When I read the book “Principles” by Ray Dalio, I immediately made a decision to adopt him as a virtual mentor. Ray Dalio is a 62 year old American investment guru who runs Bridgewater Associates, one of the biggest hedge fund managers in the world, with Asset Under Management (AUM) of $150 billion.
Recently, my mind was blown away after watching his YouTube video on “How the Economic Machine Works”. I have decided to share with you some of the things I learnt.
Transactions are the building blocks of the economic machine
Buying and selling are essential
As you may well know, every transaction involves, at least, a buyer giving money (or credit) to a seller, and the seller giving a product, a service, or a financial asset to the buyer in exchange.
Every economy is simpler than it seems
This shows that an economy is the sum total of all the transactions that make it up. For example, in every economy, you have the financial market, car market, oil market, fish market, bread market, real estate market etc. All these markets involve transactions that total what makes up an economy.
Therefore, whereas an economy may look complex, it is simply a makeup of more than a billion simple things working together, which makes it look more complex than it really is.
The bottom to top approach
To understand how an economy works, study it from the bottom up instead of studying it from the top down. This means start small and look at a single transaction first, because doing this will help you understand the economy much better.
In summary, have the following in mind when trying to understand an economy:
- The total amount of spending drives the economy.
- If you understanding transactions, you will be able to understand the economy.
- An economy consists of all the transactions in all of its market.
- All forces and all cycles in an economy are driven by transactions.
- People, businesses, banks and Governments all engage in transactions.
The three (3) main forces that drive the economy:
There are three major forces that shape the economy. They are:
- Productivity growth,
- Short-term debt cycle, and
- Long-term debt cycle
This is measured as a percentage of GDP and it grows over time as knowledge, technology, and innovations that help raise living standards.
An individual can improve productivity either by working harder or smarter. The productivity of a country is driven largely by how cost-effectively such a country can produce in relation to another country.
The following factors can influence the productivity of a country:
- Cost of uneducated people,
- Levels of bureaucracy,
- Attitudes about work,
- Raw materials cost,
- Lending, and
- Capital market efficiencies.
Short-term Debt Cycle (Business Cycle)
This usually lasts between 5-8 years and it arises from;
- The rate of growth in spending being faster than the rate of growth in the capacity to produce until
- The rate of growth is curtailed by tight money and credit, at which time a recession occurs.
Long-Term Debt Cycle
This arises from debts rising faster than incomes and money until this can’t continue. This is because debt service costs become excessive, typically because interest rates can’t be reduced any more.
He drops 3 rules of thumb which can work for individuals and policymakers of any economy
- Do not allow debt to rise faster than income, because your debt will eventually crush you
- Do not let income rise faster than productivity, because you will eventually become uncompetitive.
- Also, do all you can to raise your productivity level.
In conclusion, Nigerian policymakers, economic planners, heads of companies, and even private individuals, can learn a thing or two from this on how to improve on our economy.
To watch Ray Dalio’s YouTube video on “How the Economic Machine Works”, simply follow the link below: