Tuesday, January 09, 2018

Video Economics Primer Offers Four Ways To Reduce Long Term Deficit

Someone sent me a link to this video that explains the economy. I'm always skeptical about people explaining the economy. Why? Because economists tell us the economy is doing well, all signs are positive. But we hear

  • about the people struggling to get by, (and probably know some of them too.)   
  • that US income inequality hasn't been so high for a century. 
  • (and see) a lot of homeless folks all over.  
  • that to keep the economy growing we have to destroy the environment. (Well they don't word it quite like that.)  

My reaction is that if these things are happening in a 'good' economy,  then the economists aren't measuring the economy right.

But this video is a great start to learn how economist think about the economy,  some of  the jargon, and our options for debt reduction beyond the Republican mantras of no new taxes and spending cuts.

In fact, near the end of the video, Dalio explains why spending cuts alone exacerbate the debt problems.

And who is Ray Dialo?  Wikipedia tells us:
"Raymond Dalio (born August 1, 1949) is an American investor, hedge fund manager, and philanthropist.[3] Dalio is the founder of investment firm Bridgewater Associates, one of the world's largest hedge funds.[4] He is one of the world’s 100 wealthiest people, according to Bloomberg.[5]"
So, when he says at the end, that this 'template' has helped him, I'm assuming it means it has helped him to time and direct his investments.

Crib Sheet

This video is content rich.  He has reduced his presentation to the essentials.  Every word is important.  I couldn't listen to this while doing something else.  In fact, I had to stop it repeatedly so I could take notes.  But by doing that, I understood his conclusion.

Basically, he's saying:

The economy works in a simple, mechanical way.
  • A few simple parts
  • A lot of simple transactions, that are repeated over and over again.
    • These transactions are driven by human nature and create 3 main forces that drive the economy
      • productivity growth
      • the short term debt cycle
      • the long term debt cycle
He explains these three forces and uses the three visually superimposed on each other - productivity growth, short term debt cycle, and the long term debt cycle - to explain what people have to do to keep the cycles going in our favor.  

He starts by talking about transactions (people exchanging goods and services for money and credit) and shows how these can lead to cycles of increasing and decreasing productivity and debt.  
He puts CREDIT in the center of this model - as a critical means to increasing productivity and living standards  (He points out there is $50 trillion in credit in the US, but only about $3 trillion in cash.)

You can agree or disagree with his presentation (I have a few questions and quibbles) but it does a great job of spelling out the basics of mainstream economics.  

He tells us at the end that the short term debt cycles can be fixed by the central bank (The Fed in the US) decreasing interest rates.  But each time it does this and restimulates the economy and productivity growth, it increases the long term debt until the long term debt cycle gets us to a depression.

He offers four solutions at that point. (Lowering interest doesn't work because it is already at 0% at this point):
  1. Cut spending
  2. Restructure the debt
  3. Income redistribution
  4. Print more money

He argues that cutting spending increases the problem, and the ultimate solution is a combination of all four, which, if done well (balancing inflationary and deflationary ways to deleverage) it is 'beautiful' and gets us balanced again with the least disruption.  

I promise if you watch this carefully and take some notes, all this will make perfect sense.  

This is useful to gather jargon and understanding for when you talk to your Republican congress members who only want to cut spending and taxes.  

And, of course, economists don't agree amongst themselves, so take this all with a grain of salt.  Consider it a starting point for finding out more.

[UPDATE 5:45pm:  I've added the word 'video' into the title after seeing how relatively few people have looked at this post so far today.  LA Rain got more hits faster.  People apparently don't want to deal with the hard topics.  The video is really well done, and maybe by adding video to the title more people will stake a look.  Just musing here on blogging and people's interests.  I do recognize that I too get overloaded and skip things I should read.]

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