Ray Dalio On How The Economic Machine Works (As Of October 2011)

Tyler Durden's picture

As China 'threatens/promises' liquidity injections to its banks, Greek politicians argue over premium parking spaces, US brokers/exchanges squabble over the MF capital leftovers, and global liquidity goes from bad to worse - perhaps it is time to take a step back and focus on what really hasn't seemed to matter - the economy. Ray Dalio published his Template For Understanding back in October of 2008 and has recently updated it (as of October 2011). For your Sunday evening reading pleasure - "How the Economic Machine Works and How It Is Reflected Now". Critically, the hedge fund manager provides a framework for considering what he believes are the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle.

Readers can find it here.

Ray Dalio's Template for Understanding _Oct-2011_

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Josh Randall's picture

How the Economic Machine Works and How It Is Reflected Now": Fraud, Ponzi, and Unethical behavior - created beginning of time - updated Nov 2011

paarsons's picture

And it all ends with war.

It always end with war.  And they usually start in Europe.

But what do I nknow?


AldousHuxley's picture
  • What Does Plutonomy Mean?
  • Economic growth that is powered and consumed by the wealthiest upper class of society. Plutonomy refers to a society where the majority of the wealth is controlled by an ever-shrinking minority; as such, the economic growth of that society becomes dependent on the fortunes of that same wealthy minority.  


  • Investopedia explains Plutonomy
  • This buzz word was initially coined by analysts at Citigroup in 2005 to describe the incredible growth of the U.S. economy during that period despite increasing interest rates, commodity prices and an inflated national debt. Citigroup analysts argued that as such an economy continues to grow in the face of contradictory elements, the more important the society's ultra rich become to maintaining such growth. The analysts also believed that in addition to the U.S., Canada, Great Britain and China are also becoming plutonomies.


  • This interview was with a REPUBLICAN advisor from 2004

http://www.pbs.org/now/transcript/transcript_phillips.html BILL MOYERS: With me now is a man who has been tracking the political and economic history of American wealth for a long time. Kevin Phillips and I were both young men in Washington in the 60s. We were on different sides but had a mutual interest in politics that reached workaday people. He was the chief political strategist for Richard Nixon's victory in 1968 and wrote the bombshell book on the emerging republican majority. Ten years ago his best-selling book on the politics of rich and poor influenced the 1992 elections. In his new book, WEALTH AND DEMOCRACY, he is writing about how big money and political power are the invisible hand in the hidden story of the American experience. Good to see you again.

KEVIN PHILLIPS: Well, the plutocracy ... and I think we have one now and we didn't, 12 years ago when I wrote THE POLITICS OF RICH AND POOR is when money has ceased just entertaining itself with leveraged buyouts and all the stuff they did in the '80s, and really takes over politics, and takes it over on both sides when money not only talks, money screams. When you start developing philosophies in which giving a check is a First Amendment right. That's incredible. But what you've got is that this is what money has done. It's produced the fusion of money and government. And that is plutocracy.

BILL MOYERS: But hasn't money always held politics hostage?

KEVIN PHILLIPS: Well, it's usually been very influential. And sometimes it really hasn't been too influential,

But what we've seen in the '80s and '90s is that it's taken control of both parties, pretty much taken control of the culture, and controls the whole dynamics of politics. And that is ...

BILL MOYERS: But the si- ...


KEVIN PHILLIPS: ... a plutocracy in a way that we haven't had before, since the gilded age.

DormRoom's picture

I like the way you think, Mister.

TruthInSunshine's picture

The only rational way to analyze all markets is a parlor of chance, aka gambling hall, aka highly rigged casino (where the overwhelming majority of patrons lose their asses).

This is because the catalysts that The Bernank set in motion, with an assist from Timmay Geithner and Hank Paulson (not to mention his predecessor, Alan 'Let Me Buy You A Debt Bubble' Greenspan), have literally broken all markets.

