How The Economic Machine Works by Ray Dalio

Here’s another good video on the monetary system by Bridgewater’s Ray Dalio.  If you missed the last post about Perry Mehrling’s course on macro then see it here.  This video will provide you with a very nice foundation for understanding the monetary system.  Again, I wouldn’t say it’s 100% in paradigm with the Monetary Realism views, but it’s very good.

H/t: Zero Hedge



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • InvestorX

    I do not see anything to disagree with Ray.

  • Suvy


  • Romeo Fayette

    The “printing money” suggestion was the biggest issue I had with Dalio’s explanation. You too? I wonder if he didn’t use that term as synecdoche, just to keep it simple, since “asset swap” warrants a long explanaton.

    Any other qualms?

    Overall, great video.

  • ilya

    I think it is an asset swap if it is ever reversed through retiring the securities or through selling them back. Otherwise it is not

  • But What Do I Know?

    See, here’s what I don’t get. He says that lowering interest rates means that borrowers have more money to spend, but what about the lenders? Don’t they have less money to spend? In other words, the repayment of interest is an “economic transaction,” as he terms it, so wouldn’t more interest (higher spending) mean that the cycle moves faster? That is, higher interest rates lead to more “economic growth?”

    To me, the equation of low interest rates with inflation is not always and everywhere true–in some instances low interest rates can lead to less spending and disinflation (or deflation). If people are not willing to borrow more (in the aggregate) just because rates are lower–see US housing 2009-2013–and more and more people are relying on interest payments for income–see retirees–then the assumption that low interest rates lead to inflation can be invalid–see Japan for the last twenty years.

  • Tom Brown

    “more people are relying on interest payments for income–see retirees”

    Even with higher interest rates, they don’t generally beat the rate of inflation do they? If that’s true, then high or low interest rates, retirees would be getting poorer in real terms in both scenarios.

  • Fernand

    Wow….Very Nice video. He does not mention the Kondratiev wave…. but he sure describes it in the long cycle.

    The deleveraging he describes does not look nearly done. They are still trying austerity in Europe. In many ways, deleveraging is being forestalled.

    In Canada, consumer debt is at an all time high. Deleveraging has yet to start. Home prices are at a record high up here.

    Only one thing missing from this very good model …. physical limits of resources.

    We have Easter Island occurring on a global scale.

    When countries in the middle east can no longer supply their own energy needs …it is not a great sign.

  • fernand

    he explained that in the video.lower interest rate only work on the short term debt cycle.lower interest rates do not work during a deleveraging period / depression….which is what we have been experiencing.

  • Mark Caplan

    The graph of GDP versus time tends to have an upward slope because of productivity improvements and population growth. Dalio mentioned only productivity improvements.

    Based on comments Dalio has made on other occasions, he believes the U.S. is enjoying a “Beautiful Deleveraging,” thanks to brilliant leadership at the Fed and Treasury. I wouldn’t advise putting Dalio in the same room with Jim Rogers.

  • John Daschbach

    The problem with this is that it isn’t supported by the data. Housing affordability just before the housing crisis had dropped from the record affordability it had enjoyed from 1992 to 2008. (see the FRED series COMPHAI). In 2008 the median family had almost 120% of the income required to service the median house. In 1982 the median family had ca. 60% of the income required for the median house.

    Looking at all consumer debt levels times the mean interest rate, normalized in constant dollars and GDP is similar. Debt service costs rose a bit from where they had been for the prior 15 years, but were still far lower than the peak levels, and no higher than they had been during the high growth period in the 1980s.

    The data are even more dramatic if you add business debt (non-financial) to consumer debt. In fully normalized form, debt service before the Great Recession was not exceptional.

    Interestingly, if you look at the real growth rate of debt, most recessions before 2008 follow 1-5 year periods of decreasing consumer debt growth, almost always with negative rates just before the recession which continue during the recession. This makes sense in standard economic thinking.

