How The Economic Machine Works by Ray Dalio

Summary

このビデオスクリプトは経済の基本的な仕組みを30分で説明しており、経済は単純な機械的な動作をしています。経済は取引から成り立っており、その動向は生産性の向上、短期および長期の債務サイクルという3つの主要な力によって左右されます。信用は経済の中で最も重要で最も理解されていない部分であり、経済成長を促進する自己増強的なパターンを作り出します。しかし、債務の増加は長期的には問題を引き起こし、デフレージングが始まることがあります。政策立案者が適切なバランスを保てば、美しいデフレージングを達成し、経済は徐々に回復していきます。

Takeaways

• 🌟 経済は単純な機械的な仕組みで動作し、人間の本性に基づく取引によって駆動されます。
• 💰 経済は取引の集まりであり、それらの取引は経済を形成する最も基本的な要素です。
• 📈 信用は経済の中で最も重要で理解されがたい部分であり、経済の最大の変動要素です。
• 🔄 短期債務サイクルと長期債務サイクルは、経済を動かす3つの主要な力の2つであり、経済の動きを追跡する良いテンプレートを提供します。
• 🏦 政府は経済の最大の買手と売り手であり、中央銀行は経済におけるお金と信用の量をコントロールする重要な役割を果たします。
• 📊 債務は経済の短期的なスイングを主導するが、生産性成長は長期的な経済成長の鍵を握ります。
• 🔃 債務の増加は経済サイクルを作り出し、借り入れと返済のサイクルは経済の機械的な予測可能な一連の出来事を引き起こします。
• 📉 デフレや不況は信用の縮小によって引き起こされ、経済活動の減少は債務負担の増加につながります。
• 🛑 デフレバーシングは債務負担を軽減する必要があり、政府と中央銀行は協力して経済を刺激する财政・金融政策を実施します。
• 🌱 経済はデフレバーシングを乗り越え、債務負担が下がり、経済活動が正常に戻るまで数年以上かかることがあります。
• 📚 スクリプトは経済の基本的なルールを3つ示しており、債務、収入、生産性のバランスを保つことの重要性を強調しています。

Q & A

経済の基本的な仕組みはどのようなものですか？

経済は単純な機械的な仕組みで、人間の本性によって駆動される単純な取引から成り立っています。経済は生産性成長、短期債務サイクル、長期債務サイクルという3つの主要な力によって動きます。

取引とは何か、またなぜ経済において重要なのですか？

取引は買者が商品、サービス、または金融資産を売る者とお金や信用を交換する行為です。経済はその取引の合計であり、経済を理解するためには取引を理解することが重要です。

信用とは何で、経済においてなぜ重要なのですか？

信用は貸し手がお金を貸し、借り手が返済することを約束することによって生み出される金融的な手段です。経済の中で最も大きな而且在経済において重要なのは、それが最大かつ最も不安定な部分であるためです。

短期債務サイクルとは何で、どのようなプロセスを経ますか？

短期債務サイクルは経済活動の増加と減少を繰り返す5～8年で繰り返されるサイクルです。これは信用の利用の容易さによって経済拡大や後退が決まります。

長期債務サイクルとは何で、なぜ重要なのですか？

長期債務サイクルは75～100年で繰り返されるサイクルで、債務と収入のバランスが経済成長に影響を与えます。債務の負担が大きくなれば経済はデフレやデリーバーラジングに陥ります。

デリーバーラジングとはどのような経済状態であり、どのように対処するべきですか？

デリーバーラジングは債務の負担が大きすぎて返済が困難になり、経済が縮小する状態です。債務の削減、支出の削減、富の再分配、中央銀行による新しいお金の印刷が対処策として挙げられます。

経済において生産性とは何を意味し、なぜ重要なのですか？

生産性は人々の知識や技術の蓄積によって生活水準を向上させる能力を指します。長期的には生産性の向上が経済成長を支えます。

金利が経済に与える影響は何ですか？

金利が高いと借り入れが高価になり、信用創出が抑制され、経済活動が減少します。逆に、金利が低いと借り入れが安くなるため、信用創出が増加し経済活動が増加します。

経済のサイクルはどのようにして形成されるのですか？

経済のサイクルは信用の利用と返済の繰り返しによって形成されます。信用を利用して消費すると、将来的にはその分を返済しなければならないため、経済活動は周期的に増減します。

