Bridgewater Celebrates Financial Literacy Day!

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Bridgewater Associates sent us the following email. It appears that the  PDF has been updated (although not confirmed yet), so we will share again. Additionally, we will embed the video for those who have not seen it.

Today is “Financial Literacy Day” on Capitol Hill. As such, I wanted to re-share with you the animated video that Bridgewater’s Ray Dalio created, explaining “How the Economic Machine Works.” The 30-minute video, which is available on www.EconomicPrinciples.org, has close to 950,000 views.

The video explains a number of difficult financial concepts, including credit, inflation and interest rates, in an easy-to-understand and entertaining way. It is our hope that you will share the video with your readers, write about it, tweet it, etc. We are aiming for one million views!

 

Editors note: excerpt from PDF followed by full PDF and Bridgewater self promotion below

How the Economic Machine Works

 

 

The economy is like a machine. At the most fundamental level it is a relatively simple machine. But many people don’t understand it – or they don’t agree on how it works – and this has led to a lot of needless economic suffering. I feel a deep sense of responsibility to share my simple but practical economic template, and wrote this piece to describe how I believe it works. My description of how the economy works is different from most economists’. It has worked better, allowing me to anticipate the great deleveragings and market changes that most others overlooked. I believe that is because it is more practical. Since I certainly do not want you to blindly believe in my description of how the economic machine works, I have laid it out clearly so that you can assess the value of it yourself. So, let’s begin.

 

How the Economic Machine Works: “A Transactions-Based Approach”

 

An economy is simply the sum of the transactions that make it up. A transaction is a simple thing. Because there are a lot of them, the economy looks more complex than it really is. If instead of looking at it from the top down, we look at it from the transaction up, it is much easier to understand.

 

A transaction consists of the buyer giving money (or credit) to a seller and the seller giving a good, a service or a financial asset to the buyer in exchange. A market consists of all the buyers and sellers making exchanges for the same things – e.g., the wheat market consists of different people making different transactions for different reasons over time. An economy consists of all of the transactions in all of its markets. So, while seemingly complex, an economy is really just a zillion simple things working together, which makes it look more complex than it really is.

 

For any market, or for any economy, if you know the total amount of money (or credit) spent and the total quantity sold, you know everything you need to know to understand it. For example, since the price of any good, service or financial asset equals the total amount spent by buyers (total $) divided by the total quantity sold by sellers (total Q), in order to understand or forecast the price of anything you just need to forecast total $ and total Q. While in any market there are lots of buyers and sellers, and these buyers and sellers have different motivations, the motivations of the most important buyers are usually pretty understandable and adding them up to understand the economy isn’t all that tough if one builds from the transactions up. What I am saying is conveyed in the simple diagram below. This perspective of supply and demand is different from the traditional perspective in which both supply and demand are measured in quantity and the price relationship between them is described in terms of elasticity. This difference has important implications for understanding markets.

Source: Pixabay

ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings (1) via Bridgewater

 

Praise for “How the Economic Machine Works”

 

“It may be unconventional but it casts strong light on how the economy actually works, with its history of repetitive and ultimately destructive excesses in credit creation” – Paul Volcker.

 

“It’s great when you can use a format like this to communicate a more complex idea to many people….. Ray Dalio gives a simple (but not simplistic) explanation for how credit works.” – Bill Gates

 

“Henry M. Paulson Jr., the former Treasury secretary, has been sending the link to friends” – The NY Times

 

“A clear, engaging and fun video that explains macroeconomics in a practical way that anyone can understand. I loved it so much I asked Ray to let us put it on Khan Academy” – Sal Khan, Founder of the Khan Academy

 

“Forget Econ 101. Take a look at the lessons in Dalio 101….An oddly entertaining animated cartoon filled with provocative theories about the way the economy runs.  He 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.”  – Andrew Ross Sorkin 

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