How The Economic Machine Works by 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 — and this has led to 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 sidestep the global financial crisis, and 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 3 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 and 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 is the building block
of the economic machine. All cycles and all forces
in an economy are driven by transactions. So, 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 car 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, businesses, 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 is the most important part
because it is 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 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 the principal, 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 borrower repays the loan,
plus interest, the asset and liability disappear and the transaction is settled. So, why is credit so important? Because when a borrower receives credit, he is able to increase his spending. And 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. So when you spend more,
someone else earns more. When someone’s income rises it makes lenders more willing
to lend him money because now he’s
more worthy of credit. A creditworthy borrower
has two things: the ability to repay and collateral. Having a lot of income in relation to his 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 sold. This makes lenders feel comfortable lending him money. So increased income allows increased borrowing which allows increased spending. And since one person’s spending is another person’s income, this leads to more increased borrowing and so on. This self-reinforcing pattern leads to economic growth and is why we have Cycles. In a transaction, you have to give something in order to get something and how much you get depends on how much
you produce over time we learned and that accumulated knowledge raises
are living standards we call this productivity growth those who were invented and hard-working raise their productivity and their living
standards faster than those who are complacent and lazy, but that isn’t necessarily true over 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 — because 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 pay it back. Debt swings occur in two big cycles. One takes about 5 to 8 years and the other takes about 75 to 100 years. While most people feel the swings, they typically don’t see them as cycles because they see them too up close — day by day, week by week. In this chapter we are going to step back and look at these three big forces and how they interact to 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 regulation, it’s due to human nature and the way that 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 very quickly resembles a cycle. Basically, anytime 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 because 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. But when you buy a beer with credit, it’s like starting a bar tab. You’re 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 that the asset and 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. Now, 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. But, if you borrow money
to buy a tractor — and that tractor let’s 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 creditworthy enough to borrow $10,000 dollars – say on a credit card – so you can spend $110,000 dollars even though you only earn $100,000 dollars. Since your spending is another person’s income, someone is earning $110,000 dollars. The person earning $110,000 dollars with no debt can borrow $11,000 dollars, so he can spend $121,000 dollars even though he has only earned $110,000 dollars. His spending is another person’s income and by following the transactions we can begin to see how this process works in a self-reinforcing pattern. But 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 as the monthly payments
on your credit card going up. Because people borrow less and have higher debt repayments, they have less money leftover to spend, so spending slows …and 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 and receive credit. When credit is easily available,
there’s an economic expansion. When credit isn’t easily available,
there’s a recession. And 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. But 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 everybody thinks things are going great! People are just focusing on what’s been happening lately. And what has 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 creditworthy for a long time. But this obviously can not continue forever. And it doesn’t. Over decades, debt 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. And since one person’s spending is another person’s income, incomes begin to go down… …which makes people less creditworthy
causing borrowing to go down. Debt repayments continue to rise which makes spending drop even further… …and 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 Deleveraging. In a deleveraging; people cut spending, incomes fall, credit disappears, assets 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 creditworthy, 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 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 creditworthy. People feel poor. 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 the borrowing. However, in a deleveraging, lowering interest rates doesn’t work because interest rates are already low and soon hit 0% – so the stimulation ends. Interest rates in the United States hit 0% during the deleveraging of the 1930s and again in 2008. The difference between a recession and a deleveraging is that in a deleveraging borrowers’ debt burdens have simply gotten too big and can’t be relieved by lowering interest rates. Lenders realize 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-creditworthy, just like an individual. So what do you do about a deleveraging? The problem is debt burdens are too high and they must come down. There are four ways this can happen. 1. people, businesses, and governments cut their spending. 2. debts are reduced through defaults and restructurings. 3. wealth is redistributed from the ‘haves’ to the ‘have nots’. and finally, 4. the central bank prints new money. These 4 ways have happened in every deleveraging in modern history. Usually, spending is cut first. As we just saw, people, businesses, banks 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 borrowers don’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 a 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 promised 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 time frame or at a lower interest rate that was first agreed.
Somehow a contract is broken 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 gets 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 a deleveraging because they spend more than they earn in taxes. This is what is happening when you hear about the budget deficit on 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 redistribution of wealth in the economy – from the ‘haves’ to the ‘have nots’.
The ‘have-nots,’ who are suffering, begin to resent the wealthy ‘haves.’ The wealthy ‘haves,’ being squeezed by the weak economy, falling asset prices, 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 debtor and creditor 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 0 – 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 two trillion dollars. 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 creditworthy. 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. So, in order to stimulate the economy, the two must cooperate. 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 down. The deflationary ways need to balance with the inflationary ways in order to maintain stability. If balanced correctly, there can be a Beautiful Deleveraging. You see, a deleveraging can be ugly or it can be beautiful. How can a deleveraging be beautiful? Even though a deleveraging 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 phase.
In a beautiful deleveraging, 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 of spending 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. So, what do I mean by that? Basically, income needs to grow faster than debt grows. For example: let’s assume that a country going through a deleveraging 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. Now think about the interest rate on that debt, let’s say it is 2%. If debt is growing at 2% because of that interest rate and income is only growing at around only 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 easily be 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 deleveraging in the 1920’s. If policymakers achieve the right balance, a deleveraging isn’t so dramatic. Growth is slow but debt burdens go down. That’s a beautiful deleveraging. When incomes begin to rise, borrowers begin to appear more creditworthy. And when borrowers appear more creditworthy, 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 deleveraging process can be horrible if 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.’ Of course, the economy is a little 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 are probably headed. So 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 will eventually become uncompetitive. And 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 but most people — including most policy makers — don’t pay enough attention to this. This template has worked for me and I hope that it’ll work for you. Thank you.

