economic machine

Ray Dalio explain how the economic machine works

Transactions are the economy

The economy is made up of millions of transactions between people, government and businesses. When we exchange money or credit with someone for goods, services or financial assets, a transaction is created. The action of spending drives the economy – one person’s spending is another person’s income.

Credit is important and creates economic growth

Credit means we can temporarily spend more than we earn. When we receive credit from a lender, we’re able to increase spending, which in turn drives the economy.

When interest rates are high, we borrow less. When interest rates are low, like they are today, we borrow more, which should in turn stimulate economic growth.

You can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong so you have to be humble.

How the Economic Machine Works.”

Every time you buy something, you create a transaction, and transactions are the building blocks of the economic machine. Understanding transactions is the key to understanding the whole economy. An economy consists of all of the transactions and all of its markets. Adding up the total quantity of transactions in all markets gives you everything you need to know to understand the economy. The biggest buyer and seller is the government, which a) through a central bank controls the credit in the economy and b) collects taxes and spends money.

These transactions form markets and markets form economies. One of the keys to successful trading and investing is to understand who the buyers are, what their motivation is and what the credit/liquidity picture looks like.

Life is like a game where you seek to overcome the obstacles that stand in the way of achieving your goals. You get better at this game through practice. The game consists of a series of choices that have consequences. You can’t stop the problems and choices from coming at you so it’s better to learn how to deal with them.

On the nature of trading

Alpha is zero sum. In order to earn more than the market return, you have to take money from somebody else.

If you’re going to come to the poker table, you’re going to have to beat me. We have 1,500 people who work at Bridgewater. We spend hundreds of millions of dollars on research and so on; we’ve been doing this for 37 years.

The nature of investing is that a very small percentage of the people take money, essentially, in that poker game, away from other people who don’t know when prices go up whether that means it’s a good investment or if it’s a more expensive investment. Too many investors are reactive decision makers. If something has gone up, they say, “Ah, that’s a good investment.” They don’t say, “That’s more expensive.”

This is something many traders forget, but it’s a very important truth to keep in the front of your mind. There’s always another person on the other side of your trade. If you’re buying, someone is selling to you. If you’re selling, someone is buying from you. And everybody has the same goal: to make money! But the buyer and seller can’t both be right. Obviously one party always has to be wrong. Couple that with the fact that some of the smartest people in the world are working with enormous amounts of money and incredibly advanced tools (like Bridgewater) to extract profits from the markets, and trading doesn’t seem so easy, does it?

“Nature gave us pain as a messaging device to tell us that we are approaching, or that we have exceeded, our limits in some way.”
― Ray Dalio

“Pain + Reflection = Progress” – Ray Dalio

“Time is like a river that carries us forward into encounters with reality that require us to make decisions. We can’t stop our movement down this river and we can’t avoid those encounters. We can only approach them in the best possible way.”
― Ray Dalio, Principles: Life and Work



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