There is no longer the question of a complete and total collapse of equity, credit, bond and derivative markets. The only questin is the when. On that note, the processes that have already been set in motion by The Bernank are accelerating, and gathering destructive mass, like an avalanche.

As to the fundamental economy, it is being temporarily barely alive, on the equivalent of a ventilator, by massive intervention (that is racking up massive amounts of debt, further breaking markets and distorting price/demand curves and labor markets) by central banks.

The Bernank will be remembered as one of the greatest failures of an economist, central banker, and prognosticator/forecaster that the economic world has ever seen.

Central banks, and The Bernank, in particular, have now ensured that deleveraging will be far worse and last far longer than should have ever been the case.

Josh Randall's picture

100% correct - because i do love the technical analysis and the breakdown from the author, but come on - this economy has been reduced to a 3 Card Monty game on a $h!tty sidestreet somewhere. The mechanism of financial markets are barely working with the ridiculously inept regulators and fraudulent operators.  

fnord88's picture

Exactly like a rigged casino. I put myself through uni first dealing, then playing, Poker. People would constantly ask me why I gambled. At least the dealer always enforces the rules, and is not in the habit of letting others "frontrun" (see), my cards.

mailll's picture

I love this quote from the movie "War Games": A strange game. The only winning move is not to play. How about a nice game of chess? But it was referring to the game of "Global Thermal Nuclear Warfare".  But with the stock market, well this could apply.  The only winning move is not to play.  I know this doesn't apply to much in this forum, but I was thinking of this because I loved the movie.  But I do think it applies to war in general..The only winning move is not to play.  I'll go back to sleep now.

buzzsaw99's picture

Dalio is a good example of everything that is wrong with the world.

midgetrannyporn's picture

Maybe if you suck his dick he'll give you a nickel. ;)

The Real Fake Economy's picture

I can't speak for buzzsaw, but I think a world where a clear douchebag like Dalio is idolized by mini douchebags who surround him because of how much money he has is a pretty twisted world.  

TheSilverJournal's picture

How the Economic Machine Works and How it is Reflected Now: Print, print, print.

CrashisOptimistic's picture


 the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle 


It just boggles one's mind how things like this can be said when Brent sits this moment at $113, up from about $92 on 1 Jan.  Brent is the price of oil.  We import 11 million bpd and we pay Brent prices for it.  It is going to have an average price this year well north of $100 and this has never happened before.

The first spikes were June 2008 before money printing started so it ain't that.  

It's scarcity.  It's not anything else, and there is no fix for that, and when someone is talking about the Big Three Forces and doesn't mention what oil scarcity is doing to civilization, it's just a horrible thing to see.

samsara's picture

Yes,  THAT is the underlying cancer that is the killer.   The Finanical Collapse will bring the machine down,  but Peak Oil is the force that will KEEP it down for everyone alive's lifetime.

Peak Oil  Mo Fo's

Yen Cross's picture

 That was the most " BORING" , read! 

DormRoom's picture

dude, underestimates one important fact in his machine.  The machine he describe is analog.  We live in a high speed digital machine.  So if feedback shocks occur, they ripple throughout the world in hours, not weeks.  So it's unlikely a human can stop this digital machine, once failing cascades start.  The only way would be for world governments to shut down all  markets.


A modern glimpse of the digital feedback machine was the run up in rice prices a few years  on the rumor of a rice shortage.  It would have gotten to the 'shit got real' stage, if they didn't  find 1.1MT of WTO rice, in Japan.


Moreover, modern finance is structured in spaghetti architecture.  It's all over the place (designed that way, so no one can get caught) so it'll be hard to find the source of contagion, once spread.  It could even start with something as innocuous as MF global failing.  duh duah duah.

Yen Cross's picture

 " Dorm Room" , are you living in fantasy land. Look at a long term chart! Baltic Dry Index.!


 I appreciate your thoughts, and think you should pursue them.  Global warming is a "Farce" , And Aliens do exist!



