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How the Economic Machine Works, According to Dalio

In this timeless animated video, billionaire hedge fund founder Ray Dalio eloquently explains how the world economy works in just 30 minutes.
Visual Capitalist creates and curates enriched visual content focused on emerging trends in business and investing. Founded in 2011 in Vancouver, the team at Visual Capitalist believes that art, data, and storytelling can be combined in a manner that makes complex issues and processes more digestible. Covering high-growth opportunities and industries such as technology, mining, and energy, Visual Capitalist reaches millions of investors each year. Visual Capitalist’s infographics have been featured in The Wall Street Journal, The New York Times, Zero Hedge, Maclean’s, Gizmodo, The Vancouver Sun, and Business Insider.
Visual Capitalist creates and curates enriched visual content focused on emerging trends in business and investing. Founded in 2011 in Vancouver, the team at Visual Capitalist believes that art, data, and storytelling can be combined in a manner that makes complex issues and processes more digestible. Covering high-growth opportunities and industries such as technology, mining, and energy, Visual Capitalist reaches millions of investors each year. Visual Capitalist’s infographics have been featured in The Wall Street Journal, The New York Times, Zero Hedge, Maclean’s, Gizmodo, The Vancouver Sun, and Business Insider.

Ray Dalio has reached the part of his life where he is giving back.

Dalio founded Bridgewater Associates out of his apartment in 1975, and now the long-running hedge fund is recognized as the world’s largest by assets under management (AUM) with $122.2 billion, and as the fifth most important private company in the United States by Fortune magazine.

However, since 2011, the billionaire has passed the baton for the role of CEO at Bridgewater – and he’s also been focused on passing on his knowledge as well.

The Knowledge Baton

Most recently, Ray Dalio has been praised for releasing his book entitled Principles: Life and Work, where he outlines the principles that have guided his impressive success with Bridgewater.

Just as timeless, however, is this 30 minute animated video that he and Bridgewater released a few years ago, which gives their unique template for how the global economy works. It’s possible that you may have seen this before – but if not, it can be a useful tool to understand how the pieces fit together.

Dalio starts at the micro level, showing how individual transactions are part of the overall economic machine.

Then, using human nature and history as a guide, Dalio reduces the complex global economy down to just three major forces that must be understood.

Three Major Forces

Dalio says this model has guided Bridgewater for over 30 years, and that there are three major forces that shape the economy:

1. Productivity Growth
Productivity growth, which is measured as a percentage of GDP, grows over time as knowledge, technology, and innovations help to raise our productivity and living standards.

2. Short-Term Debt Cycle
Usually lasting 5-8 years, the short-term debt cycle is a repeating pattern that occurs as credit expands and contracts.

3. Long-Term Debt Cycle
Usually lasting 75-100 years, the long-term debt cycle usually ends in a period of extreme deleveraging, where global debtis unsustainable and asset prices fall.

Based on Dalio’s model and his concerns about the abuse of money printing by central banks, it’s clear why he routinely holds gold for about 5-10% of his personal portfolio, as well.

Rules of Thumb

The video ends with Dalio giving three rules of thumb – takeaways that make sense for individuals, companies, and policymakers.

Rule #1. Don’t have debt rise faster than income
Your debt burdens will eventually crush you.

Rule #2. Don’t have income rise faster than productivity
You’ll eventually become uncompetitive.

Rule #3. Do all that you can to raise productivity
In the long run, that’s what matters the most.

With an estimated net worth of $17 billion, it seems Dalio’s rules could be worth keeping in mind.

Many of us economy-watchers have been expecting recession, though with significant differences on odds and timing. Regardless, recent banking developments just made recession more likely and may have accelerated its onset.
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