100 comments on “How The Economic Machine Works by Ray Dalio”

  1. Supriya Tiwari says:

    Nice One !!

  2. Connor McDonald says:

    More educational than my economics degree

  3. PaulCoste Green Energy2Crypto Sustainably says:

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  4. Kobe Zhou says:

    I come back and watch this video at least once every 6 months just to get an idea where we are at in the cycles

  5. jbtown5 says:

    A lot of time spent producing this video, great explanations, Thanks Ray. 9 million and growing.

  6. Jenny Chen says:

    Thank you for this video! It’s extremely well-explained!!

  7. Abhishek Ranjan says:

    I'm an engineering major and never understood economics. This video has completely changed my perception.
    Thanks Ray!

  8. Brandon C says:

    For a video that is 6 years old and an educational topic, I am so pleased to go through comments and see a variety of dates. 4 years, 7 months, 1 week, 3 days, 3 months. All positive, all informational. I finished the intelligent investor recently, had a great run with options for a year then got rocked after 2 days. Re assessing my knowledge and my plan moving forward with my investing. I

  9. Song says:

    Does anyone know if the content on this video is also available on Ray's book?

  10. Erick Juma says:

    I've never been this informed for free. Thanks brother

  11. SupraSmart68 says:

    It's all very well explaining how the system works for the banked but it doesn't work for anyone all of the time, everyone most of the time and never will for half the world's (unbanked) population who don't even have access to it and may even be better off without. That's why decentralized applications like Bitcoin were invented to replace it. You cannot lend money at interest and ever get it all back without printing more unbacked Federal Reserve Notes as all currency is a debt instrument, thus creating an exponential debt bubble affectionately called an 'economic cycle' in brainwashed parlance in order to somehow validate the obvious insanity of it. The only possible outcome is to enslave the entire planet and so the question must arise as to the original intent of the creation of The Federal Reserve and all central banks around the world, coincidentally owned by the same families throughout history. If you disagree with that statement and call it a conspiracy theory, quit your job tomorrow and see how far you get living outside the system, starting from nothing and relying on basic human goodwill. See how many family members will help you out for more than a few days. See how many people walk past you in the street as you sit with your hand out once you become a burden for not going along to get along. See how far your newfound moral conscience gets you when you realise that your gain is someone else's loss and can't participate any longer. Move to Venezuela or Zimbabwe and see how far central planning and socialism got them.