経済のデフレとインフレーションの違いは何ですか？

デフレは物価が下がること、インフレーションは物価が上昇することを指します。デフレは支出の減少につながり、インフレーションは支出の増加につながります。

政策立案者がデリーバーラジングを乗り越えるためにはどのようなバランスを保つ必要がありますか？

政策立案者は支出の削減、債務の削減、富の再分配、新しいお金の印刷の4つの方法を適切にバランスさせることで、経済と社会的稳定性を保つ必要があります。

Outlines

00:00

📚 経済の基礎原理解説

経済はシンプルな機械的な仕組みで動作するが、多くの人々がそれを理解しておらず、経済危機を招くことがある。作者は30年以上にわたって役立つかたちのある経済モデルを提案し、経済は単純な部品と繰り返される取引から成り立っていると説明。取引は経済の基本であり、経済全体を理解するためには、政府や中央銀行の役割を理解することも重要である。特に信用は経済の中で最も重要な部分であり、債務と資産の関係性についても触れられている。

05:02

💹 経済サイクルと信用の役割

経済成長は信用の助けを借りて短期間で生産性を上回る成長を遂げることがあるが、長期的には生産性に左右される。信用は経済の短期および長期債務サイクルを形成する要因であり、経済のスイングを主導する。経済は信用なしでは生産性のみで成長し、信用を導入することでサイクルが生じる。信用の創出、債務の形成、返済のプロセスが経済に与える影響についても解説されている。

10:02

📈 信用と経済サイクルの複雑性

信用は経済の成長を促進するが、過剰消費のために債務が形成されると問題を引き起こす。信用は資源の有効配分や収入の生成に役立つが、経済の短期債務サイクルでは中央銀行の金利政策が経済活動の拡大や後退を制御する。金利の上昇は借り入れを抑制し、デフレーションや不況につながることがある。逆に金利の低下は経済活動を活性化させる。経済は信用の利用により複雑さを増し、サイクルを形成している。

15:02

🌐 長期債務サイクルとデフレ

長期債務サイクルでは、債務の負担が徐々に増大し、最終的に収入を上回る。その結果、支出の減少、収入の低下、信用の消失が生じ、経済はデフレに陥る。デフレは経済をさらに悪化させる悪循環を作り出し、財産の価値が下がることで、債務の返済負担は増大する。2008年の世界的な経済危機はこの長期債務サイクルの頂点に該当する例である。

20:07

🏦 デフレ対処と政策の選択

デフレを対処するためには、支出の削減、債務の整理、富の再分配、中央銀行による新しい貨幣の創出が行われる。これらの手段は経済の債務負担を下げることが目的であるが、バランスが取られる必要がある。特に中央銀行の貨幣創出は、信用の消失を補填するためであり、過剰なインフレーションを避けるための注意が必要である。

25:07

🌟 美しいデフレと経済回復への道

デフレを美しく処理することは可能であり、それは債務負担の相対的な減少、実質の経済成長、インフレーションの抑制を伴う状態を指す。政策立案者はデフレを穏やかに処理し、経済を回復させるためには、支出の削減、債務の整理、富の再分配、貨幣創出のバランスをとる必要がある。経済は徐々に回復し、長期的には生産性の向上が最も重要であることが示唆されている。

30:08

🛑 経済の3つの黄金則

最終段落では、経済の3つの基本原則が提示されており、債務の増加を収入の増加を上回らないように、収入の増加を生産性の向上にリンクさせ、生産性の向上に注力することが奨励されている。これらの原則は個人にも政策立案者にも適用され、経済の健全な発展につながる。

Keywords

💡経済マシン

「経済マシン」とは、経済を単純な機械的な仕組みで理解することを指します。ビデオでは、経済が複雑に思えても、基本的な部品と繰り返しの取引から成り立っていると説明しています。経済マシンは、経済の動きを追跡し、現在の状況を理解するためのテンプレートとして機能します。

💡取引

「取引」は経済の基本単位であり、ビデオでは買者と売者の間のモノやサービス、金融資産を交換する行為を指します。経済全体はこれらの取引の合計であり、経済を理解するためには取引を理解する必要があるとビデオは強調しています。

💡クレジット

「クレジット」は、ビデオの中で最も重要かつ理解されていない経済の部分とされています。貸し手と借り手が資金を創出し、経済活動を促進する役割を持っています。ビデオでは、クレジットが資産として貸し手に、負債として借り手に存在し、経済を推進する自増するパターンを形成する例として説明されています。

