How the Economic Machine Works

How the Economic Machine Works

2013, Economics  -   79 Comments
Ratings: 8.42/10 from 530 users.

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.

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Joseph Stupey
2 years ago

This is the religion of the world which runs on money. The banks are the real places of worship. Whenever I walk into a bank, I feel like I should genuflect.

concerned citizen
2 years ago

This seems like Banker Propaganda:
The part they leave out is that every time they print money, that dilutes the entire money supply – effectively stealing from each person in the economy! Inflation is theft.
Watch one of the documentaries about the Federal Reserve to learn how we've been enslaved by this system for our entire lives.

3 years ago

DUSTUP: Taking from the rich! What a joke! If we're all taking from the rich then why are the majority of Americans living from paycheck to paycheck? You sound absurd!
The "rich" thieves have been slowly but surely cutting wages for decades and expecting more work for employees.
Capitalism is the central problem because many regulations have been lifted (Thanks President Clinton for revoking the Glass-Steagall Act) and it's monopolized by a private company called the Federal Reserve Bank.
Capitalism incites greed, irresponsibility, racism, sexism...without regulations and protection for average workers it is "legally" allowed to steal by misrepresenting itself to the consumer.
No one has ever been or will ever have worked enough (mentally or physically and independently) to be able to be either a multimillionaire or a billionaire...let alone a multimillionaire.
THEY somehow get to determine what's a minimum wage. Who says? It's simply theft on a grand-scale.

Sumit Raghani
6 years ago

It makes deep sense in a grand scheme of things way. And it makes total sense too if you consider mature economies. It may not seem absolutely coherent to us when it comes to unpredictable governments and climate changes and warring times, but do the essence of what he is saying I feel can be reflected in those cycles too, and Ray definitely must have factored that in too, btw note to people who disagree - he is indeed the Founder of one of the biggest hedge funds ever Bridgewater associates..
this is superlative stuff

Randy Buchholz
6 years ago

A big issue is using the word Credit when meaning Debit. Being the author is the head of a big hedge fund the whole fiat-credit systems is a good thing.

Here is how the economic machine really works: Its a big Moving and Storing business. Take anything people believe has tangible value (like gold) and call it an asset. Create a restricted club. Implement a system where members are allowed to assign debt to people as a multiplier of the assets they start with. Call debt credit because that sounds more positive. Create a club rule, where if you give a member debt, they can call it credit, and a let them call credits assets. Now the other member has assets they can create multiplied debt from it. Create a business to move and store debt/credit, and charge people to move and store debt/credit. Nice. Now you don't care about the value of an asset, you only care that there are a lot of them to move and store. You can even take the original thing of value out of the system. No one will notice.

7 years ago

The author is Ray Dalio, head of Bridgewater Associates, the world's largest hedge fund.

David Poo Pants
7 years ago

Many mouths and no listeners.
Be happy that a starting block is available for those that have no clue.

7 years ago

The devious Socialist-Communists (obama a puppet of the owners of the Fed being the owners of the CorproGovtMedia complex) love to point to corrupt Capitalism as the cause of all problems. What has corrupted it away from the founding sound system? Both Corporatism( which is another term for Fascism) and Socialism. We know the purpose of Corporatism, the name explains it. What is the purpose of Socialism? The well indoctrinated (emotionally propagandized) by the CorproGovtMedia complex (in this case socialist Schools and Media companies) want to believe it is beneficial method to help the less fortunate. FALSE.

First, the central bank owners create a bubble big enough to cause a painful downturn (recession or worse) when they slow the easy money that created the bubble.

Second, Socialism is used as a vote buying mechanism to those in pain. The I want it all now generation (mortgages, car, boat, school, etc loans) would rather point to the rich than point in the mirror and welcome relief by taking from the rich. Which Sort Of works in a lame fashion not solving anything, until the money runs out, which it ALWAYS does.

End Result: The Big Corporatists being the cronies, minions of, as well as the owners of the central bank, meet success in eliminating competition for their entrenched corporations in 2 ways. Economic downturn gets rid of many. Socialist govt IS central control which dictates winners and losers via regulation (for the benefit of all, of course!).