  12. Nick Dannunzio says:

    The "Central Bank" (The Federal Reserve and the US Mints, a privately owned Rothschild companies) is directly responsible (with their fees and interest on all transactions) for the  "short term debt" and "long term debt" in the US (and their other company banks in all but a few countries (that matter). (Do any of these names sound familiar?) Cuba, North Korea, Afghanistan, Syria…

  13. Brain Muneza says:

    Ray Dali o is the new Albert einstein

  14. Craig Johnson says:

    The only problem I have with his explanation is where he states, "To fund their deficits, governments need to either raise taxes or borrow money." The is true for an immediate funding. But what is not said is that the government could also cut out a lot of fat by releasing much of their control in cutting "less necessary" and unnecessary costly programs. Although this should be first on their list it's usually not even looked at because the bloated government does not want to relinquish any kind of control plus it would be an admission of fault and all the egos in government would not allow that either. This increased spending by the government can also add to the overall economic deficit and definitely adds to its acceleration.

  15. Karthik Palaniswamy says:

    Beautifully compiled video on how economy works

  16. Erick Juma says:

    "Income needs to grow faster than debt grows." this is a very powerful statement and if we just apply this to our lives we'll experience a lot of good living and better life quality.

  17. Prashant Singh says:

    3.6k policy makers throughout the globe disliked this video..

  18. Lahraichi Youssef says:

    this is way so good this is way so good thank you so much the content is so interesting

  19. fame mobile says:

    Wondering why this practical aspect of economics is not taught in Primary and High Schools

  20. Robin Smith says:

    I bet they didn't mention rent, and real estate versus taxation.

  21. SolidAir54321 says:

    Rule #4: Don't repeal Glass-Steagall.

  22. stanislav says:

    i don''t understand cycle thing. if i'm spending money that i borrowed i m helping someone else pay there debt. half society spends money that they don't have and other pays back loans with that money, so in next cycle half's of society just switch roles, video shows like we all borrow and repay at same time witch is not true. Am i stupid? can someone explain this to me?

  23. WeylandYutaniInc says:

    Moral of the story is live within your means. 🙂

  24. Kristian Peace Braquis says:

    This is really informative. Thanks a lot!

  25. Shane Rothwell says:

    But there IS NO mention of the FACT that the federal reserve is PRIVATELY OWNED CORPRATION

  26. gary gerard says:

    so with the cost of credit so cheap you'd think we're doing great, but that's not the case so They say they'll lower the cost of credit again, Fast Forward – we are in trouble and soon to be in more
    Seems to be to stay out of debt – buy now / pay today

  27. bruce clothier says:

    You sir, are a fucking thief. I've talked a bout this all my life. If you buy into this bullshit, you are the problem.

  28. gary gerard says:

    yep, America is in trouble, put me in charge I'll take care of things, ha ha ha, I'd be shot dead by sundown
    yep, it's going to get ruffer than a cob – you deal with it, I quit

  29. Manpreet Singh says:

    I thought it was ray dildo

  30. Shaban Buchu says:

    i love economics

  31. kardrasa says:

    Aww ye, print money till a coffee is worth 200 dollas. Got it, thanks

  32. ORagnar says:

    24:00 Well, economics is only one factor that leads to war. In Nazi Germany there was an ideology that was driven by bad philosophy over 100 years in the making. You have to be careful about looking at only one factor.

  33. ORagnar says:

    He's missing regulations, which keep productivity down. The more regulations, the harder it is to be productive. The more taxes, the harder it is to be productive. When the government puts roadblocks in the way of doing things, it makes being innovative and productive much more difficult.

    And, before 1913 banking and the economy were more stable. There was no central bank. It was with the central bank that things have become so unstable. Today banks are leverage 30 to 1. Prior to the 1913, banks would only leverage 2 to 1 or 3 to 1.

    Also, since going off the gold standard in around 1971, inflation has gone through the roof. This robs people of their savings, because the value of the dollar drops. Inflationary policy is taxation by sneaky means. It's diabolical.

