How the Economic Machine Works

2013, Economics  -  31 min Leave a Comment
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The economy operates like a very simple apparatus. But most of the people can't fathom it - or they don't assent on how it really functions- and this has produced a lot of unnecessary economic agony.

Ray Dalio had a profound urge to distribute his straightforward but realistic instructions on economics. Though they're atypical, they have aided him to predict and dodge the global financial crisis, and have served him pretty well for the past 30 years.

Though the economic system might seem complicated, it functions in a plain, automated way. It's constructed of a few elementary components and a lot of uncomplicated transactions that are done repeatedly countless of times. These transaction agreements are predominantly compelled by human disposition, and they constitute three central forces that fuel the economy: 1. Productivity growth, 2. The Short term debt cycle, and 3. The Long term debt cycle.

We'll examine these three driving forces and how putting those in layers can generate a great pattern for following economic turbulences and evaluating what's occurring right now. All phases and all dynamics in an economic system are fueled by transactions. So, if we can comprehend them, we can appreciate the entire economy. People, companies, corporations, banks and governments all engage in transactions which are basically swapping money and credit for merchandise, services, equities and other monetary assets.

The biggest player (buyer and seller) in this "business" is the government, which has two very crucial components: Central Government that accumulates taxes and allocates money... and a Central Bank, which is very distinctive from other players because it governs the quantity of money and credit in the system.

It accomplishes this by affecting the interest rates and producing new money (literally). Because of this, the Central Bank is a critical influencer in the circulation of Credit. Credit is the most significant element of the economy, and apparently the least known. It is the most important because it is the largest and most unstable component.