Ray Dalio’s Economic Machine: 3 Forces Driving the Economy and 3 Rules of Thumb for Policymakers

First, please watch this 30 minute economics masterclass from one of the great hedge funders, Ray Dalio:

Ray believes there are 3 primary forces driving our global economy:

1. Productivity growth (how much more output can you get with the same or fewer inputs)

2. Short-term debt cycle (lasts 5-8 years)

3. Long-term debt cycle (lasts 75-100 years and is usually quite painful)

In the video’s conclusion, Ray offers 3 rules of thumb for policymakers and economists:

1. Don’t have debt rise faster than income

2. Don’t have income rise faster than productivity

3. Do all that you can to raise your productivity. That’s what matters most

Unfortunately, Ray believes we are at the end of a long-term debt cycle. If he’s right, this would mean many years of economic pain, which could come in forms such as: falling real estate and stock prices; inflation via Central Bank money printing; little-to-no real GDP growth; social disorder; austerity measures in the form of higher taxes and reduced public spending.

IANAE, just studied it in college!

My complete and messy notes below:

3 forces driving economy
1. productivity growth
2. short term debt cycle
3. long term debt cycle

Economy is sum of the transactions that make it up
Money + credit = Total spending
Total spending drives economy

Market = All buyers and sellers making transactions

Biggest buyer and seller is the federal government which is 2 parts:
1. Central Government
2. Central Bank (different because it controls amount of money and credit in economy); performs this function through two means
a. Interest rates
b. Printing money

CREDIT
Most important part of economy and least understood
Largest and most volatile part
Buyers and sellers = transactions
Lenders and borrowers = credit

Any two people can create credit out of thin air
As soon as credit is created, it creates debt
Debt is both an asset and a liability

When a borrower receives credit, they increase spending
Spending drives economy
Credit worthy borrower has a) ability to repay (eg, high income), and b) collateral if he can’t (eg, a house)

CYCLES
Productivity growth = GDP growth over time
Doesn’t fluctuate much..but Debt does

Debt occurs in cycles
Short term cycle = 5-8 years
Long term cycle = 75-100 years

Changes in productivity / GDP growth are usually driven by amount of credit
“Because we borrow, we have cycles”; due to human nature
Borrowing pulls spending forward, borrow from your future self
Any time you borrow, you create a cycle

Money vs Credit
Money is instant settlement of a transaction
Credit is starting a bar tab, a future promise

Most of what we call money is actually credit
Total US credit is 50T
Total US money is 3T

Let’s say you earn 100K, you borrow 10K on credit, now you can spend 110K, so someone is earning 110K, so he can borrow 11K on credit, and so on

Borrowing creates cycles, if it goes up, eventually comes down

Short term debt cycle – 5-8 years
1. Expansion – spending increases, prices rise, this causes inflation
2. Central Bank doesn’t want too much inflation, so it raises interest rates
3. With higher rates, fewer people can borrow, debt payments rise
4. Spending and prices go down, we have a recession
5. Central Bank lowers rates, debt payments reduced, cycle begins again

Over long period of time, debt raises faster than incomes, which causes:

Long term debt cycle – 75-100 years
1. Incomes rising, assets rise, it’s a boom; Debt:income rises (debt burden)
2. Over decades, debt burdens keep rising, debt repayments start rising faster than incomes, and then incomes start to go down, borrowing goes down
3. Cycle reverses itself, long term debt peak

US, Europe, this happened in 2008, Japan in 1989, and US in 1929

Begins DELEVERAGING
Incomes fall
Credit disappears
Asset prices drop
Stock market crashes
Real estate market tanks

But now lowering interest rates doesn’t work, they’re already low, so the stimulus ends
Rates hit 0% in 1930s and 2008

What do you do?
Debt burdens too high, must come down. 4 ways

1. Cut spending, aka “austerity”, this can lead to Depression

2. Reduce debt, this can lead to deflation

3. Central government redistributes wealth, governments raise taxes on rich, social disorder can break out

4. Central Bank prints money (especially when rates are already zero), this is inflationary, uses it to buy financial asset and government bonds
US did this in 1930s and 2008, so did other countries
only helps those who own financial assets
buys bonds, lends money to government, who then distributes to people

