How the Economic Machine Works

Introduction

• The economy functions like a simple machine.
• Misunderstanding the economy leads to needless suffering.
• The presentation provides a practical, simple economic model.
• This model has anticipated and sidestepped financial crises for over 30 years.

Basic Principles

• The economy is made up of simple parts and transactions driven by human nature.
• Three main forces drive the economy:
  1. Productivity growth
  2. Short-term debt cycle
  3. Long-term debt cycle
• Transactions: Building blocks of the economy.
  • Consist of a buyer exchanging money or credit with a seller for goods, services, or financial assets.
  • The total spending drives the economy.
  • If you divide the amount spent by quantity sold, you get the price.

Components of the Economy

• The market: Sum of all buyers and sellers of a particular thing.
• The economy: Sum of all transactions in all markets.
• Key Entities:
  • People
  • Businesses
  • Banks
  • Governments
  • Central Government (taxes and spending)
  • Central Bank (controls money and credit, influences interest rates, prints money)

Importance of Credit

• Credit is crucial yet least understood part of the economy.
• It is the biggest and most volatile part.
• Credit allows borrowing and, consequently, increased spending.

Mechanism of Credit and Debt

• Borrowers promise to repay the principal plus interest.
• High-interest rates decrease borrowing; low-interest rates increase it.
• Credit creation results in debt (an asset to lender, a liability to borrower).
• Repaying debt settles the transaction.
• Credit amplifies spending, driving economic growth.

Economic Growth and Productivity

• Productivity growth raises living standards in the long run.
• Credit drives short-term economic swings, unlike productivity which is stable.

Cycles of Debt

• Debt swings occur in two cycles:
  • Short-term debt cycle: 5-8 years
  • Long-term debt cycle: 75-100 years
• Credit allows