HEMWLD 2021.4.5 | Chap1 How the Economic Machine Works | P1-4

This article contains my reading note on page 1-23, which is the first chapter, How the Economic Machine Works. This note is written in English for two reasons. First, I merely own an English version so I read and write in English. Second, Douban says it cannot immediately publish my first note because of sensorship. I guess Ray's discussion on country's success and failure triggered something. So, it might be better to write in English. I dont' think I'm such a good English writer, so please point out if there's any errors or mistakes, thanks in advance.

At the beginning, I watched a video produced by Bridgewater with the same name as that of this chapter. In Ray's point of view, the economic machine consists of three parts

1 Productivity growth

2 Short-term leveraging cycle, 5~8 years. which is controlled by central banks.

3 Long-term leveraging cycle, 75-100 years, which is based on productivity growth.

In the end, Ray tells us three suggestions:

1 Do not let debt raise faster than your income, else you'll go bankrupt.

2 Do not let your income raise faster than your productivity. It makes me think of plenty of middle-aged people lose their jobs - their productivity decreases while they want more.

3 Try every length to raise yoru productivity. I totally agree. This is the stone of bridge!

However, the reading material contains more detail. The following is my note.

How the Economic Machine Works: "A Tracsactions-Based Approach"

1 Words Definition:

Transaction: a buyer giving money or credit to exchange a good or financial assets or service from a seller.

Market: All transactions of the same things.

Economy: a sum of all transactions in all markets.

2 The economy has two initial variables: Spending = Money + Credit (total $) and Quantity (total Q), which means if you know these two factors, you know everything.

Ray says, the motivations of most important buyers are predictable, so that if you can add then up you'll be able to forecast the economy.

3 The weight of the two factor: $ has bigger impact because there's nothing easier to change $. *Just go printing money, borrowng money. Consuming goods is really easy.*

4 Buyer categories:

Private sector: Household , business (foreign or domestic)

Public sector: Government - buy goods or service, Central banck - printing money and buy financial assets.

5 The advantages of transactions-based perspective:

1) Traditional perspective focuses too much on supply and demand, which ignored the price.

2) Velocity is misleading, Ray thinks it's credit at all. Actually if credit contracts faster than money increasement, the amount of spending will decline and prices will fall, not inflate.

How the Market-Based System Works

6 Financial assets: like lending and borrowing.

Capital formation: the creation and purchases of financial assets.

People buy and sell financial assets because they think they'll be paid more money later than they spend.

7 A short-term debt cycle: the rate of growth in $ > the rate or growth in Q , leads to the rise of P, until $ is cut by tight central bank policy.

Recession: the contradiction between the private sector debt growth arising from tight central bank policy, which ends when central bank eases.

8 Long-term debt cycle: debts rising faster than the productivity (from video), debts rising faster than both incomes and money until this can't continue because debt service costs becomes more excessive.

Deleveraging: reducing debt burdens. The private sector debt can't be rectified by the central bank lowering cost of money. End by central bank printing money.

9 Why can monetary policy be ineffective?

1) 0% interest rate

2) money goes into the purchase of inflation-hedge assets rather than into credit growth. This produces inflationary deleveraging.