💡生産性成長

「生産性成長」は、ビデオで説明されている経済を動かす3つの主要な力の1つです。長い目で見ると、積極的な働き方や発明が生産性を高め、生活標準を向上させますが、ビデオでは生産性成長が経済の短期間の変動を大きく左右しない理由も説明しています。

💡短期債務サイクル

「短期債務サイクル」は、5〜8年で繰り返される経済の周期的な動きを指し、ビデオでは経済活動の増加と減少を繰り返すことでインフレやデフレを引き起こすプロセスとして説明されています。中央銀行の金利政策がこのサイクルを制御する重要な要素であるとビデオに示されています。

💡長期債務サイクル

「長期債務サイクル」は、75〜100年で繰り返されるとビデオで述べており、債務と収入のバランスが長期にわたって変化し、最終的に経済のデフレや再調整を引き起こすサイクルです。ビデオでは、長期債務サイクルがバブルや経済の過熱を形成し、最終的にデリーバーラジングにつながることも説明しています。

💡デリーバーラジング

「デリーバーラジング」は、債務負担が過大になり、経済が債務を返済し直すプロセスを指します。ビデオでは、デリーバーラジングが債務の削減、所得の減少、信用の消失を引き起こし、経済が自己調整する過程であると説明しています。

💡インフレ

「インフレ」は、ビデオで使用される経済用語で、物価が上がることを指し、経済活動の増加とクレジットの創出に伴い、支出と収入の成長が生産に比べて速くなっている時に発生する現象です。中央銀行はインフレを避けるために金利を引き上げることで制御を試みます。

💡デフレ

「デフレ」は、ビデオ内でインフレの逆現象として説明されており、物価が下がることを意味します。経済活動の減少と債務返済の増加に伴い、支出が減少し、所得も下がることでデフレが引き起こされます。

💡中央銀行

「中央銀行」は、経済における重要な役割を果たし、ビデオでは経済における信用の量を制御する機関として紹介されています。金利の調整や新規通貨の創出を通じて、中央銀行は経済の流れや信用の供給に影響を与えます。

💡財政赤字

「財政赤字」は、ビデオ内で政府の支出が収益を上回ることを指し、特にデリーバーラジングの際に政府が失業や経済刺激計画にかかる費用をカバーするために増やされることを説明しています。政府は税金を増やすか、借金を作って財政赤字を財政的に管理します。

💡財政再編

「財政再編」は、ビデオでデリーバーラジングの過程で使用される用語で、政府や個人、企業が支出を削減し、債務を返済することで債務負担を軽減するプロセスを指します。これはデフレ的かつ痛みを伴う過程であり、ビデオでは経済の自己調整を促進する重要な要素とされています。

