Using Dalio’s Economic Machine As Diagnosis

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Essays

First, watch this video. Ray Dalio, founder of Bridgewater, the world’s biggest global macro hedge fund, breaks down the economic machine into cycles of credit, debt, and growth. If it’s TL;DR, the money section (for my purposes) starts around 24:30:

Having already lowered its interest rates to zero, [the Fed] is forced to print money. Inevitably, the central bank prints money out of thin air, and uses it to buy financial assets and government bonds… It happened in 2008 when the federal reserve printed over $2 trillion in reserves… However, this only helps those who own financial assets. The central bank can print money, but it can only buy financial assets. The central government can buy goods and services, but can’t print money. In order to stimulate the economy, the two must cooperate.

In response to the deleveraging of 2008, where debt obligations were forfeited and credit dried up (at the individual and institutional level), the United States had to respond with two levels of stimulus, as Dalio points out. We know about the American Recovery and Reinvestment Act of 2009, which was the “big stimulus that no Republicans voted for”. That was $787 billion at the time of passage, $831 billion all told. This went towards infrastructure, education, alternative energy and unemployment benefits. We also know about Troubled Asset Relief Program (TARP), which was $418 billion, of which $405 billion was repaid. This went towards rescuing financial assets. What most people *don’t* know, however, is that the Fed also printed $2 trillion in loans to financial assets. On December 5, 2008 alone, the Fed provided $1.2 trillion in relief to holders of financial assets. 

You may remember the political tenor of the conversation around the TARP bailout in 2008, and of the Obama stimulus in 2009. In both cases, the mainstream media would have led you to believe that it was a reasonable debate whether or not to have a stimulus, and whether or not the ones that were passed were too big. As Mr. Dalio pointed out, if a Fed stimulus for financial assets isn’t balanced with a central government stimulus for goods and services, you’ve got problems. And the Fed has, to date, spent way more money on bailing out financial assets than the central government did on goods and services. Way more. If you want to understand why we had an unequal recovery, and are facing the income inequality crisis we currently face, this is a good place to start. More on this topic soon.

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