7주차｜경제·금융·무역_임정은_How the Economic Machine Works

[임정은]

WK7_ 경제·금융·무역: How the Economic Machine Works

[편집본]

출처: Principles by Ray Dalio

Date: 2013. 9. 23.

word count: 747

Glossary

1. collateral: 담보
2. debt swings: 부채 변동

How the Economic Machine Works?

The economy works like a simple machine.

Many people don't understand how it works—or don't agree on how it works—and this has led to needless economic suffering.

I feel a deep responsibility to share my simple but practical economic template.

Though unconventional, it has helped me anticipate and sidestep the global financial crisis and has worked well for me for over 30 years.

Though the economy may seem complex, it works in a simple, mechanical way.

It's made up of a few simple parts and many transactions repeated over and over again.

These transactions are driven by human nature and create three main forces:

1. Productivity growth
2. The short-term debt cycle
3. The long-term debt cycle

Let's start with transactions.

An economy is simply the sum of all its transactions.

Every time you buy something, you create a transaction.

A buyer exchanges money or credit with a seller for goods, services, or financial assets.

Credit spends just like money.

Add money and credit spent together, and you get total spending.

Total spending drives the economy.

Divide the amount spent by the quantity sold, and you get the price.

That's a transaction—the building block of the economic machine.

All economic cycles and forces are driven by transactions.

So if we understand transactions, we can understand the whole economy.

People, businesses, banks, and governments all engage in transactions.

The government is the biggest buyer and seller and has two important parts: the central government, which collects taxes and spends money, and the central bank, which influences money and credit through interest rates and the creation of new money.

Now, pay attention to credit.

Credit is the most important and least understood part of the economy because it is the biggest and most volatile source of spending.

Lenders lend because they want to make more money.

Borrowers borrow to buy things they can't afford or to invest.

Borrowers promise to repay the principal plus interest.

When interest rates are high, borrowing is expensive and tends to fall.

When rates are low, borrowing becomes cheaper and tends to rise.

When borrowers promise to repay and lenders believe them, credit is created.

As soon as credit is created, it becomes debt.

Debt is an asset to the lender and a liability to the borrower.

When the borrower repays the loan plus interest, the asset and liability disappear and the transaction is settled.

Why is credit so important?

Because credit allows borrowers to increase their spending.

And remember: one person's spending is another person's income.

When someone's income rises, lenders are more willing to lend because that person becomes more creditworthy.

A creditworthy borrower has two things: the ability to repay and collateral.

So increased income allows increased borrowing, which allows increased spending, which creates more income and more borrowing.

This self-reinforcing pattern drives economic growth and creates cycles.

Now let's turn to productivity growth.

Over time, knowledge and innovation allow us to produce more and raise our living standards.

Productivity matters most in the long run, but credit matters most in the short run.

Productivity growth doesn't fluctuate much, but credit can swing dramatically.

Debt allows us to spend more than we produce when we borrow, and forces us to spend less than we produce when we repay it.

These debt swings occur in two major cycles: a short-term cycle lasting about 5–8 years and a long-term cycle lasting about 75–100 years.

Imagine an economy without credit.

The only way to increase spending is to increase income, which requires greater productivity.

Growth would therefore follow the productivity line fairly steadily.

But when we borrow, we create cycles.

Borrowing is essentially a way of pulling spending forward.

We spend more today by borrowing from our future selves, which means we must spend less in the future to repay the debt.

That's why credit is so important.

It sets in motion a mechanical and predictable series of events.

Credit is different from money.

Money settles a transaction immediately, while credit creates a promise to pay in the future.

And much of what people call money is actually credit.

Credit isn't necessarily bad.

It's bad when it finances over-consumption that can't be repaid.

But it's good when it efficiently allocates resources, generates income, and creates enough future income to repay the debt.

So, to understand the economy, we need to understand three forces: productivity growth, the short-term debt cycle, and the long-term debt cycle.