy
    • Credit = Debt
    • Credit helps increase spending
    • Another person's spending is another person's income
  • Because we borrow, we have cycles
    • Borrowing from your future self
  • Income needs to grow faster than debt growth
  • Don't have income rise faster than productivity
  • Productivity is what matters most in the long-run
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