In a break from the traditional format of the Creating Wealth Show, today features the audio version of Ray Dalio’s educational and informative video How the Economic Machine Works. Dalio discusses a range of topics in-depth to provide a full overview of how the economic machine functions – just a few examples are the inflation/deflation model, de-leveraging and the difference between credit and actual money.

Key Takeaways

01.24 – The premise for today’s show is to gain an insightful overview of economics, thanks to Ray Dalio.

08.45 – The amount of free, available education options really question why students pay so much for a College degree.

11.27 – Transactions are the lynchpin – they create the three forces which ultimately drive the economy.

14.37 – The main difference between borrowers and lenders is that the former want to buy something they can’t afford, while the latter want to make money into more money.

21.13 – Credit doesn’t necessarily have to be a bad thing; when the purchases can be used to create income it can be a positive, growth-creating technique.

22.53 – Ray Dalio takes us through his interpretation of the inflation/deflation cycles.

26.35 – Debt repayments and changing credit-worthiness are issues which have an effect worldwide.

32.07 – Because you can’t always guarantee that a borrower won’t default on their loan, so debt-restructuring is sometimes a necessary step.

38.00 – Printing money can have a positive effect on the economy, but it has to be done very specifically.

Mentioned in this episode

How the Economic Machine Works by Ray Dalio

 

Tweetables

No-one likes all mediums of communication: Reach a wider audience by creating an audio version of any of your visual content. 

Everyone over-complicates economics  – an economy is simply the sum of the transactions that make it up. 

Maintaining economic and social stability relies on a balance of cutting spending, reducing debt, transferring wealth and printing money. 

Transcript

Introduction:
This show is produced by the Hartman Media Company. For more information and links to all our great podcasts, visit www.HartmanMedia.com

Welcome to Creating Wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before, and a new slant on investing. Fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self-made multi-millionaire who not only talks the talk, but walks the walk. He’s been a successful investor for 20 years, and currently owns properties in 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom. You really can do it, and now, here’s your host, Jason Hartman, with the complete solution for real estate investors.

Jason Hartman:
Welcome to the Creating Wealth Show, this is your host, Jason Hartman and this is episode number 453. Thank you so much for joining me today. This is going to be, out of all 452 episodes prior to this, an episode where I’m kind of taking part of the episode off in a way – not really..but I am going to be introducing a fantastic piece from Ray Dalio. You probably know Ray Dalio’s name – Tony Robbins talks about him a lot in his new book, which by the way, I’m going to do a more in-depth review on. This is the video, and by the way, thank you to Doug for introducing me to this and suggesting it for the show – How the Economic Machine Works by Ray Dalio. About 1.4 million people have viewed this on YouTube; it is just a fantastic overview on the economy.

Here’s what I’ll tell you. I agree with about 93.1% of Ray’s video. In fact, let’s be a little more generous. Let’s say I agree with 95.2% of what he says on the video. Obviously, I’m kind of joking a little bit there, but this is really an excellent overview, and it is amazing to me how many people (yours truly included) can go all the way through school and then even go to College and even people that get graduate degrees in, I don’t want to say economics, because they would probably get it, but if they get an MBA, they don’t necessarily understand the stuff that Ray is going to illustrate here. He just does such a good job of it. Let’s go with 95.2% of it.

There are a couple of things that I don’t think are quite as – well, you’re a regular listener, right? You know what I think? Heck, you’ve had about 452 hours of content, hearing me preach and ramble and complain and whatever, so you know what I think. You’ll know which 4.8% of Ray’s video I don’t agree with, so I’ll let you figure it out.

What else is going on? Well, we’ll get to that in a moment. Guess what I’m doing today. I am fasting. Yes, I have never fasted in my life, and I have a headache. What is it? 6.08pm here in Arizona, and I’ve got to tell you, oddly I’m not really that hungry. That kind of went away after I skipped lunch, and I don’t think I’m going to do this fasting thing any time soon because food is just everywhere! It’s impossible not to think of it. I know that’s not true, unfortunately, for a large portion, and that’s why we should constantly remind ourselves of how grateful we should be. For a large portion of humanity, that is not true. You go to any store, you walk around, there’s restaurants everywhere, there’s food everywhere, there’s food all over my house, and I’m not eating it until tomorrow. I just kind of wanted to see if I could pull this off, so we’ll see how I do. I’ll report on that maybe on Friday’s episode.

