Why must we understand credit?

According to Ray Dalio, whose lecture was recommended by Honey Panda, the three economy forces include productivity growth, short term debt cycle (5-8 years), long term debt cycle (50-75 years).

In a nutshell:

  • total spending = $ + credit
  • price = total spending / total quantity [1]
  • Central government: collects taxes + spend $
  • Central bank: prints $ + influences interest rate
  • $ is only to increase productivity
  • our spending is another person’s income
  • credit and debt are of similar concept, just that credit is an asset to lender, debt is a liability to borrower
  • income ↑, borrowing ↑, spending ↑
  • borrowing (credit) create cycles. In cycles, after move upward, must move downward
  • inflation is due to spending ↑ faster than quantity ↑
  • inflation increases interest rate
  • In a recession, lowering interest rates works to stimulate borrowing.
  • In a deleveraging, lowering interest rates does not work.
  • If deleveraging, how? cut spending + reduce debt + redistribute wealth + central bank prints $
  • recession →deleveraging →depression
  • If depression, how? debt restructuring, increases tax
  • 3 rules of thumb: (1) don’t have debt ↑ faster than income [2], (2) don’t have income ↑ faster than productivity (so that we don’t end up being uncompetitive), (3) do all that we can to ↑ productivity.

[1] Since credits have been easy to obtain, they increase total spending and hence prices for e.g. property. See also ref2016/ray_dalio_economy_20160705.pdf

[2] If debt ↑ faster than income, debt burden will crash us.

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