
How the Economic Machine Works (2014) - jeffreyrogers
http://www.economicprinciples.org/
======
avz
This is a very good explanation for the debt cycles and the role of banks,
gov't, central bank et al.

There is one point it doesn't explain, though. It appears that the severity of
the debt cycles can be reduced and social stability improved if the economy
weren't fueled by credit to such a degree ($3 trillion in money, $50 trillion
in credit, wow). So why have so much lending? The video does briefly answer
that question with the need to finance economic investments (i.e. things that
can improve future income, e.g. a tractor).

That is only a partial answer. The narrower version of the question remains:
why do we need so much lending for consumption? Is there any benefit at all in
financing consumption with debt? It does increase present spending and
economic activity, but only at the expense of reducing future spending and
hurting future economic activity.

~~~
alecco
> why do we need so much lending for consumption? Is there any benefit at all
> in financing consumption with debt?

The benefit is for corporations. And allegedly that trickles down to
people/employees. But that's obviously not the case for this current recovery
in US. It's a sham.

~~~
refurb
_The benefit is for corporations._

I don't think that's true. Low interest rates benefit everyone as the cost of
lending decreases.

~~~
jes
Do low interest rates benefit savers? For example, senior citizens trying to
live off the interest earned from their savings?

~~~
refurb
In the short-term it certainly benefits consumers who are using debt to
finance their consumption (e.g. houses, cars).

In the long run (at least for the housing market) the benefit goes away as
housing prices adjust to reflect lower borrowing costs.

------
falava
Ray Dalio wikipedia article:

[https://en.m.wikipedia.org/wiki/Ray_Dalio](https://en.m.wikipedia.org/wiki/Ray_Dalio)

------
crimsonalucard
Some things he says in this video bug me.

1\. "Printing money doesn't always cause inflation." \-- Printing money causes
inflation under all cases unless money is literally destroyed at the same rate
it is printed.

A loan temporarily inflates the economy until it is paid off. By replacing
credit with printed money you turn the "temporary inflation" into permanent
inflation.

2\. "Increase your productivity faster then your income." \-- Are you kidding
me? I can't speak for everyone but most people in society want to be rich and
well off. That means achieving income that is far greater then what is humanly
productive. Even Elon Musk as hard working as he is cannot achieve his level
of income off of his own productivity alone. He had to build his wealth off
the shoulders of others (aka employees). By telling people to be productive
for less income he's basically telling people to work harder and don't ask for
a raise.

If you're not being paid an income equivalent to the amount of work you do,
then the extra value generated by your work will, of course, go to your
employer. This increases income disparity and decreases consumer buying power.

Here's what I advise instead: Increase your productivity but demand that your
income increases at the same rate. Be paid what you're worth. It helps the
economy.

3\. He fails to elucidate where income comes from and thus fails to model one
very important aspect of the economy: The money cycle. The economy isn't just
income coming out of thin air to facilitate transactions of product and
services. Money moves in a cycle, it flows from employer to employee as wages
then back to the employer when the employee pays for products. The total
amount of money cycling through the economy would otherwise be fixed if it
wasn't for loans and money printing.

~~~
Terr_
> Printing money causes inflation under all cases unless money is literally
> destroyed at the same rate it is printed.

Absolutely not! _De_ flation occurs _naturally_ in any growing economy--even
when your currency is indestructible--as the same quantity of money-units is
chasing a greater quantity of goods and labor.

Consider the case of a crew stranded on a deserted island, who choose to found
a new civilization. They decide to use the 100 "buttons" they recovered from
the ship as their currency since they cannot be forged on the island.

On day 30, a 1 button is worth a coconut.

On day 3000, the island is dotted with dwellings, fences keep in herds of
domesticated animals, and a scattering of boats fishes offshore... A "button"
is going to be worth a heck of a lot more than a coconut.

~~~
crimsonalucard
you're right. my mistake.

------
kensai
Can anyone tell me what will happen to inflation when, let's say, in 50 years
time we have a completely digital economy (e-money)? Would it not, in that
special case, be impossible to stash the money under the proverbial mattress
thus people may actually lose money simply by having it (in their current
accounts, obviously)?

~~~
wodenokoto
People are losing money by simply having it. Even if you store it in a normal
bank account that gives interest rates inflation will eat up the interest and
then some.

------
swatow
I wonder if General Equilibrium Theory were presented in a completely novel
way, whether it could be popular on HN. Something like "Russian mathematicians
come up with a decentralized way to solve resource allocation problems" or
"How to solve all the world's problems with calculus".

------
narrator
The most important part of this whole presentation is that credit drives
everything. If you know how credit is coming into the economy you can
anticipate credit cycles. Credit cycles are the only thing you have to keep
your eye on in order to keep from getting destroyed in economic crashes.

The credit cycle stuff is well explained by Austrian Business Cycle Theory[1],
but that's a brain bender and once you get it will make you totally unable to
have an economics conversation with anybody who doesn't understand it either.

[1].[http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory](http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory)

~~~
zurn
That theory isn't widely accepted (like you'd see if you looked it up on
wikipedia). mises.org is a libertarian organization advocating the austrian
school of economics, which is often quite divorced from reality.

~~~
honeybooboo123
You've got it backwards. The Austrian school of economic thought is the only
one that _actually corresponds to reality_.

You're not going to take my word it, but feel free to see for yourself. Watch
their lectures on YouTube ("misesmedia"), and you'll get it.