By the way, how do you like the pace? The Monday, Wednesday, Friday pace of episode production. We’ve been putting out episodes 3 times a week for several months now. Gosh, it’s a lot of work, folks, so I hope you’re listening to all of them and I hope you’re appreciating it and enjoying it and learning a lot from them. I wanted to remind you – remember that problem we had? We had a challenge about gosh, was it about a month and a half ago now, where our episodes weren’t posting in iTunes, and I think they weren’t posting properly in Stitcher. It was a problem with our RSS feed, and boy! There were some really good episodes there, so I want you to make sure that you go back and listen to those. I believe the episode numbers are 419 to 429. In there we had Jenny Craig, yes, Jenny Craig, and here I am talking about not eating and there’s diet guru, Jenny Craig. We had John Challenger, Senate Candidate Sean Haugh, we talked about property management, we talked to the great Bill Bonner with Agora Financial. There was Sidney Powell on exposing corruption in the Department of Justice, the DoJ, Scott Paul with the Alliance of American Manufacturing and just a bunch of great shows. I mentioned that only twice before, but if you missed those episodes because of our technical difficulties, go back and listen from 423 to 429 and make sure you catch Bill Bonner because wow, he’s really good. Be sure you do that.

I wanted to share this video with you. It’s on Ray’s YouTube channel, which is actually the Bridgewater Hedge Fund’s YouTube channel, and it is just fantastic. I’ve got to tell you, by the way, content creators – any of you content creators who are listening – please, whenever you do stuff in video, make an audio version too. I so much prefer audio. It’s not that I don’t like video; I have a feeling a lot of you agree with me on this. Of course, having that other visual dimension is nice, but it’s not portable, folks. My computer desktop is stacked up with videos that people have sent me and want me to watch, and I just can’t get to them all. The illustrations in Ray’s video are very, very good, so if you have a chance, do go back and watch it. I know a lot of you will never see this though, so I wanted to bring it to you because it’s really awesome. Ray did a great job, and I’m a big fan of this. I hope I can get him on the show. Heck, I had Jim Rogers on the show before a few times; we’ve had some big names – Ray Dalio, we can get some billionaires on here, right?

Anyway, let’s listen in. This is about 30 minutes long, and it’s really just an excellent, excellent overview when we talk about inflation, deflation, stagnation and stagflation for general economic situations. I think that’ll make a lot more sense to you after you listen to this.

One more comment about the plentiful amount of education, and really how it just is so obvious how it calls for a complete redesign of our educational system. With things like Ray’s video, my wonderful podcast and my other great podcasts, and the Khan Academy, which by the way, I’m making a nice year-end donation to from the Jason Hartman Foundation, there’s Wikipedia too. There’s all this great stuff out there. What the heck are kids doing going and getting into $200,000, maybe less, maybe more, of debt going to College. As long as you’re curious and as long as you’re willing to exert some self-discipline like I’m doing by fasting and cleaning out my system today. That’s a lot of self-discipline. I’m not going to do this fasting thing again, I have a headache. Anyway, they said I can drink coffee but with no cream or sugar, just black coffee. We’ll see how this goes, but it takes discipline. I’m getting a little punchy.

What was I saying? OKay. If you have the discipline to go and seek out all of this knowledge that’s out there in the world for free. It’s not like it’s hidden. Look at iTunes University, right? All of these great lectures – I listen to some of them from renowned Professors around the world, you can buy the great courses on Audible. I have purchased many of those and listened to them. There’s just so much out there; it is so different from how it used to be just several short years ago. Like I always say, it is an amazing time to be alive.

Anyway, let’s listen to Ray Dalio, here we go.

Ray Dalio:
How The Economic Machine Works in 30 Minutes

The economy works like a simple machine, but many people don’t understand it, or they don’t agree on how it works. This has led a lot of needless economic suffering. I feel a deep sense of responsibility to share my simple, but practical economic template. Though it’s unconventional, it has helped me to anticipate and to side-step the global financial crisis, and it has worked well for me for over 30 years. Let’s begin.

Though the economy might seem complex, it works in a simple, mechanical way. It’s made up of a few simple parts and a lot of simple transactions that are repeated over and over again a zillion times. These transactions are, above all else, driven by human nature and they create three main forces that drive the economy. Number 1: Productivity Growth, Number 2: The short-term debt cycle, and Number 3: The long-term debt cycle.

