Ray Dalio, billionaire hedge fund manager, in a letter released today, described the economy as a machine. Although it appears the machine is complex, it is rather simple if you look at it from a more “black and white perspective”. The hedge fund manager describes the economy as a sum of transactions. A transaction is when a buyer gives money to a seller in exchange for a good or a service.
As Dalio says, although the economy appears to be complex, it is relatively simple when you consider that there are just a bunch of transactions happening all the time. However, it goes deeper than that. Economics pertains to supply and demand which affects prices and inventory. You have labor and capital which are important parts for understanding economics.
Dalio goes on to explain the short cycle or the “business cycle” are characterized as the rate of growth in spending was faster than the ability to produce goods. When the rate of growth in spending slows because of tight money and credit, that is when a recession happens. In other words, a recession is when the economy contracts because of growing debt in the private sector sue to tight central banking regulations and policies. This action can be reversed with the central banking deploying easing policies.
On the other hand we have long term debt cycles. These cycles occur when debts are rising faster than incomes and holding cash. At this point, money can not continue at its regular pace because debt services costs are astronomical due to interest rates. Deleveraging is when you are in the process of reducing debt obligations. Depressions are contractions in deleveraging. These happen because contraction in private debt can be offset by an easing policy in the central bank.
At the end of the day, these cycles are made possible because of transactions. Transactions again are when a buyer credits a seller or gives the seller money, in exchange for goods or services. The economy has different cycles in which different theories of money and transactions happen and cause consequences.
Economics is not a difficult concept if you just break it down into what it really is. Once you layer it, you can see that everything is just in response to different patterns and movements of money during a time period. These different patterns can create wealth or destroy it depending on whether it is a prosperous environment or a depression.