8 ms·

How the Economic Machine Works (2014)

108 points by jeffreyrogers 12y ago

falava 12y ago
Ray Dalio wikipedia article: https://en.m.wikipedia.org/wiki/Ray_Dalio https://en.m.wikipedia.org/wiki/Ray_Dalio
pdecker 12y ago
http://theeconomicmachine.tumblr.com/ http://theeconomicmachine.tumblr.com/ good blog that uses Ray Dalio's thinking to examine various economies around the world.
- datainplace 12y ago
  I follow Bloomberg, FT, and sometimes the WSJ and I've never seen in mentioned that Dalio writes weekly updates on different global economies. I guess Ackman is getting all the press these days. Thanks for sharing
  - pdecker 12y ago
    ha, Ackman is so hot right now. And, its not Dalio. Just uses his approach to the markets.
dj-wonk 12y ago
From Andrew Sorkins' commentary on: http://dealbook.nytimes.com//2013/10/21/economic-theory-via-youtube-and-cartoon/?_r=0 http://dealbook.nytimes.com//2013/10/21/economic-theory-via-... > [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 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.
- cbd1984 12y ago
  I don't understand how this video represents a departure from standard macroeconomic thinking. He presents the business cycle, with a boom as an inflationary period and a bust as a deflationary one leading into recessions, the idea of credit creating debt which can be an asset, a very simplified version of the role of the central bank (really, it's all very simplified, it's only a half-hour), and, most importantly, a complete lack of the insanity I'm used to seeing in discussions of economics. 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.
  - honeybooboo123 12y ago
    Spoken like a true sophist. 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.
    - laichzeit0 12y ago
      > not a single sane person on earth actually wants his purchasing power to decrease 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.
swatow 12y ago
I wonder if General Equilibrium Theory were presented in a completely novel way, whether it could be popular on HN. Something like "Russian mathematicians come up with a decentralized way to solve resource allocation problems" or "How to solve all the world's problems with calculus".
crimsonalucard 12y ago
Some things he says in this video bug me. 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.
- sharemywin 12y ago
  productivity is people + machines(computers included). most productivity is created by getting a machines to do something people manually did before. you create wealth by creating a machine that is more productive than anyone else at the time.
  - crimsonalucard 12y ago
    in terms of productivity produced by human capital, we are all bounded by our physical form and intelligence.
- 12y ago
narrator 12y ago
The most important part of this whole presentation is that credit drives everything. If you know how credit is coming into the economy you can anticipate credit cycles. Credit cycles are the only thing you have to keep your eye on in order to keep from getting destroyed in economic crashes. 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 http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory
- zurn 12y ago
  That theory isn't widely accepted (like you'd see if you looked it up on wikipedia). mises.org is a libertarian organization advocating the austrian school of economics, which is often quite divorced from reality.
  - honeybooboo123 12y ago
    You've got it backwards. The Austrian school of economic thought is the only one that actually corresponds to reality. 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.
    - simonh 12y ago
      The Austrian theory offers some important insights and a lot of it's ideas are valuable. That is why it is widely considered a precursor of modern credit cycle theory, but carrying it's conclusions too far without considering other factors such as savings rates, fiscal and monetary policy.
      - honeybooboo123 12y ago
        Just because you say so, I guess?
deleted 12y ago
[deleted]
kensai 12y ago
Can anyone tell me what will happen to inflation when, let's say, in 50 years time we have a completely digital economy (e-money)? Would it not, in that special case, be impossible to stash the money under the proverbial mattress thus people may actually lose money simply by having it (in their current accounts, obviously)?
- wodenokoto 12y ago
  People are losing money by simply having it. Even if you store it in a normal bank account that gives interest rates inflation will eat up the interest and then some.
avz 12y ago
This is a very good explanation for the debt cycles and the role of banks, gov't, central bank et al. 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.
- alecco 12y ago
  > why do we need so much lending for consumption? Is there any benefit at all in financing consumption with debt? 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.
  - refurb 12y ago
    The benefit is for corporations. I don't think that's true. Low interest rates benefit everyone as the cost of lending decreases.
    - jes 12y ago
      Do low interest rates benefit savers? For example, senior citizens trying to live off the interest earned from their savings?
      - refurb 12y ago
        In the short-term it certainly benefits consumers who are using debt to finance their consumption (e.g. houses, cars). In the long run (at least for the housing market) the benefit goes away as housing prices adjust to reflect lower borrowing costs.
fiatjaf 12y ago
The Cultural and Spiritual Legacy of Fiat Inflation, by J. G. Hülsmann: http://web.archive.org/web/20061102222328/http://www.mises.org/story/1570 http://web.archive.org/web/20061102222328/http://www.mises.o...