We’ll look at these three forces and how laying them on top of each other creates a good template for tracking economic movements and figuring out what’s happening now. Let’s start with the simplest part of the economy – transactions.

An economy is simply the sum of the transactions that make it up. A transaction is a very simple thing. You make transactions all the time. Every time you buy something, you create a transaction. Each transaction consists of a buyer exchanging money or credit with a seller for goods, services or financial assets. Credit spends just like money, so adding together the money spent and the amount of credit spent, you can know the total spending.

The total amount of spending drives the economy. If you divide the amount spent by the quantity sold, you get the price, and that’s it. That’s a transaction. It’s the building block of the economic machine. All cycles and all forces in the economy are driven by transactions. If we can understand transactions, we can understand the whole economy. A market consists of all the buyers and all the sellers making transactions for the same thing. For example, there is a wheat market, a farm market, a stock market and markets for millions of things. An economy consists of all of the transactions in all of its markets. If you add up the total spending and the total quantity sold in all of the markets, you have everything you need to know to understand the economy. It’s just that simple. People, business, banks and governments all engage in transactions the way I just described – exchanging money and credit for goods, services and financial assets.

The biggest buyer and seller is the government, which consists of two important parts: a Central Government that collects taxes and spends money and a Central Bank, which is different from other buyers and sellers because it controls the amount of money and credit in the economy. It does this by influencing interest rates and printing new money. For these reasons, as we’ll see, the Central Bank is an important player in the flow of credit. I want you to pay attention to credit. Credit is the most important part of the economy, and probably the least understood. It’s the most important part because it’s the biggest and most volatile part.

Just like buyers and sellers go to the market to make transactions, so do lenders and borrowers. Lenders usually want to make their money into more money, and borrowers usually want to buy something they can’t afford, like a house or a car. Or they want to invest in something like starting a business. Credit can help both lenders and borrowers get what they want. Borrowers promise to repay the amount they borrow, called principle, plus an additional amount, called interest. When interest rates are high, there is less borrowing because it’s expensive. When interest rates are low, borrowing increases because it’s cheaper.

When borrowers promise to repay and lenders believe them, credit is created. Any two people can agree to create credit out of thin air. That seems simple enough but credit is tricky because it has different names. As soon as credit is created, it immediately turns into debt. Debt is both an asset to the lender and a liability to the borrower. In the future, when the borrow repays the loan plus interest, the asset and the liability disappear and the transaction is settled.

Why is credit so important? When a borrower receives credit, he is able to increase his spending. Remember: spending drives the economy. This is because one person’s spending is another person’s income. Think about it – every dollar you spend, someone else earns, and every dollar you earn, someone else has spent. When you spend more, someone else earns more. When someone’s income rises, it makes lenders more willing to lend them money. Now, he’s more worthy of credit. A credit-worthy borrower has two things: the ability to repay and collateral. Having a lot of income in relation to this debt gives him the ability to repay.

In the event that he can’t repay, he has valuable assets to use as collateral that can be used to be sold. This makes lenders feel comfortable lending them money. Increased income allows increased borrowing, which allows increased spending. Since one person’s spending is another person’s income, this leads to more increased borrowing. This self-reinforcing pattern leads to economic growth and it’s why we have cycles.

In a transaction, you have to give something in order 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. We call this productivity growth. Those who are inventive and hard-working raise their productivity and their living standards faster than those who are complacent and lazy. That isn’t necessarily true of the short-run. Productivity matters most in the long-run, but credit matters most in the short-run. This is because productivity growth doesn’t fluctuate much, so it’s not a big driver of economic swings; debt is. It allows us to consume more than we produce when we acquire it, and it forces us to consume less than we produce when we have to pay it back.

Debt swings occur in two big cycles. One takes about 5-8 years, and the other takes about 75-100 years. While most people feel the swings, they typically don’t see those cycles because they see them too up-close, day-by-day, week-by-week. In this chapter, we’re going to step back and look at these three big forces and how they interact and make up our experiences. As mentioned, swings around the line are not due to how much innovation or hard work there is. They’re primarily due to how much credit there is.

