How The Economic Machine Works by Ray Dalio

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How The Economic Machine Works by Ray Dalio 5

Economics 101 -- "How the Economic Machine Works."

Created by Ray Dalio this simple but not simplistic and easy to follow 30 minute, animated video answers the question, "How does the economy really work?" Based on Dalio's practical template for understanding the economy, which he developed over the course of his career, the video breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work and why economic cycles occur.

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💬 Comments on the video

The public school system sucks. I get all of my education on YouTube.

Author — Chu Kim


Less than 5 minues into this and I already feel so much more educated and I have finished a whole page of notes. Oddly enough this is actually fun. Why isn't school like this??

Author — family account


Who's watching in 2020, the deleveraging is happening now.

Author — Im Davis - Personal Finance, Career, & Wealth Tips


This video should be shown in schools before they start to teach the textbook economics !!
Most people don't know how the economy actually works, I was one of them before watching this video, but slowly my understanding of economics is increasing !!!
Thanks RAY DALIO !!! 💐💐💐👍👍👌👌

Author — Digvijay Desai


Can we all take a moment to appreciate the quality of the animation here!! Simply extraordinary

Author — Mugiwara-No Luffy


1:17 Transactions
3:27 Credit
6:19 Cycles
11:58 Short Term Debt Cycle
14:35 Long Term Debt Cycle
16:51 Deleveraging
21:03 Depression
26:18 A Beautiful Deleveraging
29:37 In Closing

Author — Tamotsu IMAI


Great video, got my economic lessons through Mr Rueben Jacob platform, he taught me more about financial savings through his bitcoin mining platform, which i have really been so grateful to ever since.

Author — Debbie Flipping


Who's here in 2020 during the end of the Long-Term debt cycle?

Author — Kevin Schmidt


The only thing they need to show early in school to everybody on the planet a financial education most essential concept

Author — la maison vanderstein


Who's watching amidst the corona crashes of 2020?

Author — Hanna Colbert


The issue with the economic system is that their is a belief that somehow a person can increase their wage with higher productivity. That's not how this works. You can be the best worker in the company, but if the company has no reason to reward you it won't.

Author — Spider Ebola


Addendum: The FED is in private hands. Very likely in the hands of the super rich bankers who founded it.

They can threaten the government (printing money or manipulating interest rates in a way to cause damage to the economy). And through the ability to create money from thin air, they can buy the favors of politicians, lawmakers etc..

Author — Rokuro


Video Summary: Part 1
Economy works in a simple mechanical way. It is made of simple parts and simple transactions that are repeated over and over. Transactions are created by human nature. These transactions create three main forces that drive the economy.
1. Productivity growth
2. Short term debt cycle
3. Long term debt cycle.

Let us start with simplest part of economy. Transaction. Economy is sum of transactions that make it up. Every time you buy something you create a transaction.
Each transaction consists of buyer exchanging money or credit with a seller for goods, services or financial assets. Credit spends just like money. Total spending = Credit+ Money. Total spending is what drives the economy. If you drive amount spent/quantity sold you get the price. This equation is called transaction. If you understand a transaction you understand the economy. Market consists of all buyers and sellers making transactions for the same thing. Eg Wheat/corn/stock market. An economy consists of all transactions in all the markets. If you add total spending and total quantity sold of all all market you call it economy. People, businesses banks and governments all engage in transactions: exchanging money nd credits for goods service and financial assets.
Biggest buyer and seller is Government. It consists of two parts :  
1. A central govt that collects taxes and spends money
2. A central bank which is different from other buyers and sellers, because it controls amount of money and credit in economy. It does by influencing interest rates and printing new money. Central bank is important player in flow of CREDIT. 

CREDIT is most important part and least understood part for economy. It most important because it is biggest and most volatile part. just like buyers and sellers go to market go to market to make transactions. So do lenders and borrowers. Lenders lend money to make more money. Borrowers usually borrow to buy something they cannot afford (House or car) or to invest (start a business). CREDIT can help both lenders and borrowers get what they want.

Borrowers promise to repay amount they borrowed (Principle) plus additional amount called interest. When interest rates are low, borrowing is more as borrowing is cheaper (and vice versa).
When borrowers promise to repay and lenders believe them, CREDIT is created. So credit is created out of thin air. As soon as credit is created it IMMEDIATELY turns into debt.
Debt is an asset to a lender and liability is to the borrower. In the future when borrower repays the loan plus interest, the asset and liability disappear and transaction is settled.

