How the economics works
Draft Version
Economic Principles
I. How the Economic Machine Works
1
II. Debt Cycles: Leveragings & Deleveragings
a) An In-Depth Look at Deleveragings
25
b) US Deleveraging 1930s
61
Timeline of Events
c) Weimar Republic Deleveraging 1920s
115
Timeline of Events
III. Productivity: Why Countries Succeed & Fail Over the Long Term
1. Part 1: The Last 500 Years and the Cycles Behind The Template
162
2. Part 2: The Formula for Economic Success
179
© 2014 Bridgewater Associates, LP
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
Economic Principles
I. How the Economic Machine Works
1
II. Debt Cycles: Leveragings & Deleveragings
a) An In-Depth Look at Deleveragings
25
b) US Deleveraging 1930s
61
Timeline of Events
c) Weimar Republic Deleveraging 1920s
115
Timeline of Events
III. Productivity: Why Countries Succeed & Fail Over the Long Term
1. Part 1: The Last 500 Years and the Cycles Behind The Template
162
2. Part 2: The Formula for Economic Success
179
© 2014 Bridgewater Associates, LP
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