Let’s, for a second, imagine an economy without credit. In this economy, the only way I can increase my spending is to increase my income, which requires me to be more productive and do more work. Increased productivity is the only way for growth. Since my spending is another person’s income, the economy grows every time I or anyone else is more productive. If we follow the transactions and play this out, we see a progression like the productivity growth line.

But because we borrow, we have cycles.This isn’t due to any laws or regulations, it’s due to human nature and the way the credit works. Think of borrowing as simply a way of pulling spending forward. In order to buy something you can’t afford, you need to spend more than you make. To do this, you essentially need to borrow from your future self. In doing so, you create a time in the future that you need to spend less than you make in order to pay it back. It quickly resembles a cycle. Basically any time you borrow, you create a cycle. This is as true for an individual as it is for the economy. This is why understanding credit is so important; it sets into motion a mechanical, predictable series of events that will happen in the future.

This makes credit different from money. Money is what you settle transactions with. When you buy a beer from a bartender with cash, the transaction is settled immediately. When you buy with credit, it’s like starting a bar tab. It’s saying you promise to pay in the future. Together, you and the bartender create an asset and a liability. You just created credit out of thin air. It’s not until you pay the bar tab later than the asset and the liability disappear, the debt goes away and the transaction is settled.

The reality is that most of what people call money is actually credit. The total amount of credit in the United States is about $50 trillion, and the total amount of money is only about $3 trillion. Remember, in an economy without credit, the only way to increase your spending is to produce more, but in an economy with credit, you can also increase your spending by borrowing. As a result, an economy with credit has more spending and allows incomes to rise faster than productivity over the short-run, but not over the long-run.

Don’t get me wrong; credit isn’t necessarily something bad that just causes cycles. It’s bad when it finances over-consumption that can’t be paid back. However, it’s good when it efficiently allocates resources and produces income, so you can pay back the debt. For example, if you borrow money to buy a big TV, it doesn’t generate income for you to pay back the debt. If you borrow money to, say, buy a tractor, and that tractor lets you harvest more crops and earn more money, then you can pay back your debt and improve your living standards. In an economy with credit, we can follow the transactions and see how credit creates growth.

Let me give you an example. Suppose you earn $100,000 a year and have no debt, you are credit-worthy enough to borrow $10,000, say on a credit card. You can spend $110,000, even though you only earn $100,000. Since your spending is another person’s income, someone is earning $110,000. The person earning $110,000 with no debt can borrow $11,000, so he can spend $121,000, even though he is only earning $110,000. His spending is another person’s income, and by following the transactions, we can begin to see how this process works in self-reinforcing pattern. Remember: borrowing creates cycles, and if the cycle goes up, it eventually needs to come down. This leads us into the short-term debt cycle.

As economic activity increases, we see an expansion – the first phase of the short-term debt cycle. Spending continues to increase and prices start to rise. This happens because the increase in spending is fueled by credit, which can be created instantly out of thin air. When the amount of spending and incomes grow faster than the production of goods, prices rise. When prices rise, we call this inflation. The Central Bank doesn’t want too much inflation because it causes problems. Seeing prices rise, it raises interest rates. With higher interest rates, fewer people can afford to borrow money and the cost of existing debts rises. Think about this system of monthly payments on your credit card going up. Because people borrow less and have higher debt-repayments, they have less money left over to spend, so spending slows. Since one person’s spending is another person’s income, incomes drop, and so on and so forth.

When people spend less, prices go down. We call this deflation. Economic activity decreases and we have a recession. If the recession becomes too severe and inflation is no longer a problem, the Central Bank will lower interest rates to cause everything to pick up again. With low interest rates, debt repayments are reduced and borrowing and spending pick up, and we see another expansion. As you can see, the economy works like a machine. In the short-term debt cycle, spending is constrained only by the willingness of lenders and borrowers to provide credit. When credit is easily available, there’s an economic expansion. When credit isn’t easily available, there’s a recession. Note that this cycle is controlled primarily by the Central Bank. The short-term debt cycle typically lasts 5-8 years and happens over and over again for decades. Notice that the bottom and top of each cycle finish with more growth than the previous cycle and with more debt. Why? Because people push it. They have an inclination to borrow and spend more, instead of paying back debt. It’s human nature.