So, all you socialists, whether you want to admit it or not are the Marxist-Leninist-Stalinist stated useful idiots which bring about your own enslavement and dependency as easy as a fiddle playing on your emotions as well as your selfish greed (racking up debt rather than racking up savings, then taking someone else's savings making the middle class poor; the truly rich avoid taxes).

If you gathered together independently from political parties and saw to it decent appropriate people were running for all offices from all parties in numbers, we wouldn't have a greedy power hungry group of central bankers and their minions running the show. No central bank, No fractional reserve banking, only transactions twixt free people. Then the only way to get more is to produce more, be a more valuable employee, or buy low sell higher (is it evil to buy apples in bulk and sell them one at a time at a profit for their trouble? Where you have the choice Not to buy or buy from another? If so, then Capitalism is evil. Clearly those who think so believe they should get paid to sit on their backside). That is true Capitalism, to entities choosing freely to exchange value. Harder for the I want it all now crowd, but MUCH fairer than any form of Collectivism(communism, socialism, fascism) what the usa is now, where the rich get richer and the poor get poorer. The usa ceased being a capitalist economy long ago. Clearly the people were smarter when the schools were non Govt. Anything govt does such as school IS by definition SOCIALISM.

Oh poor them, what about the unfortunates that I as a socialist am willing to give the shirt off of everyone else's back to help? You emotionally played suckers will never pull you heads out. Decent people are generous to the truly needy. Americans give more out of their pocket, AFTER taxes than the rest of the world. The problem is, the socialists are Not those. They feel guilty about it. They want to believe everyone is like their cheapness so vote to steal from everyone. Taxes for things you don't approve of is theft despite any BS way you want to spin it for your corrupt head. Govt is always happy to expand and grow because the power hungry are drawn to govt. "Here let us take care of what YOU should be doing yourself." And your laziness is happy to let them until they become the monster you voted for.

In summary, Socialism is all about eliminating competition to the big boys and to bring them even more dough as you become less free. (More taxes = Less freedom) They end up with the tax revenue the govt spends ...while govt skims more and more for itself while only dribbling a pittance to the dupes who keep voting for this. Brilliant.

7 years ago

Income tax in the US all goes to pay interest on the National Debt. It sucks wealth away from the middle class to the top 1%. Yes, the Federal Reserve is a private Bank looking after private interest. Fiat currency (dollar) has no intrinsic value... it needs to become money which has a true value backed by a commodity like Gold.

8 years ago

Does this mean that we are never not in debt

8 years ago

15 minutes if you play at double speed.

8 years ago

I like the nice little "black box" called the Fed... that prints money, controls interest (by flipping a switch)... oh and is not a part of the federal government...

I look at modern capitalistic economies like this: We all live in a dream and there are a small class of people that generate what we should be dreaming. This is all due to group physiology of authoritative figures... which are heros of the dream.

Freaking fairy dust...

And this is best we have?

Jordan Watkins
9 years ago

This is nothing more than Socialist propaganda bulls**t

9 years ago

Good documentary. It is simplistic but you have to start somewhere ("Economics 101"), and leaving out all the 'how it really is' details, 'how it should be' debates etc. makes the topic more accessible to many people. Sure, you could/should know more, and finding out the simplifications made for this doc should be part of the fun. As suggested by reading the other comments here, many of the further details of Economics are highly debated.

9 years ago

im sorry, but this documentary is so simplistic it is divorced from reality, it assumes all money is equal, all debt liabilities are equal, all borrowers and lenders are equal. it ignores power structures both social and geopolitical, and international influences. it spams meaningless catch phrases at you. It should be made clear this is an explanation of a process, with a lot of speculation added (especially when it starts going into taxing the rich -> inferences to nazi germany... that's just... =_= no comment). it is NOT an explanation of the economy. I'm not denouncing the capitalist process, but this explanation is so simplistic it clouds judgement, and is a crutch. This can only be seen as the first step in understanding economic processes. People who stop trying to find out more at this step are simply being misled.