      As I trollip through the " Gulfstream"  , pages of life.  have you ever

  SKY Dived, Raced Expensive cars , Climbed Mountains,  Sailed Boats? ECT...

eureka's picture

sometimes even zerohedge wastes time...

US is cracking at its foundations - and all the talk is about EU - kind of pathetic.

Talk about how to tackle US problems - that, could be worth while.

DormRoom's picture

it's being tackled.




Whenever there comes a time when one group has a disproportinate amount more than another, walls always get erected.  It's a common design pattern throught human civilization. 


In modern times, the wall is called the po-lice.  The longer inequality persists, the closer we get to becoming a Police State.  Oh wait--we are already there.. see Patriot Act.  The wall will come down.



Mr Lennon Hendrix's picture


We need action, not just a bunch of bums and hippies sitting around eating beans and rice, discussing feelings and emotions.


GeezerGeek's picture

Obama's Witless Sycophants are no better than a mob. We've already witnessed all sorts of deranged behavior on their part, like demanding free food at fast food restaurants, indecent public acts, pushing old ladies down, and on and on. OWS is not an example of assembling peacefully. I never saw Tea Party gatherings do these sorts of things, but the OWS mob seems mostly to get a pass from the MSM.

Perhaps the community organizer in chief hopes to use the mob-like behavior to induce us to ask for more police protection, so the Police State can become stronger? See Something, Say Something. Why the repetitive SS meme? Is all this just to solidify the safety of the crony-capitalism elites?


PulauHantu29's picture

The "economy"...how quaint.

It's all about Bankers and Bonuses.

michael_engineer's picture

The author might want to consider reading the observations at the following website to consider how inputs and outputs of the economy are related, and what might be expected in the economy due to Hubbert Curves for various depleting resource :


It might make his paper more entertaining and interesting.

Nate H's picture

no explanation of the engine is complete without energy source/sink.

his #1 of trendline productivity growth is merely (largely) the replacement of human labor with fossil labor at 1/1000 the price. This theme has yet to enter hedge fund land. (But other than that his is one of best explanations Ive seen)

oldman's picture

The machine is dead

These clowns are left over from the dinosaur days of capitalism

we've moved on looking for a model that is more inclusive

they still believe it is special to be who they used to be

not seeing themselves as they are perceived by living human beings

these are the walking dead

the hungry ghosts of Buddhist thought

these are the true 'fucking sickos'

the machine is dead

worship at its tomb, asshole


Market Man's picture

Wow, I thought it was a great read -- a good summary of how things work!   :)

John Law Lives's picture

Huge profits for Wall Street whilst the middle class capitulates...



"Wall Street firms - independent companies and the securities-trading arms of banks - are doing even better. They earned more in the first 21 / 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show."


bill1102inf's picture

What a bunch of horse shit. Money is not 'tied' to 'somethting' Money just IS. You can not tie money to the price of bread, or 12 eggs. It does not work that way. The reason eggs are $2.00 is because of inflation which is the DEBASEMENT of our fiat (fake) currency AND NOTHING MORE. Fiat IS PEGGED to ONE THING and  ONE THING only.  THE ABILITY OF THE NATION TO CHARGE TAXES (or %) from its citizens. AND THAT IS ALL.  As you state, there is 50 TRIL in debt and 3 TRIL in actual cash floating around out there. THAT is why eggs are $2.00, gasoline is $4.00, houses are $150,000, etc etc etc. REMOVE the bullshit debt, reissue NEW currency and the price of everything goes down by a factor of 10-200X's.

America CAN DO THIS.  If the world wants FOOD and our medical inventions, and our military support, etc etc etc. they will PAY US FOR IT, in new 'WHATEVER DOLLARS'  They will be FORCED to accept our dollars just as they are NOW.  Saudi wants to sell a billion barrels of oil? Those fucking crooks, they will need to accept our NEW DOLLARS.