Because of this, over long periods of time, debts rise faster than incomes, creating the long-term debt cycle. Despite people becoming more indebted, lenders even more freely extend credit. Why? Because everyone thinks things are going great. People are just focused on what’s been happening lately, and what’s been happening lately? Incomes have been rising, asset values are going up, the stock market roars, it’s a boom. It pays to buy goods, services and financial assets with borrowed money. When people do a lot of that, we call it a bubble, so even though debts have been growing, incomes have been growing nearly as fast to offset them. let’s call the ratio of debt to income the debt-burden. So long as incomes continue to rise, the debt-burden stays manageable. At the same time, asset values soar. People borrow huge amounts of money to buy assets as investments, causing their prices to rise even higher. People feel wealthy, so even with the accumulation of lots of debt, rising incomes and asset values help borrowers remain credit worthy for a long time.

This obviously cannot continue forever, and it doesn’t. Over decades, dent burdens slowly increase, creating larger and larger debt repayments. At some point, debt repayments start growing faster than incomes, forcing people to cut back on their spending. Since one person’s is another person’s income, incomes begin to go down, which makes people less credit-worthy, causing borrowing to go down. Debt repayments continue to rise, which makes spending drop even further. The cycle reverses itself. This is the long-term debt peak. Debt-burdens have simply become too big. For the United States, Europe and much of the rest of the world, this happened in 2008. It happened for the same reason it happened in Japan in 1989 and in the United States back in 1929. Now the economy begins de-leveraging. In a de-leveraging, people cut spending, incomes fall, credit disappears, asset prices drop, banks get squeezed, the stock market crashes, social tensions rise and the whole thing starts to feed on itself the other way.

As incomes fall and debt repayments rise, borrowers get squeezed. No longer credit-worthy, credit dries up and borrowers can no longer borrow enough money to make their debt repayments. Scrambling to fill this hole, borrowers are forced to sell assets. The rush to sell assets floods the market at the same time as spending falls. This is when the stock market collapses, the real estate market tanks and banks get into trouble. As asset prices drop, the value of the collateral borrowers can put up drops. This makes borrowers even less credit-worthy. People feel poor and credit rapidly disappears. Less spending, less income, less wealth, less credit, less borrowing and so on – it’s a vicious cycle. This appears similar to a recession, but the difference here is that interest rates can’t be lowered to save the day. In a recession, lowering interest rates works to stimulate borrowing.

However, in a de-leveraging, lowering interest rates doesn’t work because interest rates are already low, and soon hit zero percent, so the stimulation ends. Interest rates in the United States hit zero percent during the de-leveraging of the 1930s, and again in 2008. The difference between a recession and a de-leveraging is that in a de-leveraging, borrowers’ debt-burdens have simply gotten too big and can’t be relieved by lowering interest rates.

Lenders realized that debts have become too large to ever be fully paid back. Borrowers have lost their ability to repay and their collateral has lost value. They feel crippled by the debt. They don’t even want more. Lenders stop lending, borrowers stop borrowing. Think of the economy as being not credit-worthy, just like an individual. What do you do about a de-leveraging?

The problem is debt burdens are too high and they must come down. There are four ways this can happen. One: People, businesses and government cut their spending. Two: Debts are reduced through defaults and restructurings. Three: Wealth is re-distributed from the haves to the have-nots. Finally, four: the Central Bank prints new money. These four ways have happened in every de-leveraging in modern history. Usually, spending is cut first. As we just saw, people, businesses and even Governments tighten their belts and cut their spending so that they can pay down their debt. This is often referred to as austerity. When borrowers stop taking on new debts and start paying down old debts, you might expect the debt burden to decrease. But the opposite happens.

Because spending is cut and one man’s spending is another man’s income, it causes incomes to fall. They fall faster than debts are repaid, and the debt burden actually gets worse. As we’ve seen, this cut in spending is deflationary and painful. Businesses are forced to cut costs, which means less jobs and higher unemployment. This leads to the next step – debts must be reduced. Many borrowers find themselves unable to repay their loans, and a borrower’s debts are a lender’s assets. When a borrower doesn’t repay the bank, people get nervous that the bank won’t be able to repay them, so they rush to withdraw their money from the bank.

Banks get squeezed and people, businesses and banks default on their debts. This severe economic contraction is a depression. A big part of the depression is people discovering much of what they thought was their wealth isn’t really there. Let’s go back to the bar.