  34. DJ M.I.A. says:

    "It's one big club, & we aint in it."

  35. Damian Wong says:

    Most valuable video on YouTube. Thank you Ray Dalio.

  36. Don B says:

    This should be required study for all schools in the US.

  37. TXLionHeart says:

    The economy is not a machine — there's no engine that can stall. No expert can fix it, because there's no "it" at all. The economy is us ; we don't need a mechanic! Put away your Keynesian wrenches… The economy is organic!

  38. Joseph Ephraim says:

    14:45 was the most sarcastic moment of my life haha

  39. Tycoon Lutfur says:

    What I didn’t learn from entire University life, which I have learned from last 30 minutes. Thank You so much.

  40. Nazeer Hussain says:

    Islamic financing is the solution, where credits are highly scruternised and allowed only for essential commodity,
    interest is prohibited and
    in turn there is profit and loss sharing between the lender and borrower.

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  42. inertiaforce says:

    So 50 million people died in world war 2, and the most horrible weapon ever was created (the nuclear bomb), all because of bad monetary policy by governments during deleveraging. Wonderful.

  43. Gary Murtagh says:


  44. Brandon b says:

    Great video

  45. Ankit Shah says:

    No need to have MBA degree, This video is everything. Thank you so so much for making this awesome useful video.

  46. Supadubya says:

    Some of the drastic oversimplifications in this video are extremely harmful to having a full understanding of the issues.

    For instance, at 11:00 on the video talks about how if you borrow money, somebody else earns and can spend more (a point that is repeated many times in this video). However it also ignores the other side of this equation- somebody else (whoever is lending you money) has to spend less to lend you that money.

    Even if your lender turns around and sells that debt to someone else, it only shifts around who ends up having to cut their spending so you can borrow and spend more. And, because somebody spends less, somebody else (whoever would have provided goods/services to your lender) earns less because they have one less buyer for their goods or services. So ultimately, total spending and incomes in the economy remain CONSTANT- defeating the entire supposed basis of the short-term cycles the video purports to explain…

    The concepts of leveraged debt, Return on Investment, and other more advanced ideas explain some of these phenomena. But, once again, the video oversimplifies things…

  47. Chris Bishop says:

    so basically if we ban usury we'll be all good

  48. Chris Bishop says:

    I can't be the only person thinking this is not a sane way to run the world

  49. Bruce Vllaine says:

    you fat sweety guy. Your knowledge inspiring Me

  50. Sigmundy Freud says:

    the problem with the credit is when you creat more money than the economy grow, in this case the money lost its value and it s the problem for MORE 35 YEARS … usa lead the econmy in debt since marshall plan

  51. Samuel Mani says:

    Thank God for the Internet and Youtube

  52. County Vape says:

    The government does not run the central bank this association is dangerous to propagate for it implies an ability to control and thus remove potential danger and threat to our way of life.

  53. County Vape says:

  54. Policin Helicopta says:

    And all this is happening because someone while protesting the corruption of the Catholic church in the 16th century, said that higher income and higher material wealth in general, is a sign that you'r chosen by God. The US were founded by people who believed this doctrine which initially was known as Protestantism (in the US as Puritanism) but which further became known as Capitalism. This doctrine perfectly coincided with the era of the Great Geographical Discoveries, the so called Age of Exploration that gave rise to Colonialism and what's more, it justified it. It basically turned the Christian Catholic doctrine of poverty as a sign of God's election upside down. Now, you don't have to be poor to enter the Kingdom of God as the Catholic church tought based on a Christ's saying that "… it is easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of God". On the contrary, now the more wealthy you are, the more chances you have to be chosen by God and get to Heaven after death. As usually happens with ideas, this idea too became distorted to the point of unrecognizability and more and more people started to amass wealth not because they were particulary concerned about their life after death but because they understood this idea as a cart blanche for exploitation of people and natural resources. This idea combined with the Age of Science and later with the Enlightenment pushed the European continent and the US accordingly, further into secularism and atheism, away from theology and religion in general. Then came Marx and the all this bullshit became twice bigger. Now all this materialistic-wealth-oriented capitalist mentality was married to messianic ideas about a world revolution of the proletariat, the masses exploited by the capitalists. But since the slaves were as greedy and power hungry as their masters, and believed the same ideas as them, the result of this revolution was even worse.