Highlights

经济机器的工作原理被比作一个简单的机械装置，但其复杂性常常导致人们对其理解不足或存在分歧，这引发了很多不必要的经济苦难。

提出了一个简单但实用的经济模板，帮助预测和规避全球金融危机，在过去30年中表现良好。

经济由简单的部分和大量重复的简单交易组成，这些交易主要由人性驱动，并创造了推动经济的三大力量：生产力增长、短期债务周期和长期债务周期。

交易是经济的基础，理解交易就能理解整个经济。

市场由所有买家和卖家组成，他们为同一事物进行交易，如小麦市场、汽车市场、股票市场等。

政府是最大的买家和卖家，由中央政府和中央银行组成，后者通过影响利率和印制新货币来控制经济中的货币和信贷量。

信贷是经济中最重要且最不被理解的部分，它是最大且最不稳定的部分。

信贷的创造立即转化为债务，债务对贷款人是资产，对借款人是负债。

借款人接收信贷后能够增加支出，支出推动经济，因为一个人的支出是另一个人的收入。

信用良好的借款人具有偿还能力和抵押品，这使得贷款人愿意贷款。

收入增加允许增加借款，这允许增加支出，从而形成自我加强的模式，导致经济增长和经济周期的形成。

生产力增长在长期内最为重要，但信贷在短期内最为重要，因为生产力增长波动不大，而债务允许我们消费超过我们生产的量。

债务的波动以两个大周期发生，一个周期大约5到8年，另一个周期大约75到100年。

在没有信贷的经济中，唯一的增长方式是提高生产力。但在有信贷的经济中，我们可以通过借贷来增加支出，从而形成周期。

短期债务周期通常持续5到8年，由中央银行通过调整利率来控制。

长期债务周期是由于人们倾向于借贷和消费而不是偿还债务，导致债务增长速度快于收入。

在去杠杆化过程中，人们削减支出，收入下降，信贷消失，资产价格下降，银行受到挤压，股市崩溃，社会紧张局势上升。

在去杠杆化中，债务负担过高，必须降低，这可以通过减少支出、债务重组、财富再分配和中央银行印制新货币来实现。

在美丽的去杠杆化中，债务相对于收入下降，实际经济增长是积极的，通货膨胀不是问题，这是通过正确的平衡实现的。

政策制定者需要平衡降低债务负担的四种方式，以维持经济和社会稳定。

如果处理得当，去杠杆化最终将解决问题，尽管这可能需要十年或更长时间，这就是所谓的'失去的十年'。

总结三个经验法则：不要使债务增长速度超过收入，不要让收入增长速度超过生产力，尽一切可能提高生产力，因为从长远来看，这是最重要的。

Transcripts

How the economic machine works, in 30 minutes.

The economy works like a 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.

Though it's unconventional,

it has helped me to anticipate and sidestep the global financial crisis,

and has worked well for me for over 30 years.

Let's begin.

Though the economy might seem complex, it works in a simple, mechanical way.

It's made up of a few simple parts and a lot of simple transactions

that are repeated over and over again a zillion times.

These transactions are above all else driven by human nature,

and they create 3 main forces that drive the economy.

Number 1: Productivity growth

Number 2: The Short term debt cycle

and Number 3: The Long term debt cycle

We'll look at these three forces and how laying them on top of each other

creates a good template for tracking economic movements

and figuring out what's happening now.

Let's start with the simplest part of the economy:

Transactions.

An economy is simply the sum of the transactions that make it up

and a transaction is a very simple thing.

You make transactions all the time.

Every time you buy something you create a transaction.

Each transaction consists of a buyer

exchanging money or credit

with a seller for goods, services or financial assets.

Credit spends just like money,

so adding together the money spent and the amount of credit spent,

you can know the total spending.

The total amount of spending drives the economy.

If you divide the amount spent

by the quantity sold,

you get the price.

And that's it. That's a transaction.

It is the building block of the economic machine.

All cycles and all forces in an economy are driven by transactions.

So, if we can understand transactions,

we can understand the whole economy.

A market consists of all the buyers

and all the sellers

making transactions for the same thing.

For example, there is a wheat market,

a car market,

a stock market

and markets for millions of things.

An economy consists of all of the transactions

in all of its markets.

If you add up the total spending

and the total quantity sold

in all of the markets,

you have everything you need to know

to understand the economy.

It's just that simple.

People, businesses, banks and governments

all engage in transactions the way I just described:

exchanging money and credit for goods, services and financial assets.

The biggest buyer and seller is the government,

which consists of two important parts:

a Central Government that collects taxes and spends money...

...and a Central Bank,

which is different from other buyers and sellers because it

controls the amount of money and credit in the economy.

It does this by influencing interest rates

and printing new money.

For these reasons, as we'll see,

the Central Bank is an important player in the flow

of Credit.

I want you to pay attention to credit.

Credit is the most important part of the economy,

and probably the least understood.

It is the most important part because it is the biggest

and most volatile part.

Just like buyers and sellers go to the market to make transactions,

so do lenders and borrowers.

Lenders usually want to make their money into more money

and borrowers usually want to buy something they can't afford,

like a house or car

or they want to invest in something like starting a business.

Credit can help both lenders

and borrowers get what they want.

Borrowers promise to repay the amount they borrow,

called the principal,

plus an additional amount, called interest.

When interest rates are high,

there is less borrowing because it's expensive.

When interest rates are low,

borrowing increases because it's cheaper.

When borrowers promise to repay

and lenders believe them,

credit is created.

Any two people can agree to create credit out of thin air!

That seems simple enough but credit is tricky

because it has different names.

As soon as credit is created,

it immediately turns into debt.

Debt is both an asset to the lender,

and a liability to the borrower.

In the future,

when the borrower repays the loan, plus interest,

the asset and liability disappear

and the transaction is settled.

So, why is credit so important?

Because when a borrower receives credit,

he is able to increase his spending.

