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posted on 21 December 2016

Documentary Of The Week: How The Economic Machine Works

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Econintersect: Ray Dalio has produced a simple (but not simplistic) and easy to follow 30 minute, animated video which 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.

Ray Dalio is an American businessman and founder of the investment firm Bridgewater Associates, one of the world's largest hedge funds.

Econintersect note: This is largely a correct discussion, but one thing that may be confusing: Dalio mixes together discussion of the general economy (macro economics) with talk about how individuals and companies are effected by money, credit and debt (micro economics). This may be confusing if the listener does not remain alert.

He talks about "printing money" without giving much specific information. An important thing that he doesn't explain is that the reason peaks occur in the business cycle is primarily the result of debt repayment plus interest being a greater amount than the original loan. If additional money accrues as profits to some in the economy, and any of those profits are "saved" and not "spent", even more money is removed from the "working" economy.

These are the reasons the debt burden increases, even with substantially all investments of loans being "wise". There eventually arises a situation where debt cannot grow anymore to cover the continually accumulating shortfall which leads to what Dalio calls "deleveraging". He represents deleveraging to be, in part, "printing money". He doesn't really give much detail about this process and misses the point that, if there were a better balance of money and credit to begin with, the business cycle could be a much smoother curve than we have traditionally experienced. People and firms could still make bad decisions and poor investments, bankruptcies could still occur, but their occurrence as part of a systemic event would be much less frequent.

Source: YouTube

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