These 4 happened in every modern history deleveraging

Depression is when people realize much of their wealth…isn’t really there

Deflationary and Inflationary ways must be balanced

Can be beautiful Deleveraging:
Debts decline relative to income
Real economic growth is positive
Inflation isn’t a problem

Will printing money raise inflation? It won’t if it offsets credit

Printing money can be abused because it’s so easy
Key is to avoid unacceptably high inflation

Takes a decade for “Reflation” / “Lost Decade” of this deleveraging

3 rules of thumb:
1. Don’t have debt rise faster than income
2. Don’t have income rise faster than productivity
3. Do all that you can to raise your productivity, that’s what matters most

Highlights from The Book of Satoshi

Phil Champagne does a great job of collecting, organizing, and providing context for all of Satoshi’s known public writing. Here are some of my favorite excerpts from the book. Amazon link.

The below are copied verbatim from the book. I may have mistakenly attributed some things to Satoshi that were actually Phil’s own words. Hopefully nothing major!

Highlights:

For greater privacy, it’s best to use bitcoin addresses only once. You can change addresses as often as you want…

Those coins can never be recovered, and the total circulation is less. Since the effective circulation is reduced, all the remaining coins are worth slightly more. It’s the opposite of when a government prints money and the value of existing money goes down.

“natural deflation”… I like that name for it. Yes, there will be natural deflation due to payment mistakes and lost data. Coin creation will eventually get slow enough that it is exceeded by natural deflation and we’ll have net deflation.

In the absence of a market to establish the price, NewLibertyStandard’s estimate based on production cost is a good guess and a helpful service (thanks). The price of any commodity tends to gravitate toward the production cost. If the price is below cost, then production slows down. If the price is above cost, profit can be made by generating and selling more. At the same time, the increased production would increase the difficulty, pushing the cost of generating towards the price.

One argument is that anyone who chooses to generate coins is actually making the choice to purchase bitcoins with electricity/computational resources, and that because some/ many people are in fact making that choice, bitcoins have at least that much “value” to the generators, who can be assumed to be maximizing their utility.

It’s hard to imagine the Internet getting segmented airtight. It would have to be a country deliberately and totally cutting itself off from the rest of the world. Any node with access to both sides would automatically flow the block chain over, such as someone getting around the blockade with a dial-up modem or sat-phone. It would only take one node to do it. Anyone who wants to keep doing business would be motivated.

I anticipate there will never be more than 100K nodes, probably less. It will reach an equilibrium where it’s not worth it for more nodes to join in. The rest will be lightweight clients, which could be millions.

I think the traditional qualifications for money were written with the assumption that there are so many competing objects in the world that are scarce, an object with the automatic bootstrap of intrinsic value will surely win out over those without intrinsic value. But if there were nothing in the world with intrinsic value that could be used as money, only scarce but no intrinsic value, I think people would still take up something.

Bitcoins have no dividend or potential future dividend, therefore not like a stock. More like a collectible or commodity.

It would be unwise to have permanently recorded plaintext messages for everyone to see. It would be an accident waiting to happen. If there’s going to be a message system, it should be a separate system parallel to the bitcoin network. Messages should not be recorded in the block chain.

I wish you wouldn’t keep talking about me as a mysterious shadowy figure, the press just turns that into a pirate currency angle. Maybe instead make it about the open source project and give more credit to your dev contributors; it helps motivate them.

From the author:

One of the major benefits of such decentralized domain name servers would bypass a government attempt at disrupting Internet communications to its citizens, as we have seen occur in Egypt in 2011.

His various writings seem to indicate that he did not expect Bitcoin to take off as rapidly as it has.

From a commenter:

The real problem with the DNS system as it exists today is that somebody has to own theroot. At the end of the day, you have to trust ICANN.

A very thoughtful long essay: Jeff Lonsdale’s 2020 predictions

Below are some of my favorite bits, and here’s the full essay.

—

A very small subreddit will have experts happily engaging with neophytes, while a place with a large commentator base will often put discussions around tribal dynamics first and foremost.

You can say things about people you could never say on Twitter or in blog format. This makes for a golden age of podcasting that might not last as long as we would like.

In a move called the yellow economy, protesters are using apps that lets them know which businesses are in favor of the protests so they can support them and ignore the so-called blue businesses that are owned by people who support the CCP and current establishment in Hong Kong.

