GRS Theater: How The Economy Works

 J.D. Roth         March 2018

It’s time for another episode of Get Rich Slowly Theater, boys and girls! This week, we’re going to enjoy a thirty-minute YouTube video exploring how the economy works. Think of it as Economics 101, but instead of a semester spent sitting in a classroom, you get all of the info in the time it would take you to watch an episode of Big Bang Theory.

This animated presentation, written and narrated by billionaire investor Ray Dalio, breaks down economic concepts like credit, deficits and interest rates, allowing viewers to learn the basic driving forces behind the economy, how economic policies work, and why economic cycles occur.

Basically, Dalio says, economic cycles are a combination of productivity growth, short-term debt cycles, and the long-term debt cycle. It sounds boring, but it’s not.

Here’s the video: https://www.youtube.com/watch?v=PHe0bXAIuk0

Components of the Economic Cycle

This is the model Dalio uses to view the world and make big bucks. He thinks it can be helpful to other people. If, like me, you’re not a huge fan of watching videos, I’ve paraphrased Dalio’s presentation below.

Transactions

“The economy works like a simple machine,” Dalio begins. “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 three main forces that drive the economy.”

Transactions are the building blocks of the economic machine. A transaction is any exchange of money for goods or services. (Money includes both cash and credit.) “All forces in an economy are driven by transactions,” says Dalio. “If we can understand transactions, we can understand the whole economy.”

Markets consist of all buyers and sellers making transactions for the same thing. The stock market is made up of all buyers and sellers of stocks. The wheat market is made up of all buyers and sellers of wheat. The fruit market is made up of all buyers and sellers of fruit. And so on.

When you combine all of the transactions in all of the markets, you get an economy. So, the U.S. economy is made up of all of the transactions in all of the markets in the United States.

Simple so far, right?

The biggest buyer and seller in the economy is the government, which is made up of two parts: the central government (which collects taxes and spends money) and the central bank (which controls the amount of money and credit in the economy by setting interest rates and printing new money).

The Most Important Part of the Economy

Dalio says that credit is the most important part of the economy because it’s the largest and most volatile component. “Credit can help both lenders and borrowers get what they want,” he says. “Why is credit so important? Because when a borrower receives credit, he is able to increase his spending. And remember, spending drives the economy.”

He explains: “This is because one person’s spending is another person’s income.

To continue reading, please go to the original article here:
https://www.getrichslowly.org/how-the-economy-works/