Karim Amghar
9 years ago

OMG i really like it, in the beginning i suspected a simple and useless explanation, because as i knew the economy is far more complicated if you want to study it in its details, the micro/macro and a theoretical knowledges are necessary for that, but for a general idea for people who are studying something else that's really a good explanation, so thank you for that !! Peace :)

9 years ago

Rule number 2, "Don't have your income rise faster than your productivity" because you will eventually become uncompetitive.

I don't get it. How income rising influence or affect our competitiveness?? Anyone please help me out.

From Chiang Mai, Thailand

Simon Thorpe
9 years ago

Very nice explanation. Ray Dalio nearly says everything you nee to understand what's going on. But there's one thing missing. We need the money in the system to be created with no debt. This can be done by what Positive Money calls "Sovereign Money Creation" - the central bank provides debt free money directly to central government which can then use that money to pay for vital work that is in the public interest - house building, repairing the transport infrastructure, renewable energy etc. It can also be in the form of direct payments to citizens - an unconditional basic income. The critical point is that this money creation has to have no debt attached.

Finally, to prevent too much money getting into the system (and causing inflation), the Central Bank could be given the power to remove excess money by imposing a universal financial transaction tax on every electronic transaction. This is not a tax to raise money for the government, but simply to mop up any excess. The value of that tax could be minuscule because transactions are so high (at least $5 quadrillion a year in the US). All it would need to do is remove just enough extra money to keep the money supply at the right level.

It would be great if the team could add these extra ideas to their beautifully presented documentary.

9 years ago

what an simple way to explain .. great :)

9 years ago

People like to buy stuff, make mistakes, experiment, create and follow ideas. Those things I mentioned are the real building blocks to sustainable economy for the environment and for mankind but it requires money at the same time for people to do those things. And a way we can enable this is to create non-obligitory credit. Off course all you gold standard freaks will scream at your computer something like "HYPER-INFLATION" but if we spent more time learning how to issue money freely without inflationary repercussions than telling people that we have to suffer sh*tty years of recession because we like to think that we're balancing some metaphorical book somewhere - we'd be a little closer to progress.

9 years ago

from 50 random facts about gold:
The value of gold has been used as the standard for many currencies.
After WWII, the United States created the Bretton Woods System, which set
the value of the U.S. dollar to 1/35th of a troy ounce (888.671 mg)
of gold. This system was abandoned in 1971 when there was no longer enough
gold to cover all the paper money in circulation.d

The world’s largest stockpile of gold can be found five stories
underground inside the Federal Reserve Bank of New York’s vault and
it holds 25% of the world's gold reserve (540,000 gold bars). While it
contains more gold than Fort Knox, most of it belongs to foreign governments.f
The gold standard has been replaced by most governments by the fiat (Latin for “let it be done”) standard. Both Thomas Jefferson and Andrew Jackson strongly opposed fiat currency. Several contemporary economists argue that fiat currency increases the rate of boom-bust cycles and causes inflation.d
aswell as:
Only approximately 142,000 tons of gold have mined throughout history. Assuming the price of gold is $1,000 per ounce, the total amount of gold that has been mined would equal roughly $4.5 trillion. The United States alone circulates or deposits over $7.6 trillion, suggesting that a return to the gold standard would not be feasible. While most scholars agree a return to a gold standard is not feasible, a few gold standard advocates (such as many Libertarians and Objectivists), argue that a return to a gold standard system would ease inflation risks and limit government power.d

9 years ago

Two realities transform our discussion of the economy into merely an academic exercise. The first is that the important markets are manipulated such that any picture of a business cycle no longer applies. If you don't believe me, then explain how demand for gold can sky-rocket and the price drops. The second reality is peak oil. Our economy is based on the availability of cheap oil and when that goes away, our economy goes with it. You won't hear about these realities on the nightly news and because of that they will hit the unprepared like a slap in the face with a cold fish.