We ARE A BUNCH OF FUCKING IDIOTS, exporting DOLLARS and DOLLAR debt outside of the country since forever. If we had a real energy policy we would be SELLING more food to Saudi Arabia than they sell us in OIL.  We would be charging China more for our technology than we spend on their crap products they send to us.  THe US is one of the ONLY self sustaining countries on the PLANET.  

We need to retake our position in this world as #1 and ALL AMERICANS should be able to bask in our glory! 

oldman's picture

Hey Bill,

"America CAN DO THIS.  If the world wants FOOD and our medical inventions, and our military support, etc etc etc. they will PAY US FOR IT, in new 'WHATEVER DOLLARS'  They will be FORCED to accept our dollars just as they are NOW.  Saudi wants to sell a billion barrels of oil? Those fucking crooks, they will need to accept our NEW DOLLARS."

The few people who want what america has are already here. I get around Europe and South America and I haven't heard anyone say they want our food or our military or medical inventions or etc. etc.

I do hear many americans spout off about this, mainly on msm trying to drum up a little biz fo Kelloggs, or GM, but, honestly, I am amazed to see these words on ZH.

As far as your last sentence: "We need to retake our position in this world as #1 and ALL AMERICANS should be able to bask in our glory!"

It is exactly why the rest of the world hates us: what glory have we ever had that another nation has not paid dearly for?

I'm quite puzzled by your poem-------------sorry, but I just don't get it                        om

bill1102inf's picture

LFTR's could have saved us all.  Instead from carter to obama, blowing the shieks of Saudi was more important

FlimFlam's picture

Dalio's right.  An interest-money system must cycle as he describes.  Interest is cumulative and thus traces an exponential growth rate.  Real-world economic growth cannot simply continue exponentially.  Hence any given economic system must therefore reach a production peak defined as the time when the economic growth rate falls below the critical threshold required for balance with the interest-money growth rate.  When that threshold is breached, the entire enchilada comes up for review.


This economic cycling allows for change and renewal.  An economy is not merely as Dalio describes---it is fundamentally a social agreement.  The character of that agreement defines the character of the economy in question.  Thus our economy post-1930s has been very different than that pre-1930s.  The 1930s crash and depression stimulated that change.  We simply had to work together in a different way to work at all, as the previous agreement had reached its cyclical end.


What I'm describing is a non-linear developmental model.  A social agreement of a given character---call it a functioning economy---will, when first instituted, operate in a growth mode, following which it will contract.  The contraction occurs for this essential reason: the rigidity of the rules of the economic system, which is required for that system to work at all, become ever more outdated given accumulating changes in the external social and economic environment.  Those changes, importantly, are wrought by the system in question, hence the system contains the seeds of its own undoing: it self-outmodes.  Ages, in other words, then dies.


One can put this another way: a given system will exhaust all potentials in its available modes of operating.  When it does, it will become instable, with that instability eventually reaching a peak of chaos.  Some "strange attractor" will then appear such that some small event---the straw that breaks the camel's back---appears as the trigger for collapse.  Black swan, baby.  The collapse leads to a non-linear leap, developmentally speaking. 


Notice that in the instabiliity phase, a system tends to ball up in contradiction and cannibalization.  We are seeing this in the massive, nausea-inducing fraud of the financial system.  Through that fraud, it is killing itself because it's destroying its base.  The fraud, one can see, is a sign of extreme obsolescence, and a system's last act.


We are thus moving into a time where many things we thought were normal (aspects of our present social way of operating) will undergo revision and change.  This, of course, is all for the better.  Given such developments over history---which are developments of finer, more interlocked ways of working together---we have raised standards of living, reduced violence and war (see Pinker's new book, or simply think about torture methods of a few hundred years ago), etc. 


And yes, we're hitting various friction points given rising costs of resource extraction and falling rates of resource recovery.  That factor, plus the factors I mentioned above, for me account for the change we're seeing.