And remember, spending drives the economy.

This is because one person's spending

is another person's income.

Think about it, every dollar you spend, someone else earns.

and every dollar you earn, someone else has spent.

So when you spend more, someone else earns more.

When someone's income rises

it makes lenders more willing to lend him money

because now he's more worthy of credit.

A creditworthy borrower has two things:

the ability to repay and collateral.

Having a lot of income in relation to his debt gives him the ability to repay.

In the event that he can't repay, he has valuable assets to use as collateral that can be sold.

This makes lenders feel comfortable lending him money.

So increased income allows increased borrowing

which allows increased spending.

And since one person's spending is another person's income,

this leads to more increased borrowing and so on.

This self-reinforcing pattern leads to economic growth

and is why we have Cycles.

In a transaction, you have to give something in order to get something

and how much you get depends on how much you produce

over time we learned

and that accumulated knowledge raises are living standards

we call this productivity growth

those who were invented and hard-working raise

their productivity and their living standards faster

than those who are complacent and lazy,

but that isn't necessarily true over the short run.

Productivity matters most in the long run, but credit matters most in the short run.

This is because productivity growth doesn't fluctuate much,

so it's not a big driver of economic swings.

Debt is — because it allows us to consume more than we produce when we acquire it

and it forces us to consume less than we produce when we pay it back.

Debt swings occur in two big cycles.

One takes about 5 to 8 years and the other takes about 75 to 100 years.

While most people feel the swings, they typically don't see them as cycles

because they see them too up close -- day by day, week by week.

In this chapter we are going to step back and look at these three big forces

and how they interact to make up our experiences.

As mentioned, swings around the line are not due to how much innovation or hard work there is,

they're primarily due to how much credit there is.

Let's for a second imagine an economy without credit.

In this economy, the only way I can increase my spending

is to increase my income,

which requires me to be more productive and do more work.

Increased productivity is the only way for growth.

Since my spending is another person's income,

the economy grows every time I or anyone else is more productive.

If we follow the transactions and play this out,

we see a progression like the productivity growth line.

But because we borrow, we have cycles.

This isn't due to any laws or regulation,

it's due to human nature and the way that credit works.

Think of borrowing as simply a way of pulling spending forward.

In order to buy something you can't afford, you need to spend more than you make.

To do this, you essentially need to borrow from your future self.

In doing so you create a time in the future

that you need to spend less than you make in order to pay it back.

It very quickly resembles a cycle.

Basically, anytime you borrow you create a cycle.?

This is as true for an individual as it is for the economy.

This is why understanding credit is so important

because it sets into motion

a mechanical, predictable series of events that will happen in the future.

This makes credit different from money.

Money is what you settle transactions with.

When you buy a beer from a bartender with cash,

the transaction is settled immediately.

But when you buy a beer with credit,

it's like starting a bar tab.

You're saying you promise to pay in the future.

Together you and the bartender create an asset and a liability.

You just created credit. Out of thin air.

It's not until you pay the bar tab later

that the asset and liability disappear,

the debt goes away

and the transaction is settled.

The reality is that most of what people call money is actually credit.

The total amount of credit in the United States is about $50 trillion

and the total amount of money is only about $3 trillion.

Remember, in an economy without credit:

the only way to increase your spending is to produce more.

But in an economy with credit,

you can also increase your spending by borrowing.

As a result, an economy with credit has more spending

and allows incomes to rise faster than productivity over the short run,

but not over the long run.

Now, don't get me wrong,

credit isn't necessarily something bad that just causes cycles.

It's bad when it finances over-consumption that can't be paid back.

However, it's good when it efficiently allocates resources

and produces income so you can pay back the debt.

For example, if you borrow money to buy a big TV,

it doesn't generate income for you to pay back the debt.

But, if you borrow money to buy a tractor —

and that tractor let's you harvest more crops and earn more money

— then, you can pay back your debt

and improve your living standards.

In an economy with credit,

we can follow the transactions

and see how credit creates growth.

Let me give you an example:

Suppose you earn $100,000 a year and have no debt.

You are creditworthy enough to borrow $10,000 dollars

- say on a credit card

- so you can spend $110,000 dollars

even though you only earn $100,000 dollars.

Since your spending is another person's income,

someone is earning $110,000 dollars.

The person earning $110,000 dollars

with no debt can borrow $11,000 dollars,

so he can spend $121,000 dollars

even though he has only earned $110,000 dollars.