~~~
simonh
The Austrian theory offers some important insights and a lot of it's ideas are
valuable. That is why it is widely considered a precursor of modern credit
cycle theory, but carrying it's conclusions too far without considering other
factors such as savings rates, fiscal and monetary policy.

~~~
honeybooboo123
Just because you say so, I guess?

~~~
divegeek
No need to take his word for it. If you look at the Austrian school theories
you'll see that those things aren't accounted for. Another crucial element
that isn't considered is velocity of money, and the concomitant effects on
money supply. The Austrian school has a lot of important insights, but it
omits several important factors. It has a good and useful set of ideas, but
it's not the grand unified theory of economics that many libertarians (like
me) wish it were.

~~~
honeybooboo123
Well, I just responded to your other post, where you were economically
confused :)

Velocity of money? Concomitant effects, huh? .. I suspect you might be some
sort of government shill though. Very few actual Libertarians don't see
Austrian economics for the rational truth it is.

------
pdecker
[http://theeconomicmachine.tumblr.com/](http://theeconomicmachine.tumblr.com/)

good blog that uses Ray Dalio's thinking to examine various economies around
the world.

~~~
datainplace
I follow Bloomberg, FT, and sometimes the WSJ and I've never seen in mentioned
that Dalio writes weekly updates on different global economies. I guess Ackman
is getting all the press these days.

Thanks for sharing

~~~
pdecker
ha, Ackman is so hot right now. And, its not Dalio. Just uses his approach to
the markets.

------
fiatjaf
The Cultural and Spiritual Legacy of Fiat Inflation, by J. G. Hülsmann:
[http://web.archive.org/web/20061102222328/http://www.mises.o...](http://web.archive.org/web/20061102222328/http://www.mises.org/story/1570)

------
dj-wonk
From Andrew Sorkins' commentary on:
[http://dealbook.nytimes.com//2013/10/21/economic-theory-
via-...](http://dealbook.nytimes.com//2013/10/21/economic-theory-via-youtube-
and-cartoon/?_r=0)

> [Ray Dalio] dispenses with the way economists have long taught economics in
> school, and instead explains the economy as if it were a “machine” that he
> believes is much easier to understand and predict.

"Dispenses", really? Dalio is no small force [1], but his thoughts and models
are, in some sense, just "another" model to add to the mix.

[1]:
[http://www.economist.com/node/21549968](http://www.economist.com/node/21549968)

Here, my point is not to support or detract from Dalio's model. My point is
simply that many people (and many journalists) don't seem to get what models
are, at their core. They are tools.

Yes, sometimes traditional economic models get "too much" credit and
mindshare. I like seeing alternative models. After taking a look at Dalio's
snappy presentation, connecting _almost_ everything with a nice explanation, I
really miss an academic presentation, with equations. (I'm not saying Dalio
doesn't have them -- Bridgewater Associates certainly does.)

Both in the case of this presentation and in many mainstream accounts, the
language commonly used in economic models sometimes lulls
readers/listeners/viewers into conflating the model with reality. Don't let
it. The world is complicated. If you want to force a complicated world into a
simple model, you can, with varying results.

Here is my central point. Everyone, including all flavors of economists and
Dalio himself, are peddling models. Don't let their claims of being "simple"
and "mechanical" distract you. (Some people claim the opposite, e.g. "my
complex model is the most realistic".) People will accentuate any aspect of
their model. Like any good salesperson or marketer, they will find the words
that engender trust.

(In modeling-speak, modelers often seek to build models that their audience
will find intuitive. Models that are too non-intuitive, in their assumptions
at least, sometimes get quickly discarded. Models with intuitive low-level
behavior and non-intuitive higher-level behavior often garner a lot of
attention, because they are deemed to be believable but surprising.)

What makes a good model? That's a long conversation. For now, I'll just say
this: use some model(s) that are useful for your situation. It is obvious, but
you'd be amazed how few people take this advice to heart. Perhaps they want
the "best" model, which is akin to asking for the "best" car. In practice,
many people go with the most familiar model, though many don't like to admit
it.

I'm not saying models are bad. I am saying two main things:

1\. If you are using numbers (even rough ones) and seriously think that you
aren't using a model, you are fooling yourself. I'll give three examples where
people pretend that they aren't using a model:

1A. If you are shooting from the hip, then you are using an unspecified,
perhaps instinctual, probably non-repeatable, model.

1B. If you are "just doing the numbers" then your choice of what numbers to
include _is_ your model.

1C. If you are doing "theory-free" data mining, then you are still relying on
some technique(s) to surface certain patterns. Ok, so you might not be using a
specified model (such as linear regression with particular variables), but how
did you select your variables? If you are using a SVM, what kernel are you
using? If you are using a NN, how many layers and what configuration? These
are still assumptions. Your choice of technique (and preference for bias vs.
variance) will shape what patterns you find.

2\. Relying on too few models is foolish.

