Practical Economics from Ray Dalio

By Shlomo Maital

          Dalio       Ray Dalio

  As an academic economist, I am highly critical of myself and my colleagues, whose theories offer no help or guidance to practical policymakers trying to make our lives better.  A recent NYT op-ed defends the common anomaly of Nobel Prizes awarded for conflicting theories, by saying that, well, economics is tough, we can’t do lab experiments. 

   In his “Dealbook” column, NYT writer Andrew Ross Sorkin (always worth reading) cites a new viral video on “practical economics”,  Dalio 101, by Ray Dalio, founder of Bridgewater Associates, the world’s biggest hedge fund ($150 b.), the man worth $13 b. who saw the financial crisis of 2008 coming and also saw the recovery coming.  Check out his 31-minute YouTube video (search on Ray Dalio  on YouTube).   Here are a few insights:

     Austerity:  why it doesn’t work.  When borrowers stop borrowing and pay off debt, debt increases, because spending falls; since one man’s spending is another man’s income, incomes fall, and the debt burden rises.  Simple?

    Borrowing:  why we get into trouble.    Borrowing is a way of pulling spending forward in time.  To buy something you can’t afford today, you borrow from your future self.  In doing so you create  a time in future when you need to spend less than you earn in order to pay it back.  But if you’re addicted to debt, that becomes hard to do.  (Compare: America the ever-borrowing country). 

   Lost decade:  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’. 

   Monetarism and Milton Friedman:  If money M times velocity V equals a price index P and real GDP Q,  then if velocity is constant, when you boost money, either P or Q or both must rise, increasing economic momentum.   The reason this doesn’t work, is that today there isn’t much velocity, it has slowed, and only we the people control velocity (the rate at which money circulates).  It doesn’t help to create piles of money if it those piles just sit there, with banks not lending and businesses not borrowing.

     Dalio 101.    You have to listen to someone who has used simple economics to make $150 b.