There will be a continuing fight between governments who want cheap telecom technology and are willing to expose their infrastructure to the Chinese and those who want to stick to systems that implicitly allow surveillance by the US and its allies.

Korea already implemented a Cinderella law, doesn’t let kids under the age of 16 play between midnight and six o’clock in the morning. But that wasn’t enough for some mental health professionals in Korea, who saw games as a cause of problems among young men, and they lobbied the World Health Organization to add an internet gaming disorder to its International Classification of Diseases. The WHO announced in 2019 that it will include the disorder in the its 2022 ICD.

Making games is expensive, and anything that can be done to derisk games is going to be done. This isn’t new. Farmville, the first major success on social, was really just a remix of Harvest Moon. League of Legends is a version of Dota, modified to increase the twitch gaming and remove aspects that overly complicate the game.

One thing that has been underrated this past decade is that most people were only cancelled after they let themselves be cancelled. Trump is the politician who blew this open, he didn’t let any allegation, true or false, bring him down. The people most at risk from cancel culture are the individuals and institutions who have enthusiastically wielded the tools of cancel culture.

the court of public opinion is stronger than before and it is vital to come out swinging against false allegations that other people see as credible. Making a lukewarm apology and then disappearing from public life is the equivalent of ceding the field to your enemies. For those looking for a non-Trump model for how this plays out, Carlos Ghosn’s very public pushback on the allegations made against him by Japan’s prosecutors and Nissan will serve as a template for others who have been unjustly accused.

Favorite highlights from Disunited Nations by Peter Zeihan

Disunited Nations is my second Peter Zeihan book. The first was Absent Superpower. I also shared favorite highlights from that one; there was so much information and nuance that I reached Kindle’s limit on same-book highlights.

All highlights below are copied verbatim from the Kindle version:

—

Near the end of the Imperial Age in 1920, there were about fifty countries. As of 2020, the count is over two hundred. Remove the Order and what has enabled many of these countries to form, survive—even thrive—will fade away.

Dozens of assets contribute to national survival and power, but these are the big four:
-Viable home territories, with usable lands and defensible borders
-A reliable food supply
-A sustainable population structure
-Access to a stable mix of energy inputs to participate in modern life

There can be a darker side too. If it’s easy to move goods and people and ideas, it’s also easy to move troops. Cultural merging, or assimilation, is not the only way to “unify” a territory. Hunting down dissident and minority groups is more straightforward. Again, the American Midwest is a premier example. The Native Americans never had a chance. Similar unification-via-obliteration unfolded in most of the world’s countries with flatlands, most notably in the North China Plain, the Northern European Plain, and the vast open spaces of North Africa and the Middle East.

Many make light of what it means for the Chinese population to have an extra 41 million men under age forty who will never marry. The two most common concerns are how unmoored males might threaten social stability (legitimate) and how the Chinese government might be willing to throw a few million extra men into a military meat grinder just to get rid of them

Women are now more likely to live in cramped, coastal, urban quarters where they hold upwardly mobile white-collar or light manufacturing jobs their entire careers, while men are more likely either to live in different provinces in the poor interior or to work as undocumented migrants in China’s economic underbelly.

About the only thing that encourages people to have more kids is for people to have more space. That’s why Germany did have a baby boomlet during a period they understandably don’t enjoy discussing: the Lebensraum era of the late 1930s, when Germany was busy annexing its neighbors and getting physically bigger.

As Hastings Ismay, NATO’s first secretary general, so famously put it, the alliance’s raison d’être was “to keep the Americans in, the Russians out, and the Germans down.”

Europe now faces simultaneous, interlocking crises: currency, finance, banking, monetary policy, supply chains, inequality, migration, oil, natural gas, electricity, demographics, consumption, exports, imports, Libya, Syria, Turkey, Russia. (Perhaps even America?) It gets worse: Any response requires that all European states agree on how to prioritize and address each problem.

A cohesive French identity as early as the fifth century, a full half millennium before the English and twice that before the German. From the French core in the Beauce,

The longest, most successful, and least bad-blood-ridden foreign relationship the Americans have ever had with anyone has been with the French.

Fourth, for the four new regional powers—Turkey, Iran, Japan, and Argentina—allaying American concerns and courting American goodwill will be essential to long-term success.