  55. michael ronsed says:

    This video is full of shit! And you are responsible for brainwashing of more than 9 000 000 viewers minds. Shame on you!

    1. Economy can't be described by transactions only. Economy is something more. Resources!!! If you have no resources, then you have no transactions!
    Modern "Economists" don't want to admit that, or they are too stupid, brainwashed or whatever… so for them economy is the amount of currency, credit and transactions, showing the size of the market to predict profit… This is financial economy.
    Thanks to that corrupted (*thinking/definition) businesses don't bother about saving resources.
    And that's the opposite of the real, resource based economy, leading us all to a big time disaster.

    2. Central banks are not parts of governments!!!

    3. Spending does not increase the economy! Spending increases the number of transactions within the economy!
    Engine and fuel are not a car – just small parts of it!!!

    4. So called "economic growth" is an enemy of the "real economy", because it increases the demand for resources.
    As they are limited, this might cause the price increase (supply shortage) or "drying" the resources.
    In both cases it leads to market/economy collapse.

    I have a strange feeling, that the author of this video instead of explaining the economy, explained the sum of markets and the way they work.
    Sorry mate, but you can't exclude resources from the definition of economy!

  56. Thomas J. says:

    forgot to mention that debts only get out of hand after a government de-regulates the banks. Keep a well regulated banking system and these drastic fluctuations will stop.

  57. Steve Hudson says:

    somebody spent a lot of money producing this fundamentally wrong propaganda

  58. IrelandVonVicious says:

    New title: How the central bank always wins!
    They get to print money from nothing and take assets from everyone else when it's the cheapest to do so.
    Long term theft at it's best.

  59. Travis Williams says:

    Beat the system. Buy into ETFs and be financially free long term without relying on banks. Check out my top 7 ETFs that anyone can buy through Robinhood, Vanguard, or many other brokerages starting with as little as $40 you can buy into dividend paying ETFs that put money back into your pocket

  60. John Justice says:

    Deception No.1 The "cycle" is represented as a wave line on an upward trajectory. "Cycle" is from the Greek meaning, "wheel:" it is in fact the very same word. A better representation would be a mouse on a wheel getting nowhere. The upward trajectory of the wave line is misleading, if it symbolises anything other than higher prices and longer work.

  61. Naha Ktam says:

    I pick up more and more each time I watch this. Thank you Ray Dalio
    By the way, I think Ray could be a fantastic voice actor for animation film or movie of some kind. He's got such a good tone of voice!!

  62. Jay Sun says:

    Thanks Ray!

  63. tarkatirtha says:

    Most BRILLIANT explanation I ever come across!

  64. the Art of Humanity says:

    Soo uhhhh. Does anybody wanna buy some Herbalife? Come on! It’ll help the economy? I think.

  65. slipknot73745 says:

    Watch this. Again and again.

  66. Absolute Zero says:

    Actually the author of the video got it wrong. The Central Bank doesn't print money out of nothing, it is selling national debt and this is regulated by the US Congress. So, another miss-informative video on YouTube. Reference:

  67. Chuck Dellano says:

    Newsflash ;a home in 1970 cost 25.000 and now the same home is $500.000 and the cost to pay it off with a 30 year morgage is 1Million with first 15 years mostly intrest.The half million intrest is why everyone is broke.Now factor in $6000 a year property tax .🙊🙉🙈😎😨😵😱😬💀💀💀💀💀🌐

  68. Muhammad Murtuza Ali Khan says:

    Brother, You have made my day….
    Now I am able to understand the Economy… You know what? i am an US CMA Aspirant and this video has helped me a lot to understand Economy and Recession….

