How the Economic Machine Works (2014)
economicprinciples.org
economicprinciples.org
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.
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.
I don't think that's true. Low interest rates benefit everyone as the cost of lending decreases.
In the long run (at least for the housing market) the benefit goes away as housing prices adjust to reflect lower borrowing costs.
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.
Absolutely not! Deflation 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.
Elon has specific role in "production". If his work/energy/decisions are going to spawn new factory, new technology or new product that is going to improve productivity of millions then by all means his income is justified by his productivity.
> Printing money causes inflation under all cases unless money is literally destroyed at the same rate it is printed.
This is not true. Emphasis on "all cases". If you create money at exactly the same rate as the economy's produce grows than money has it's background in actual "things" that have value.
As for other arguments I think author was trying to convey very complex subject in 30 minutes of video. Of course there will be certain generalizations so he can better convey the message.
A new technology, a new product, and improving the productivity of millions are not activities or goals that are achievable by any single individual. Elon must utilize additional human capital to achieve any of these goals. Thus there is a limit on how productive a human can be and in turn a limit on how much wealth he or she deserves.
>This is not true. Emphasis on "all cases". If you create money at exactly the same rate as the economy's produce grows than money has it's background in actual "things" that have value.
My bad, I meant most cases. Sorry.
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
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.
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.
good blog that uses Ray Dalio's thinking to examine various economies around the world.
Thanks for sharing
> [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
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.
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.
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.
As with all things in life, this is a tradeoff. I'm willing to concede decreasing purchasing power in exchange for some other advantage. Like I'm willing to exchange shitty battery life for a better and faster web browsing experience on my phone, or how I'm willing to exchange years off my life for some added pleasures like cigarettes and alcohol.
That may be, but that's something everyone should get to choose for themselves. In today's world, we don't, and that's wrong.
Besides, we're not even getting any advantages "in exchange" for losing our purchasing power to the machinations of governments and central banks everywhere. We're just getting milked and fleeced six ways from Sunday all the time.
If we could, we'd choose a sound currency, and then our purchasing power would keep increasing steadily (because of productivity improvements and wealth accumulating over time).
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.
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
>> 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.