When you bought a beer and put it on a bar tab, you promise to repay the bartender. Your promise became an asset of the bartender, but if you break your promise, if you don’t pay him back and essentially default on your bar tab, then the asset he has isn’t really worth anything. It has basically disappeared. Many lenders don’t want their assets to disappear and agree to debt restructuring. Debt restructuring means lenders get paid back less or get paid back over a longer period of time or at a lower interest rate than was first agreed. Somehow, a contract is brokered in a way that reduces debt. Lenders would rather have a little of something than all of nothing. Even though debt disappears, debt restructuring causes income and asset values to disappear faster, so the debt burden continues to get worse. Like cutting spending, debt reduction is also painful and deflationary.

All of this impacts the Central Government because lower incomes and less employment means the Government collects fewer taxes. At the same time, it needs to increase its spending because unemployment has risen. Many of the unemployed have inadequate savings and need financial support from the Government. Additionally, Governments create stimulus plans and increase their spending to make up for the decrease in the economy.

Governments’ budget deficits explode in the de-leveraging because they spend more than they earn in taxes. This what’s happening when you hear about the budget deficit in the news.  To fund their deficits, governments need to either raise taxes or borrow money, but with incomes falling and so many unemployed, who is the money going to come from? The rich.

Since governments need more money and since wealth is heavily concentrated in the hands of a small percentage of the people, Governments naturally raise taxes on the wealthy, which facilitates a re-distribution of wealth in the economy from the haves to the have nots. The have-nots who were suffering begin to resent the wealthy haves. The wealthy haves being squeezed by the weak economy, falling asset prices and higher taxes begin to resent the have nots. If the depression continues, social disorder can break out. Not only do tensions rise within countries, they can rise between countries, especially debter-incredited countries. This situation can lead to political change that can sometimes be extreme. In the 1930s, this led to Hitler coming to power, war in Europe and depression in the United States. Pressure to do something to end the depression increases.

Remember: most of what people thought was money was actually credit. So when credit disappears, people don’t have enough money. People are desperate for money, and you remember who can print money – the Central Bank can.

Having already lowered its interest rates to nearly zero, it’s forced to print money. Unlike cutting spending, debt reduction and wealth redistribution, printing money is inflationary and stimulative. Inevitably, the Central Bank prints new money out of thin air and uses it to buy financial assets and government bonds. It happened in the United States during the Great Depression, and again in 2008 when the United States Central Bank, the Federal Reserve printed over $2 trillion. Other Central Banks around the world that could, printed a lot of money too. By buying financial assets with this money, it helps drive up asset prices which makes people more credit-worthy. However, this only helps those who own financial assets.

You see, the Central Bank can print money, but it can only buy financial assets. The Central Government, on the other hand, can buy goods and services and put money in the hands of the people, but it can’t print money. In order to stimulate the economy, the two must co-operate. By buying government bonds, the Central Bank essentially lends money to the Government, allowing it to run a deficit and increase spending on goods and services through its stimulus programs and unemployment benefits. This increases people’s income as well as the government’s debt. However, it will lower the economy’s total debt-burden. This is a very risky time. Policy makers need to balance the four ways that debt-burdens come.

The deflationary ways need to balance with the inflationary ways in order to maintain stability. If balanced correctly, there can be a beautiful de-leverage.

You see, a de-leveraging can be ugly or it can be beautiful. How can a de-leveraging be beautiful? Even though a de-leveraging is a difficult situation, handling a difficult situation in the best possible way is beautiful; a lot more beautiful than the debt-fueled unbalanced excesses of the leveraging fix. In a beautiful de-leveraging, debts decline relative to income, real economic growth is positive and inflation isn’t a problem. It is achieved by having the right balance. The right balance requires a certain mix of cutting spending, reducing debt, transferring wealth and printing money so that economic and social stability can be maintained.

People ask if printing money will raise inflation. It won’t if it offsets falling credit. Remember, spending is what matters. A dollar of spending paid for with money has the same effect on price as a dollar spent and paid-for with credit. By printing money, the Central Bank can make up for the disappearance of credit with an increase in the amount of money. In order to turn things around, the Central Bank needs to not only pump up income growth, but get the rate of income growth higher than the rate of interest on the accumulated debt.