  69. Ben Forrest says:

    To any econ students please could you help me clarify a point?
    At 6:30 , Ray says that productivity growth drives the economy (GDP). If the population of a country (or the world) doubled but they were still as productive (efficient) as before the economy (GDP) would have grown but productivity would be unchanged.
    Therefore population growth multiplied by productivity is what increases nominal GDP.
    Unless the 'economy' in this example is meant to mean GDP per capita. In which case what is really being said is per person productivity increases GDP per capita (living standards).
    What am I not understanding.
    Awesome video though Mr. Dalio. Thank you.

  70. Ian says:

    Does anyone know how to go about finding this data for themselves? Like looking at the graphs of short-term debt cycles over long-term debt cycles over productivity?

  71. michael george says:

    Help please I have a question:

    @5:00 The narrator said: "So, why is credit so important? Because when a borrower receives credit, he's able to increase spending. Spending drives the economy. This is because one person's spending is another person's income ".

    I think the narrator didn't look from the lender's prospective. When a lender receives credit, his spending will decrease. So the economy is balanced and this will not drive the economy.

  72. Frank D says:

    Wow this is the best way to use YouTube…instead of watching fox news..cnn with the so called experts.

  73. chinmay surve says:

    That's just amazing what I got in 30 minutes

  74. Nizamym says:

    A beautiful explanation to a complex issue

  75. domino L says:

    i give it 3 months, then we are in the next depression

  76. ali abbasi says:

    This video is amazing… Learnt more that I learnt in my graduate school. Thank you

  77. Mulani Aleem says:

    Most of the humans today are slaves to the industrialised world and the fiat money that keeps it going. The people behind this control system want to strip us of our connection to the natural world and ancestral heritage etc and force us to be dependant upon a society where profit is an absolute priority over everything else. Its like your mind, body and sight becomes totally oblivious to the misguidance force fed into you.



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  79. StoreWTF says:

    Money is debt, that’s why credit is a debt

  80. Syncopator says:

    There are a few problems with this– first, prior to the income bubble pop in 2008, incomes had stagnated for over a decade, so the income growth described early in this video didn't happen for a significant portion of the US population. And the idea that productivity growth is a straight upwards ramp is erroneous– since this video was posted, productivity growth has declined. One of the explanations for that decline is automation- automation compresses labor share of income and increases income inequality by hollowing out middle-class jobs. Unless displaced labor can find new highly productive and high-wage occupations, workers may end up in low-wage jobs that create a drag on productivity growth. Another explanation is that both benefits in technology and outsourcing have not translated to improved productivity of the labor force, only at the aggregate management level who are the only ones who reap the rewards of such benefits. And since then, the balancing act has gone in the other direction– taxes have been cut on the wealthy, not increased, further imbalancing the scale. Not enough debts have been cut and laws have been passed against defaulting reducing bankruptcy as an option, and not enough money is being printed and incomes have not been on the rise, or at least, not enough to 'balance" all of this– mainly because it all reduces the assets of the wealthy, who are in charge– the other problem with all this is the rich are in control and our democracy is not functioning except for them– the rest of us are at their mercy, almost no one in government represents the labor force anymore. So the balancing act described here is not happening, redistribution isn't happening, which is why we're seeing social disorder increasing, but it's falling on deaf ears, deaf ears in both political parties. There's no "beautiful deleveraging" going on here, policymakers are not even TRYING to "achieve the right balance," they're just looking to maintain the status quo that for the last several decades has been working just fine for them at the expense of everyone else. And given every one else has had all power of democracy stolen away from them (partly by advertising money and the corporate media convincing them things are different than they are, and partly by anti-democratic manipulation of our elections through a whole variety of techniques– fear, gerrymandering, superdelegates, "lost" ballots, splitting the opposition votes, etc.) And the "solutions" here re: productivity are pipe dreams, these are not under labor's control for the most part, quite the contrary– they've been specifically and intentionally undermined by policymakers who are only serving the wealthy– policymakers of BOTH parties. But the advertisers along with the political parties will make sure people will continue to vote the same oligarchs, red or blue, into office who will promise one thing but deliver something else. A better title for this video would be, "How the Economic Machine was Supposed to Work, but Hasn't Been for at least 30 Years."