His spending is another person's income

and by following the transactions

we can begin to see how this process

works in a self-reinforcing pattern.

But remember, borrowing creates cycles

and if the cycle goes up, it eventually needs to come down.

This leads us into the Short Term Debt Cycle.

As economic activity increases, we see an expansion

- the first phase of the short term debt cycle.

Spending continues to increase and prices start to rise.

This happens because the increase in spending is fueled by credit

- which can be created instantly out of thin air.

When the amount of spending and incomes grow faster than the production of goods:

prices rise.

When prices rise, we call this inflation.

The Central Bank doesn't want too much inflation

because it causes problems.

Seeing prices rise, it raises interest rates.

With higher interest rates, fewer people can afford to borrow money.

And the cost of existing debts rises.

Think about this as the monthly payments on your credit card going up.

Because people borrow less and have higher debt repayments,

they have less money leftover to spend, so spending slows

...and since one person's spending is another person's income,

incomes drop...and so on and so forth.

When people spend less, prices go down.

We call this deflation.

Economic activity decreases and we have a recession.

If the recession becomes too severe

and inflation is no longer a problem,

the central bank will lower interest rates to cause everything to pick up again.

With low interest rates,

debt repayments are reduced

and borrowing and spending pick up

and we see another expansion.

As you can see, the economy works like a machine.

In the short term debt cycle, spending is constrained only by the willingness of

lenders and borrowers to provide and receive credit.

When credit is easily available, there's an economic expansion.

When credit isn't easily available, there's a recession.

And note that this cycle is controlled primarily by the central bank.

The short term debt cycle typically lasts 5 - 8 years

and happens over and over again for decades.

But notice that the bottom and

top of each cycle finish

with more growth than the previous cycle and with more debt.

Why?

Because people push it

— they have an inclination to borrow and spend more instead of paying back debt.

It's human nature.

Because of this,

over long periods of time,

debts rise faster than incomes

creating the Long Term Debt Cycle.

Despite people becoming more indebted,

lenders even more freely extend credit.

Why?

Because everybody thinks things are going great!

People are just focusing on what's been happening lately.

And what has been happening lately?

Incomes have been rising!

Asset values are going up!

The stock market roars!

It's a boom!

It pays to buy goods, services, and financial assets

with borrowed money!

When people do a lot of that, we call it a bubble.

So even though debts have been growing,

incomes have been growing nearly as fast to offset them.

Let's call the ratio of debt-to-income the debt burden.

So long as incomes continue to rise,

the debt burden stays manageable.

At the same time asset values soar.

People borrow huge amounts of money

to buy assets as investments

causing their prices to rise even higher.

People feel wealthy.

So even with the accumulation of lots of debt,

rising incomes and asset values help borrowers remain creditworthy for a long time.

But this obviously can not continue forever.

And it doesn't.

Over decades, debt burdens slowly increase creating larger and larger debt repayments.

At some point, debt repayments start growing faster than incomes

forcing people to cut back on their spending.

And since one person's spending is another person's income,

incomes begin to go down...

...which makes people less creditworthy causing borrowing to go down.

Debt repayments continue to rise

which makes spending drop even further...

...and the cycle reverses itself.

This is the long term debt peak.

Debt burdens have simply become too big.

For the United States, Europe and much of the rest of the world this

happened in 2008.

It happened for the same reason it happened in Japan in 1989

and in the United States back in 1929.

Now the economy begins Deleveraging.

In a deleveraging; people cut spending,

incomes fall, credit disappears,

assets prices drop, banks get squeezed,

the stock market crashes, social tensions rise

and the whole thing starts to feed on itself the other way.

As incomes fall and debt repayments rise,

borrowers get squeezed. No longer creditworthy,

credit dries up and borrowers can no longer borrow enough money to make their

debt repayments.

Scrambling to fill this hole, borrowers are forced to sell assets.

The rush to sell assets floods the market

This is when the stock market collapses,

the real estate market tanks and banks get into trouble.

As asset prices drop, the value of the collateral borrowers can put up drops.

This makes borrowers even less creditworthy.

People feel poor.

Credit rapidly disappears. Less spending ›

less income ›

less wealth ›

less credit ›

less borrowing and so on.

It's a vicious cycle.

This appears similar to a recession but the difference here

is that interest rates can't be lowered to save the day.