108 points by jeffreyrogers 12y ago

Ray Dalio wikipedia article: https://en.m.wikipedia.org/wiki/Ray_Dalio https://en.m.wikipedia.org/wiki/Ray_Dalio

http://theeconomicmachine.tumblr.com/ http://theeconomicmachine.tumblr.com/ good blog that uses Ray Dalio's thinking to examine various economies around the world.

datainplace 12y ago
I follow Bloomberg, FT, and sometimes the WSJ and I've never seen in mentioned that Dalio writes weekly updates on different global economies. I guess Ackman is getting all the press these days. Thanks for sharing
- pdecker 12y ago
  ha, Ackman is so hot right now. And, its not Dalio. Just uses his approach to the markets.

dj-wonk 12y ago

From Andrew Sorkins' commentary on: http://dealbook.nytimes.com//2013/10/21/economic-theory-via-youtube-and-cartoon/?_r=0 http://dealbook.nytimes.com//2013/10/21/economic-theory-via-... > [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 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.

cbd1984 12y ago
I don't understand how this video represents a departure from standard macroeconomic thinking. He presents the business cycle, with a boom as an inflationary period and a bust as a deflationary one leading into recessions, the idea of credit creating debt which can be an asset, a very simplified version of the role of the central bank (really, it's all very simplified, it's only a half-hour), and, most importantly, a complete lack of the insanity I'm used to seeing in discussions of economics. 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.
- honeybooboo123 12y ago
  Spoken like a true sophist. 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.
  - laichzeit0 12y ago
    > not a single sane person on earth actually wants his purchasing power to decrease 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.

swatow 12y ago

I wonder if General Equilibrium Theory were presented in a completely novel way, whether it could be popular on HN. Something like "Russian mathematicians come up with a decentralized way to solve resource allocation problems" or "How to solve all the world's problems with calculus".

crimsonalucard 12y ago

Some things he says in this video bug me. 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.

sharemywin 12y ago
productivity is people + machines(computers included). most productivity is created by getting a machines to do something people manually did before. you create wealth by creating a machine that is more productive than anyone else at the time.
- crimsonalucard 12y ago
  in terms of productivity produced by human capital, we are all bounded by our physical form and intelligence.
12y ago

narrator 12y ago

The most important part of this whole presentation is that credit drives everything. If you know how credit is coming into the economy you can anticipate credit cycles. Credit cycles are the only thing you have to keep your eye on in order to keep from getting destroyed in economic crashes. 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 http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory

zurn 12y ago
That theory isn't widely accepted (like you'd see if you looked it up on wikipedia). mises.org is a libertarian organization advocating the austrian school of economics, which is often quite divorced from reality.
- honeybooboo123 12y ago
  You've got it backwards. The Austrian school of economic thought is the only one that actually corresponds to reality. 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.
  - simonh 12y ago
    The Austrian theory offers some important insights and a lot of it's ideas are valuable. That is why it is widely considered a precursor of modern credit cycle theory, but carrying it's conclusions too far without considering other factors such as savings rates, fiscal and monetary policy.
    - honeybooboo123 12y ago
      Just because you say so, I guess?

deleted 12y ago

[deleted]

kensai 12y ago

Can anyone tell me what will happen to inflation when, let's say, in 50 years time we have a completely digital economy (e-money)? Would it not, in that special case, be impossible to stash the money under the proverbial mattress thus people may actually lose money simply by having it (in their current accounts, obviously)?

wodenokoto 12y ago
People are losing money by simply having it. Even if you store it in a normal bank account that gives interest rates inflation will eat up the interest and then some.

avz 12y ago

This is a very good explanation for the debt cycles and the role of banks, gov't, central bank et al. 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.

alecco 12y ago
> why do we need so much lending for consumption? Is there any benefit at all in financing consumption with debt? 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.
- refurb 12y ago
  The benefit is for corporations. I don't think that's true. Low interest rates benefit everyone as the cost of lending decreases.
  - jes 12y ago
    Do low interest rates benefit savers? For example, senior citizens trying to live off the interest earned from their savings?
    - refurb 12y ago
      In the short-term it certainly benefits consumers who are using debt to finance their consumption (e.g. houses, cars). In the long run (at least for the housing market) the benefit goes away as housing prices adjust to reflect lower borrowing costs.

fiatjaf 12y ago

The Cultural and Spiritual Legacy of Fiat Inflation, by J. G. Hülsmann: http://web.archive.org/web/20061102222328/http://www.mises.org/story/1570 http://web.archive.org/web/20061102222328/http://www.mises.o...