9 years ago

And when you go beyond the usual economic generalizations you find still another very subtle problem, that is, while some people will consume all they have today, without thought for the morrow, there are others who will not consume all their production today, but rather save some for the morrow. When inevitably a crisis arrives, and distress becomes apparent, resulting in losses of jobs and income, those who have saved will still possess purchasing power. Voila, the haves and the have nots...... But few economists or book writers are among those without purchasing power, so they may well discount this phenomena. But notice, when a crisis occurs, the old timers who have witnessed these same problems understand the consequences .....

9 years ago

This film is totally clueless. The idea that the central bank "literally" produces new money by changing the interest rate, for instance, is completely wrong. The central bank's interest rates only influence the rate of money creation by the private banks, by encouraging or discouraging loans (which produce new money). It doesn't always work as intended and it's not a direct control, its just setting up conditions that usually encourage private banks to increase the money supply.

The film clings to capitalism yet denies its main and primary engine, the very thing that allowed it to come into being - reserve banking. Without which there would be very little capital investment at all. Capitalism's secret to success is its ability to pull capital from the future, to generate it with nothing more than the promise of its success. In effect its capital that brings itself into being, from simply the idea of its existence. Without it, modern capitalism can't exist.

Kansas Devil
9 years ago

This is how the economy is supposed to work. Politics prevents that balance from happening. Obama suggested a balanced approach several years ago. That got nowhere. No beautiful deleveraging allowed.

9 years ago

And now children lets watch Part 2, where International Trade will be taken into account rendering the conclusion in Part 1 moot.
Also, the brutal economic disparity created by the Cantillon Effect and the inevitably massive Inflation in the LR resulting from the relentless Seigniorage will be duly discussed.
Happy future kids of the West :)

Hector Velez
9 years ago

The most important thing left out of this scheme is where does it all begin. Labor creates all wealth therefore the basis of the whole economic system.

9 years ago

Hm, according to the graph at 1:15, if we simply eliminate all loan from our lives we would have stabile constant growth. Who needs banks then? This doc is trying to convince us otherwise (that loan is an absolute must for economy) and then they show the graph that disproves them. Currently, one generation suffers, one thrives but regardless of anything the bankers get rich. It is a nice little scam they got going on.

OK, now let’s get serious. Without bank loans, to start a business, you would have to have investors (and they would own most of your business) which is kind of bad. With bank loan you basically get an affordable investor (only takes few percent of your business). The catch is: investors should take risks but banks do not (they are protected) – if the business fails they squeeze you and squeeze you and basically make you a slave (you and your family). It is a very nice scam they got going on.

Janeen Clark
9 years ago

ill tell you how it works in a sentence. make the slaves feed and house themselves. make the system detailed enough so they have no time to focus on self development and education and finally in every area possible use the concept of an enemy image any place where unity between people is possible so they can never form groups intelligent enough to make changes. (the only real groups of people are large music concerts 700,000 + people)

9 years ago

Seems like a great Video for a 9th Grader. Unfortunately, some of us are past that stage. Do I agree with everything? NO! I agree with about 10% of it because its pretty much not including a lot of factors about credit and money Ex: Bank's and Fed.
Further more, this has no information about serious Economic drivers as Energy (oil, natural gas) nor Precious Metals (Gold and Silver)
I have to think of this video as an IRS training requirement program and nothing more.

9 years ago

Seems a bit of a simple documentary. I am pretty convinced one day the human species will ditch money all together, and come up with a more sustainable system.

9 years ago

..."is human nature!" ha ha ha

9 years ago

Spot the severe flaws in the conventional economy against Islamic system.

9 years ago

The problem with this video is that the dollar is also debt/credit. The Fed purchases bonds and international countries "lend" to us. The real economic shift hasn't occurred because the dollar is the world's currency. If it was some other currency, the US would be Haiti.

9 years ago

This is total bs.. Identifies the bank that prints money for the government as a federally owned institution when in reality it is the federal reserve that prints U.S money and it is a privately owned business..

9 years ago

This doco seems to be explaining why boom/bust cycles happen, but to say that it's explaining "How the Economic Machine Works" is a bit of a stretch in my humble opinion.