In a recession, lowering interest rates works to stimulate the borrowing.

However, in a deleveraging, lowering interest rates doesn't work because

interest rates are already

low and soon hit 0% - so the stimulation ends.

Interest rates in the United States hit 0% during the deleveraging of

the 1930s

and again in 2008.

The difference between a recession

and a deleveraging is that in a deleveraging borrowers' debt burdens have

simply gotten too big

and can't be relieved by lowering interest rates.

Lenders realize that debts have become too large to ever be fully paid back.

Borrowers have lost their ability to repay and their collateral has lost value.

They feel crippled by the debt - they don't even want more!

Lenders stop lending. Borrowers stop borrowing.

Think of the economy as being not-creditworthy,

just like an individual.

So what do you do about a deleveraging?

The problem is debt burdens are too high and they must come down.

There are four ways this can happen.

1. people, businesses, and governments cut their spending.

2. debts are reduced through defaults and restructurings.

3. wealth is redistributed from the 'haves' to the 'have nots'.

and finally, 4. the central bank prints new money.

These 4 ways have happened in every deleveraging in modern history.

Usually, spending is cut first.

As we just saw, people, businesses, banks and even governments tighten their belts and

cut their spending so that they can pay down their debt.

This is often referred to as austerity.

When borrowers stop taking on new debts,

and start paying down old debts, you might expect the debt burden to decrease.

But the opposite happens! Because spending is cut

- and one man's spending is another man's income - it causes

incomes to fall. They fall faster than debts are repaid

and the debt burden actually gets worse. As we've seen,

this cut in spending is deflationary and painful.

Businesses are forced to cut costs...

which means less jobs and higher unemployment.

This leads to the next step: debts must be reduced!

Many borrowers find themselves unable to repay their loans

— and a borrower's debts are a lender's assets.

When borrowers don't repay the bank, people get nervous that the bank won't

be able to repay them

so they rush to withdraw their money from the bank. Banks get squeezed and

people,

businesses and banks default on their debts. This severe

economic contraction is a depression.

A big part of a depression is people discovering much of what they thought

was their wealth isn't really there.

Let's go back to the bar.

When you bought a beer and put it on a bar tab,

you promised to repay the bartender. Your promise became an asset of the bartender.

But if you break your promise - if you don't pay him back and essentially default

on your bar tab -

then the 'asset' he has isn't really worth anything.

It has basically disappeared.

Many lenders don't want their assets to disappear and agree to debt

restructuring.

Debt restructuring means lenders get paid back

less or get paid back over a longer time frame

or at a lower interest rate that was first agreed. Somehow

a contract is broken in a way that reduces debt. Lenders would rather have a

little of something than all of nothing.

Even though debt disappears, debt restructuring causes

income and asset values to disappear faster,

so the debt burden continues to gets worse.

Like cutting spending, debt reduction

is also painful and deflationary.

All of this impacts the central government because lower incomes and less employment

means the government collects fewer taxes.

At the same time it needs to increase its spending because unemployment has risen.

Many of the unemployed have inadequate savings

and need financial support from the government.

Additionally, governments create stimulus plans

and increase their spending to make up for the decrease in the economy.

Governments' budget deficits explode in a

deleveraging because they spend more than they earn in taxes.

This is what is happening when you hear about the budget deficit on the news.

To fund their deficits, governments need to either raise taxes

or borrow money. But with incomes falling and so many unemployed,

who is the money going to come from? The rich.

Since governments need more money and since wealth is heavily concentrated in

the hands of a small percentage of the people,

governments naturally raise taxes on the wealthy

which facilitates a redistribution of wealth in the economy -

from the 'haves' to the 'have nots'. The 'have-nots,' who are suffering, begin to

resent the wealthy 'haves.'

The wealthy 'haves,' being squeezed by the weak economy, falling asset prices,

higher taxes, begin to resent the 'have nots.'

If the depression continues social disorder can break out.

Not only do tensions rise within countries,

they can rise between countries - especially debtor and creditor countries.

This situation can lead to political change

that can sometimes be extreme.

In the 1930s, this led to Hitler coming to power,

war in Europe, and depression in the United States. Pressure to do something

to end the depression increases.

Remember, most of what people thought was money was actually credit.

So, when credit disappears, people don't have enough money.

People are desperate for money and you remember who can print money?

The Central Bank can.