What do I mean by that? Basically, income needs to grow faster than the debt grows. For example, let’s assume that a country going through a de-leveraging has a debt to income ratio of 100%. That means that the amount of debt it has is the same as the amount of income the entire country makes in a year. Think about the interest rate on that debt. Let’s say it’s 2%. If debt is growing at 2% because of that interest rate and income is only growing at about 1%, you will never reduce the debt-burden. You need to print enough money to get the rate of income growth above the rate of interest.

However, printing money can be easily abused because it’s so easy to do and people prefer it to the alternatives. The key is to avoid printing too much money and causing unacceptably high inflation, the way Germany did during its de-leveraging in the 1920s. If policy makers achieve the right balance, a de-leveraging isn’t so dramatic. Growth is slow, but debt-burdens go down. That’s a beautiful de-leveraging.

When incomes begin to rise, borrowers begin to appear more credit-worthy and when borrowers appear more credit-worthy, lenders begin to lend money again. Debt burdens finally begin to fall. Able to borrow money, people can spend more. Eventually, the economy begins to grow again, leading to the reflation phase of the long-term debt cycle. Though the de-leveraging process can be horrible and handled badly, if handled well, it will eventually fix the problem. It takes roughly a decade or more for debt-burdens to fall and economic activity to get back to normal, hence the term ‘lost decade’.

In closing, of course the economy is a little bit more complicated than this template suggests. However, laying the short-term debt cycle on top of the long-term debt cycle, and then laying both of them on top of the productivity growth line gives a reasonably good template for seeing where we’ve been, where we are now and where we’re probably headed. In summary, there are three rules of thumb that I’d like you to take away from this.

First: Don’t have debt rise faster than income because your debt-burdens will eventually crush you.

Second: Don’t have income rise faster than productivity because you’ll eventually become uncompetitive.

Third: Do all that you can to raise your productivity because in the long-run, that’s what matters most.

This is simple advice for you and it’s simple advice for policy makers. You might be surprised that most people, including most policy-makers don’t pay enough attention to this. This template has worked for me, and I hope it will work for you.

Thank you.

Outro A:
I’ve never really thought of Jason as subversive, but I just found out that’s what Wall Street considers him to be.

Outro B:
Really? Well how is that possible at all?

Outro A:
Simple, Wall Street believes that real estate investors are dangerous to their schemes because the dirty truth about income property is that it actually works in real life.

Outro B:
I know. How many people do you know, not including insiders, who created wealth with stocks, bonds and mutual funds? Those options are for people who only want to pretend they’re getting ahead.

Outro A:
Stocks and other non-direct traded assets are a losing game for most people. The typical scenario is you make a little, you lose a little, and spin your wheels for decades.

Outro B:
That’s because the corporate crooks running the stock and bond investing game will always see to it that they win. This means, unless you’re one of them, you will not win.

Outro A:
And, unluckily for Wall Street, Jason has a unique ability to make the everyday person understand investing the way it should be. He shows them a world where anything less than a 26% annual return is disappointing.

Outro B:
Yup, and that’s why Jason offers a one-book set on Creating Wealth that comes with 20 digital download audios. He shows us how we can be excited about these scary times and exploit the incredible opportunities this present economy has afforded us.

Outro A:
We can pick local markets untouched by the economic downturn, exploit packaged commodities investing and achieve exceptional returns safely and securely.

Outro B:
I like how it teaches you how to protect the equity in your home before it disappears and how to outsource your debt obligations to the government.

Outro A:
And this set of advanced strategies for wealth creation is being offered for only $197.

Outro B:
To get your Creating Wealth Encyclopedia Book One, complete with over 20 hours of audio, go to www.JasonHartman.com/Store.

Outro A:
If you want to be able to sit back and collect checks every month, just like a banker, Jason’s Creating Wealth Encyclopedia series is for you.

Outro:
This show is produced by the Hartman Media Company, all rights reserved. For distribution or publication rights and media interviews, please visit www.HartmanMedia.com or email [email protected] Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax, legal, real estate or business professional for individualized advice. Opinions of guests are their own and the host is acting on behalf of Platinum Properties Investor Network Inc. exclusively.

 

 

Episode: CW 453: How The Economic Machine Works with Ray Dalio - Founder of the Bridgewater Associates Investment Firm

Guest: Ray Dalio

iTunes: Stream Episode

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