There is absolutely no question in my mind we're going into something very significant.  No question for Dalio either, though he clearly doesn't understand non-linear development.  Expect a considerable revamping of our attitudes toward stuff-accumulation.   The earth isn't big enough for compound material growth.  Quality and information and eduction and *care* are emergents I spot.  Apple, Nucor, Whole Foods, Costco---these are some companies that have made a qualitative shift in what and how they produce.  These will perform well on a newly recalibrated measure of value.  The age of huge profits is over.  Debt forgiveness looks to be in the offing.

mkkby's picture

Hey, ZH, how about some QC on your web pages?  This doc stock thing is half covered by the right nav pane.

And how about going back to including pdf's?  These embedded doc formats are almost totally unreadable.  Try using your own site once in a while and notice these things.  I've been complaining for a least a year.

Arius's picture

did you try "download" upper right corner ...

RoadKill's picture

Any economic analysis that starts and ends with money is a waste of time.

Economics starts and ends with people getting up and going to work everyday. This is multiplied by technological advancement. Assuming they make stuff other people want, we have a virtuous cycle of growth.

Money is simply a way of making barter more efficient. Equity and debt are both claims on production, but with different payout structures.

Our economic problems need to be viewed through that lens.

Problem 1 - Too many promises. This is a three fold problem. We all know that the government has promised retirees and welfare recipients too much for the productive class to support. We need to have as high a % of the population producing as possible. But the private markets have done the same. Debt and equity are THE SAME thing. Claims on future production - but with different pay out structures. Per MM58, if you have too much debt relative to equity, debt becomes more equity like. This is what's plaguing most of the world now. People thought they were holding low risk debt and planned accordingly. But they actually hold riskier equity like payouts. This is confidence draining. Furthermore, the private markets have done the same thing. The housing bubble and increases in the % of GDP going to corporate earnings x growing multiples, led middle class Americans to believe we could support everyone having a McMansion, driving an SUV and retiring at 50. But we can't. The most productive society is one where the highest % of the population is working as possible, using the most productive technology/capital and maligned stuff that others want. That brings us to...

Problem 2 - Governments are making too much of aggregate consumption and investment decisisons. Governments, being far less efficient then markets, are thus a huge drag on economic efficiency. This is compounded by the growing % of GDP going to corporate profits that accrue to the 1% and the growing % of GDP being allocated by the government to the UNPRODUCTIVE 50% of the 99%. This has created a mismatch in production and demand capacity because a Bugatti may cost 10,000x as much as a bicycle, but you can't turn the labor and materials that go into a Bugatti into even 100 bicycles.

The readjustment process is simple, but will be painful. We need to restructure debt, equity and entitlement ratios. We need to reduce the economic decision making of the government, while maintaining it's abillity to protect the social contract. And we need to get as many people back into the workforce as possible - with the skills and technology to make the things everyone wants - not just the 1%.

Tic tock's picture

There's the 'machine' analog, which is correct for a Recession and then there's the 'Political' situation, which is far more granular, on top of being subjective, as a series of issues - in a Deleveraging.

It's a difficult truth - always the case when these outsized events occur, people come out into the streets baying for blood. To make it worse, we used to have decent cartoons, now it's endless government-is-basically-inept-News; so this time, of course it's going to be messy.

Several neatly-made points in the article, like the Fed has tools for a Recession, but there is a conflict in interests between the capital formation base and the holders of existing debt, when using those tools in a Deleveraging.

Plutocracy - that the Decadent Western Capitalist system is a Feudal-Serf economy; that looks about right, I think maybe that's the populist issue: a lot of emerging nations would like to sponsor cheaper services, utilities and production- the thing that stands in their way is 'retaliation' from Western interests - that's why the first technology they go for is nuclear bomb-making. ...what i'm saying is, we don't need to 'break the western political system - which is what a deleveraging tends towards - we just have to give room to the emergence of better housing, water, energy, materials production , at far lower costs, and the global nature of economic linkages will return us to equilibrium. 

johnjm22's picture

The document is no longer up.  Does anyone know where it can be downloaded?

Schmuck Raker's picture

Get a throw away e-mail and post here, I'll forward a pdf.