  81. RobertMOdell says:

    Propaganda. Money printing is immoral theft.

  82. souheil3333 says:

    It is so easy to understand, even for me who can hardly talk English. Thanks from Sweden 🙂

  83. MsStuartForbes says:

    This proves that credit only distorts the economy, while in the long term all that matters is productivity.

  84. JuaN B. says:

    fuck the central bank

  85. TheRVSN says:

    :))) Finance is a deceit. All that math on "credit" and "interest rate" is based on a deceit that money is goods and can be sold.

  86. phani karthik cs says:

    Me : watching vedio.
    Google pay pop up: "Stay on top of your spending..check your balance"😂

  87. chess747 says:

    It’s all rubbish, it’s simply to enslave you, and to control you.

  88. Dzia Dzia says:

    So, simple question is: who owns the Country? Central Bank is. Abd that is institution independent of country. And fake on the other hand. Who paid of a politicians by meriage for eg to buy a regulations they need (this is how it started). This is a cancer!

  89. 10 minute club says:

    Need more videos like this thank you😃

  90. Zaki Choudhary says:

    23:26 Shake harda boy!!

  91. Benami Ark says:

    "someone is earning 110,000 dollars!" And that person, is typically an elitest that contributes it to being a little extra more difficult for the lower class to succeed by using efficiency as a viable strategy to choke the working class! ECONOMICS! IT IS INNOCENT! 😀

  92. Evolve Coaching says:

    Pretty solid explanation of a lot of facets of the economic system. I feel like you missed a crucial point around 16 minutes in when you first begin to discuss the downturn in a long debt cycle. You said, "at some point, debt repayments start growing faster than incomes" but failed to give an explanation for this other than growth cannot continue forever and you are filtering the data to fit your model. Every time there is a downturn in the long debt cycle it is the result of some specific set of events breeding some form of financial misconduct. You alluded to this by discussing the history of the 1929 collapse and the factors that contributed to it. Similarly, in 2008 the reason debt repayments were growing faster than incomes was due to poor lending practices in the mortgage industry. Human culture is the biggest thing threatening a downturn in the long debt cycle, but your model is guilty of suggesting there will be an eventual economic downturn, simply as the result of the economy following a cycle. Other than that, the rules you gave at the end of the video are a sufficient approach to minimizing economic disaster. Cheers.

  93. Liam McGrath says:

    What happens if you add a GLOBAL TRADE WAR?!?

  94. shiny x says:

    It never ceases to amaze me how much rich people think of themselves. Ray Dalio, who created this video, is a hedge fund manager. He's not an economist, or a professor, or anything of the sort. And this video is both over-simplistic and in other cases just plain wrong. PLEASE do not think this substitutes for an ECON 101 class or doing your own research and reading into macro-economics. This is a rich bored person's pet project. It's not an education.

  95. TheScienceofnature says:

    Decreasing inflation is different from deflation. Decreasing and increasing inflation are OK, deflation is a nightmare.

    Debts are given against future earnings. Providing people are employed and the banks and firms are well regulated, debts will always be repaid. Especially with a steady inflationary pressure. When people are in debt, they work harder and will be more productive. More productivity generates more money. Before and during the financial crisis of 2008 people in UK and America were more productive than ever. Where did all their productivity go? I am not saying banks and politicians are corrupt. But corruption causes loss of major amounts of money in an economy, that is why we have tax havens. Tax havens are the black-whole of productivity. Money just disappears in tax havens. Evidently David Cameron turned out to have an offshore bank account. Of course he didn't have all the money people worked for. But you get the picture. Some people just don't play by the rules.

  96. Epic878787 says:

    1) "Buy" and "sell" are [unintentionally}deceptive terms because there is really no difference between them: Everything is just a trade, you could say, "I'm going to the grocery store to sell some currency for a loaf of bread and a dozen eggs.