  • John Daschbach

    I think the same, based upon simple arithmetic. Cullen sees it otherwise.

  • Kaka

    There are two unaddressed issues in the video. The slope of the productivity growth. I don’t think if it has been a nice, stable up slope all the time. And, there is probably a role for demographics there. That’s not to say that the up slope is in place for the near future, making the issue irrelevant.

    Secondly, role of investment that feeds back in productivity growth. Like the multi-decade government/defense investment into computers. Maybe, we will have a multi-decade investment into clones and/or drones next which will give a further jump to productivity, who knows…

  • InvestorX

    Every purchase is an asset swap in the same sense. The monetary base is not going to be reversed (see the Fed is maintaining the level of old purchases by addidional purchases plus it is doing QE 3+4).

    This asset swap view is completely false, unless the swap is reversed, which currently does not seem to be the case. So in that sense every monetary transaction by any individual is an “asset swap”, be it purchasing a hot dog, a car, or a bond.

    And telling me that the swap is irrelevant, because it “unprints” a bond is also false. Whatever I buy with my money, I “unprint” it from the market.

    The asset swap view is wrong, because:
    1) the swap is not reversed, thus the money print is permanent
    2) the quantity of money increases vs. the quantity of goods and financial assets (the “stimulative” effect is mostly on financial assets though)

  • InvestorX

    Lowering IR means mor money to spend because:
    – lower IR payments
    – higher debt increase is possible with the same income
    – credit suppliers create money out of thin air and are thus not constrained by supply

    At some point lowering IR leads to the lower bound and oversaturation / little demand for credit. If GDP growth is overly dependent on credit exapnsion (check “credit impulse”), the incomes drop and credit can become unserviceable. Then you get Japan, 2008 or 1930s.

  • InvestorX

    Tom, why don’t you look at the Fed Funds rate vs. annual CPI. Most of the time it is higher or equalt to CPI. So it depends how you save, but most of the time the real IR is positive.

  • InvestorX

    So housing prices dropped not because of problems with debt servicing or affordability, but becasue prices themselves developed like a bubble that burst similarly to the Nasdaq bubble, when the supply of greater fools was exhausted.

  • Mark Caplan

    Dalio shows the federal government selling T-bonds to the Fed. The Fed buys the bonds with the Fed’s newly printed money. The government pays its bills and meets its entitlement obligations with that newly printed money. This is the naive, layman’s concept of monetary policy.

    Dalio says nothing about the Fed’s newly created money actually going into impotent, outside-money bank reserves, as PragCap has explained it. PragCap is undoubtedly right, but somehow the muddleheaded Ray Dalio is No. 31 on the Forbes 400.

  • Cullen Roche


    The bonds will mature and roll over back to the Tsy at some point. And that’s assuming the Fed doesn’t sell them back. That is, of course, unless you buy into the conspiracy theory that the Fed HAS to keep enlarging its balance sheet because it’s about “flow” and not “stock”….

  • Tom Brown

    But the banks don’t pay the FFR to their depositors. They pay less don’t they? Otherwise there wouldn’t be much advantage to attracting depositors.

  • Mr. Market

    I disagree with Dalio on only one or two (very) minor points. Interesting video.

  • Suvy

    There’s around $2.2 trillion of deposits over loans when loans and deposits previously tracked at a 1:1 ratio(since loans usually create deposits). All of this is due to the Fed. QE primarily works through FX/asset markets/commodity mechanisms, but not through the credit mechanisms that we’re normally used to. If we did what we’re doing right now during normal circumstances, it would be highly inflationary.

  • InvestorX

    Currently their is no indication at all that the Fed will let its BS decline or wind back QE. It will keep replacing maturing bonds with new ones as it is doing now.

    And even if it reduces its balance sheet you require from market participants to have the long tern horizon AND foresight to treat this in a way similar to Ricardian equivalence and see through the temporary money illusion – something that is too much required from today’s instant gratification crowd.

    So the effects will be there, mostly in the form of asset bubbles.