How the Economic Machine Works

How the Economic Machine Works, According to Ray Dalio

This excellent video crossed my desk recently. It’s produced by legendary US investor Ray Dalio who is giving back to society by teaching economic principles.  I really encourage you to take 30 minutes to watch this. It’s well worth the time.

Here is a quick summary:

Using human nature and history as a guide, Dalio reduces the complex global economy down to just three major forces that must be understood.

THREE MAJOR FORCES

Dalio says this model has guided Bridgewater for over 30 years, and that there are three major forces that shape the economy: 

  1. Productivity Growth
    Productivity growth, which is measured as a percentage of GDP, grows over time as knowledge, technology, and innovations help to raise our productivity and living standards.
  2. Short-Term Debt Cycle
    Usually lasting 5-8 years, the short-term debt cycle is a repeating pattern that occurs as credit expands and contracts.
  3. Long-Term Debt Cycle
    Usually lasting 75-100 years, the long-term debt cycle usually ends in a period of extreme deleveraging, where global debt is unsustainable and asset prices fall.

 

Based on Dalio’s model and his concerns about the abuse of money printing by central banks, it’s clear why he routinely holds gold for about 5-10% of his personal portfolio, as well.

RULES OF THUMB

The video ends with Dalio giving three rules of thumb – takeaways that make sense for individuals, companies, and policymakers.

Rule #1. Don’t have debt rise faster than income
Your debt burdens will eventually crush you.

Rule #2. Don’t have income rise faster than productivity
You’ll eventually become uncompetitive.

Rule #3. Do all that you can to raise productivity
In the long run, that’s what matters the most.

With an estimated net worth of $17 billion, it seems Dalio’s rules could be worth keeping in mind.