Having already lowered its interest rates to nearly 0

- it's forced to print money. Unlike cutting spending,

debt reduction, and wealth redistribution,

printing money is inflationary and stimulative. Inevitably, the central bank

prints new money

— out of thin air — and uses it to buy financial assets

and government bonds. It happened in the United States during the Great Depression

and again in 2008, when the United States' central bank —

the Federal Reserve — printed over two trillion dollars.

Other central banks around the world that could, printed a lot of money, too.

By buying financial assets with this money,

it helps drive up asset prices which makes people more creditworthy.

However, this only helps those who own financial assets.

You see, the central bank can print money but it can only buy financial assets.

The Central Government, on the other hand,

can buy goods and services and put money in the hands of the people

but it can't print money. So, in order to stimulate the economy, the two

must cooperate.

By buying government bonds, the Central Bank essentially lends money to the

government,

allowing it to run a deficit and increase spending

on goods and services through its stimulus programs

and unemployment benefits. This increases people's income

as well as the government's debt. However,

it will lower the economy's total debt burden.

This is a very risky time. Policy makers need to balance the four ways that debt

burdens come down.

The deflationary ways need to balance with the inflationary ways in

order to maintain stability.

If balanced correctly, there can be a

Beautiful Deleveraging.

You see, a deleveraging can be ugly or it can be beautiful.

How can a deleveraging be beautiful?

Even though a deleveraging is a difficult situation,

handling a difficult situation in the best possible way is beautiful.

A lot more beautiful than the debt-fueled, unbalanced excesses of the

leveraging phase. In a beautiful deleveraging,

debts decline relative to income, real economic growth is positive,

and inflation isn't a problem. It is achieved by having the right balance.

The right balance requires a certain mix

of cutting spending, reducing debt, transferring wealth

and printing money so that economic and social stability can be maintained.

People ask if printing money will raise inflation.

It won't if it offsets falling credit. Remember, spending is what matters.

A dollar of spending paid for with money has the same effect on price as a dollar

of spending paid for with credit.

By printing money, the Central Bank can make up for the disappearance of credit

with an increase in the amount of money.

In order to turn things around, the Central Bank needs to not only pump up

income growth

but get the rate of income growth higher than the rate of interest on the

accumulated debt.

So, what do I mean by that? Basically,

income needs to grow faster than debt grows. For example:

let's assume that a country going through a deleveraging has a debt-to-

income ratio of 100%.

That means that the amount of debt it has is the same as the amount of income the

entire country makes in a year.

Now think about the interest rate on that debt,

let's say it is 2%.

If debt is growing at 2% because of that interest rate and

income

is only growing at around only 1%, you will never reduce the debt burden.

You need to print enough money to get the rate of income growth above the

rate of interest.

However, printing money can easily be abused because it's so easy to do and

people prefer it to the alternatives.

The key is to avoid printing too much money

and causing unacceptably high inflation, the way Germany did during its

deleveraging in the 1920's.

If policymakers achieve the right balance, a deleveraging isn't so dramatic.

Growth is slow but debt burdens go down.

That's a beautiful deleveraging.

When incomes begin to rise, borrowers begin to appear more creditworthy.

And when borrowers appear more creditworthy,

lenders begin to lend money again. Debt burdens finally begin to fall.

Able to borrow money, people can spend more. Eventually, the economy begins to

grow again,

leading to the reflation phase of the long term debt cycle.

Though the deleveraging process can be horrible if handled badly,

if handled well, it will eventually fix the problem.

It takes roughly a decade or more

for debt burdens to fall and economic activity to get back to normal

- hence the term 'lost decade.'

Of course, the economy is a little more complicated than this template

suggests.

However, laying the short term debt cycle on top of the long term debt cycle

and then laying both of them on top of the productivity growth line

gives a reasonably good template for seeing where we've been,

where we are now and where we are probably headed.

So in summary, there are three rules of thumb that I'd like you to take away

from this:

First: Don't have debt rise faster than income,

because your debt burdens will eventually crush you.

Second: Don't have income rise faster than productivity,

because you will eventually become uncompetitive.

And third: Do all that you can to raise your productivity,

because, in the long run, that's what matters most.

This is simple advice for you and it's simple advice for policy makers.

You might be surprised but most people — including most policy makers — don't pay enough attention

to this.

This template has worked for me and I hope that it'll work for you.

Thank you.