    2) "Drives the economy"(1:52) re spending. This term suggests that everything depends on spending rather than other things and is deceptive. It would be far more explanatory and clear to say that *supply meeting demand" drives the economy, that is, transactions. Imagine a barter economy; there is no currency or credit so there is no "spending" yet there is still an economy and it could be almost identical to ours but without spending, so ***spending does Not drive the economy***. You are being deceived into believing that more and more spending is good, it's not. Not all spending is good, rather we should rate different types; spending on production is good, on consumption is bad and putting currency in the mattress is the worst. By the 5:25 mark he seems to be guilty of the broken window fallacy, create spending by breaking all the windows so we have to hire more glass makers and window installers and spend money on window replacement and we'll all get rich.

    3) The central government shouldn't be an important part of the economy and isn't really unless your talking about regulation and law enforcement and that sort of thing.

    4) "Any two people can agree to create credit out of thin air". Not monetary credit, is he talking about a reputation, wtf, oh, he means with the banks' and governments' help. The real big deal about creating credit, he doesn't tell you: You are borrowing money that doesn't exist, wasn't earned, wasn't saved; it's fake, fiat money so why should the lender make a profit? Is he taking a risk? Not if the loan is secured. If you have 50% of your house paid for in a non-scam economy, housing prices will not fall by 50%+ in a short period of time so there is no risk, so *why are you paying interest in earned money and why does the bank get to collect it*? Scam. If you have 50% down on your house you should be able to fractionally reserve lend the remaining 50% to your self wiping out the interest payment, but no, you are enslaved to the banks.

    5) (7:50) We should not be trying to increase our spending. This video is a lie and trying to get the public happier with maximum debt and real money interest payments on fake money lent; it's a scam. Following is more deception based on, "borrowed money spent". If credit is spent on productive capacity that spending is only good if the production purchased produces enough wealth to pay the debt. All spending on consumption is bad for the economy(though much is necessary of course) because that wealth is destroyed, eventually ending up in the land-fill.

    6) (10:40) He does make a distinction between spending on consumption and spending on production but he is much too gentle in how he communicates this and I think his earlier explanation and graphics will leave folks with the wrong impression.

    7) (12:00 or so) The whole credit cycle thing is made safe making the price of credit based on supply and demand like everything else rather than on fixing the price of credit through central bank influence. So if there is little savings in the economy, credit would be expensive because the supply is down, and vice versa. The free market is awesome because when the cost of credit is super low, instead of saving money – because you're getting almost no interest on it – you will spend it on something you enjoy. This will decrease the supply of credit and make it more expensive again. It's a self correcting system which is an awesome thing.

    8) The purpose of the Federal Reserve is to hold together the banking cartel(which is what the Fed is) by fixing the price of credit so the banks don't compete against each other. The purpose of fractional reserve lending is to hide the fact that, eg. when the reserve rate is 40:1 and you borrow at a listed 5% interest, you are really paying 200% interest – *usury*.

    9) (15:07) No, it never pays to buy goods and services with borrowed money; it always *charges*.

    10) (22:36) "The government must increase spending" lol. The economy is not something that can be stimulated that's a BS term. The economy can be fucked with and manipulated to benefit the few.

    11) (23:00) "The government must raise taxes or borrow money" * or abolish the Fed before it happens and allow the free market to operate. The "haves" will leave the country to avoid those higher taxes. This is called capital flight. Then the government will build a wall to keep everyone in. It is the USSR, except the ultra rich haves control government so they will be fine and the rest will suffer.

    12) (27:00) The right balance is achieved by letting the free market operate, it is self correcting, when there is too little savings, the price of credit rises, this is the interest you should essentially get in your savings account, so you would be motivated to cut spending and save more, say at 20%. If there is too much savings, the cost of credit might be 1% and you would decide to spend the money on something nice for yourself instead of saving it.

    13) Rule 3 is a good one.

  97. Thobias mathew says:

    Thank you sire!

  98. Shambhu Baidya says:



  99. Kev Alan says:

    The explanation of cycles is not clear to me. Why isn't it possible to continuously adjust the interest rate so that there are no (or close to no) swings?

  100. Kev Alan says:

    This video should be updated in 2019… definitely interested in how the world today looks through the lens of Ray Dalio's "Economic Machine"

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