When borrower borrows they can increase their spending. Spending drives the economy. One persons spending is another persons income.
Every dollar you spend, someone else earns more. When someone's income rises it makes lender more willing to lend them money, because now he is more worthy of credit. Credit worthy borrowers have 2 qualities.
1. Ability to repay: Because having a lot of income.
2. Having a lot of collaterals: In event he cannot repay, he has valuable assets that can be sold.

Increased income allows increased borrowing and increased spending. More you borrow, more you spend, more the transactions in the market the bigger the economy.
This self reinforcing patterns leads to economic growth and is why we have CYCLES.

In a transaction you have to give something to get something. How much you get depends on how much you produce. 
Over time we learn, and that accumulated knowledge raises our living standards called productivity growth.
Those who are inventive and hard working raise productivity and living standards faster than who are complacent and lazy.

BUT productivity matters in LONG RUN and credit matters most in short run. This is because the productivity growth does not fluctuate much, so not a big driver of economic swings.
Debt is: Allows us to consume more than we produce when we acquire it and forces us to consume less than we produce it when we have to pay it back.

Debt swings occurs in two big cycles.
Short term debt cycles: 5-8 years.
Long term debt cycles: 75-100 years.

While most people Feel the swings they don't SEE the cycles as they see them to up close and personal: Day by day, week by week (Miss the forest for the tree?
Swings around the line are not due to how much innovation/hard work there is . It is primarily due to how much credit there is.

In an economy credit with only way to increase spending is to increase income by being more productive (Do more work). That is increased productivity is the only way for growth.
Since my spending is other persons income, economy grows only when all participants are more productive.

But because we borrow we have cycles. This is due to human nature and way the credit works. In order to buy something you cannot afford, you need to spend more than you make.
To do this you need to borrow from your future self. Any time you borrow you create a cycle. Credit sets into a motion a mechanical predictable series of events that will unfold in future. Money is what you settle transactions, eg Buy beer from a bartender with cash.
If you buy the same beer using credit you have created an asset and a liability that is you created credit out of thin air.
It is not until you pay the bartender later the asset liability disappear, debt goes away and transaction is settled.
Problem is that what people called money is actually credit.
Credit is US is 50 T USD. Money is ONLY 3 T dollars.
Only way to spend more is produce more.
In economy with credit you can increase spending by borrowing.
More spending, income rises faster than productivity over short term but not over long run.

Author — Tapas 2017


"[...] because the interest rates were already low!"

Author — jbmaru


This is 30 minutes of my time well spent

Author — Joe Rubia


I'm so happy that 2 years ago, when I got a great bump in pay, decided to reduce debt, instead of buy. Now unemployed, it served me well to eliminate some monthly debts

Author — MsTuliplady


Who's here in June - 2020.. we are 23:43 Social Unrest... ooh I wonder what happens next?

Author — G Maan


How to become rich? I understand this from the video.

At the phase when the long term debt cycle is at its peak, you need to sell your assets to generate cash and you need to buy assets when the long term debt cycle is at the lowest.

This way you can earn more by selling assets at a high value and buying assets at a low value. Thus, the economic machine and long term debt cycle won't have a big of an impact on you!

Edit: Please comment if got any better idea than me or if mine is not accurate.

Author — Toon Flix


This video just proves what king Solomon said:

*The servant is borrower to the lender.*

As smooth talking as Ray sounds he is indirectly admitting that the Central Banks control the short and long term debt cycles. While we are meant to see it as a result of "human nature" this is in fact a problem which has been artificially created.

Sadly we have another classical case of the _Wizard of Oz_ occurring with the man behind the curtain. The man behind the curtain being the central government and the central banks operating the levers of this "Economic Machine". Yet how do people fall for this facade? *When the people lose their brains* (Scarecrow = No Education), *lose their hearts* (Tinman = Unfeeling Machine), and *become cowardly* (Lion = Loss of bravery): then the people are easily terrorized by the ravenous flying monkeys and duped by the spells of the wicked witch.

Author — Jeremy Castro


Learned more in 30min video than in 3 years economy class

Author — Elena