~~~
cbd1984
I don't understand how this video represents a departure from standard
macroeconomic thinking. He presents the business cycle, with a boom as an
inflationary period and a bust as a deflationary one leading into recessions,
the idea of credit creating debt which can be an asset, a very simplified
version of the role of the central bank (really, it's all very simplified,
it's only a half-hour), and, most importantly, a complete lack of the insanity
I'm used to seeing in discussions of economics.

In short, he might not be precisely the exact flavor of Keynesian which is in
favor now, but he's obviously not a Marxist, an Austrian Schooler, a goldbug,
an anarcho-whatever-you're-not, or any other variety of Flat Earther, so he
seems fairly mainstream.

So he's presenting basically sound ideas (as opposed to "Sovereign debt is
just like household debt" or "Gold is the only honest money" or "Bankers are
pure evil class war villains" or "All government is bad") in a very accessible
format. His models are simple, maybe even simplistic, but they're close enough
to the mainstream that people who are otherwise out of the loop should be able
to follow the discussion intelligently, as opposed to being terrified out of
their wits that the government debt is a bigger number than their mortgage.

~~~
honeybooboo123
Spoken like a true sophist.

So anything that's not mainstream is just as crazy as thinking that the earth
is flat, huh?

For example, it's decidedly mainstream to believe that ~2% inflation is a
_good_ thing, mostly because governments say so.

But it's plain crazy to disagree, realizing that not a single sane person on
earth actually _wants_ his purchasing power to _decrease_ , but that's exactly
what the 2% inflation does to us.

~~~
divegeek
Inflation doesn't decrease your purchasing power unless you're living on a
fixed, non inflation-adjusted income, or from a limited pool of wealth which
you keep in cash.

If you're doing productive work, you can expect your wages to keep pace with
inflation, and if they're not, it's very likely that without inflation you'd
be seeing wage cuts; your relative value as a worker is independent of
inflation. If you're living off of stored wealth, you need to store it in the
form of goods, not cash. Real estate, stocks, etc.

There are advantages to inflation. One is that it encourages people to keep
their wealth invested in production (aside: This is also part of the economic
value proposition for property taxes, which discourage non-productive land-
hoarding). Another is that it discounts debt. Because debt payments are not
inflation-adjusted and wages effectively are, making your payments gets easier
over time. This isn't a good in and of itself, but it's a good when considered
against the alternative possibility of deflation, which tends to create
insolvency among borrowers. Of course, inflation can harm creditors who don't
factor it into their interest rate, but this is less harmful to the economy as
a whole.

The ideal would be a money supply that exactly kept pace with growth in
production resulting in neither inflation nor deflation. But that's hard.
Because mild inflation is not particularly harmful, and deflation is really
bad, policymakers prefer to aim for mild inflation as a hedge against
deflation.

~~~
honeybooboo123
Yes, salaries are a variable, but even if salaries do rise in sync with
inflation, that doesn't make inflation good. It's still bad.

Nope, we can't expect our salaries to rise along with inflation - not in
today's insane world.

    
    
      - http://www.pewresearch.org/fact-tank/2014/10/09/for-most-workers-real-wages-have-barely-budged-for-decades/
      - http://www.theguardian.com/money/2011/nov/23/uk-household-earnings-fall
    

.. and whatever you'd feel like Googling up.

>> There are advantages to inflation. One is that it encourages people to keep
their wealth invested in production

That's not an advantage. Inflation does punish saving (which is bad to begin
with), but also encourages risky investments. The higher the inflation, the
higher the return on investments you need to not lose wealth, and the riskier
your investments, the more likely you're to lose them.

So no, that's not good. Purchasing power increases are good.

>> Another is that it discounts debt.

Yes, this is why governments keep lying to us that inflation is good for us.
They're trying to manage their massive debts, but they'll ultimately fail.

How about just not using money you don't have, or money you can't afford to
borrow? Oh but that would curtail politicians' crony-capitalist spending, so
we can't have that.

>> The ideal would be a money supply that exactly kept pace with growth in
production resulting in neither inflation nor deflation

You're basically suggesting that our purchasing power should not increase.
That's just absurd.

>> Because mild inflation is not particularly harmful

So even you acknowledge that it _is_ harmful, even if not to a large extent.
But what do you get if there's 2% inflation for 10 years? It keeps compounding
you know. How much of your purchasing power will you have lost by then?

>> deflation is really bad

No it's not. It's your purchasing power increasing. Everyone wants to get more
for less, and that's what (price-)deflation means.

~~~
divegeek
Sorry, you're badly confused about a lot of things, but it's not worth the
effort to me to educate you. I'll just let you have the last word.

