Ray Dalio: Is Credit Good for Society?

00:00:00.000 | When you're doing that kind of back and forth on a topic like the economy, which you have,

00:00:06.880 | to me, perhaps I'm naive, but it seems both incredible and incredibly complex.

00:00:13.320 | The economy, the trading, the transactions, that these transactions between two individuals

00:00:19.720 | somehow add up to this giant mechanism.

00:00:22.520 | You've put out a 30 minute video, you have a lot of incredible videos online that people

00:00:29.080 | should definitely watch on YouTube, but you've put out this 30 minute video titled How the

00:00:34.600 | Economic Machine Works.

00:00:36.800 | That is probably one of the best, if not the best video I've seen on the internet in terms

00:00:42.760 | of educational videos.

00:00:44.520 | So people should definitely watch it, especially because it's not that the individual components

00:00:51.260 | of the video are somehow revolutionary, but the simplicity and the clarity of the different

00:00:56.080 | components just makes you ... There's a few light bulb moments there about how the economy

00:01:01.280 | works as a machine.

00:01:03.040 | So as you described, there's three main forces that drive the economy, productivity growth,

00:01:07.200 | short term debt cycle, long term debt cycle.

00:01:11.360 | The former productivity growth is how much value people create, valuable things people

00:01:19.040 | create.

00:01:20.040 | The latter is people borrowing from their future selves to hopefully create those valuable

00:01:25.620 | things faster.

00:01:27.360 | So this is an incredible system to me.

00:01:29.720 | Maybe we can linger on it a little bit, but you've also said what most people think about

00:01:36.200 | as money is actually credit.

00:01:38.000 | Total amount of credit in the US is $50 trillion.

00:01:42.840 | Total amount of money is $3 trillion.

00:01:46.320 | That's just crazy to me.

00:01:48.280 | Maybe I'm silly, maybe you can educate me, but that seems crazy.

00:01:53.120 | It gives me just pause that human civilization has been able to create a system that has

00:01:57.340 | so much credit.

00:01:59.240 | So that's a long way to ask, do you think credit is good or bad for society?

00:02:07.300 | That system that's so fundamentally based on credit.

00:02:11.140 | I think credit is great, even though people often overdo it.

00:02:16.860 | Credit is that somebody has earned money and what happens is they lend it to somebody else

00:02:26.780 | who's got better ideas and they cut a deal and then that person with the better ideas

00:02:31.380 | is going to pay it back.

00:02:32.620 | And if it works well, it helps resource allocations go well, providing people like the entrepreneurs

00:02:40.220 | and all of those, they need capital.

00:02:42.580 | They don't have capital themselves.

00:02:44.260 | And so somebody is going to give them capital and they'll give them credit along those lines.

00:02:48.900 | Then what happens is it's not managed well in a variety of ways.

00:02:53.980 | So I did another book on principles, principles of big debt crises that go into that.

00:03:00.780 | And it's free by the way, I put it free online as a PDF.

00:03:05.980 | So if you go online and you look principles for big debt crisis is under my name, you

00:03:11.140 | can download it in a PDF or you can buy a print book of it and it goes through that

00:03:15.980 | particular process.

00:03:18.140 | And so you always have it overdone in always the same way.

00:03:24.060 | Everything by the way, almost everything happens over and over again for the same reasons.

00:03:29.180 | So these debt crises all happen over and over again for the same reasons.

00:03:33.180 | They get it overdone.

00:03:34.620 | In the book it explains how you identify whether it's overdone or not.

00:03:38.180 | They get it overdone and then you go through the process of making the adjustments according

00:03:43.180 | that and then, and it explains how they can use the levers and so on.

00:03:47.460 | If you didn't have credit, then you would be sort of, everybody sort of be stuck.

00:03:53.000 | So credit is a good thing, but it can easily be overdone.

00:03:59.300 | So now we get into the question, what is money?

00:04:01.980 | What is credit?

00:04:02.980 | Okay.

00:04:03.980 | You get into money and credit.

00:04:05.380 | So if you're holding credit and you think that's worthwhile, keep in mind that the central

00:04:10.340 | bank, let's say it can print the money.

00:04:12.660 | What does that prompt?

00:04:14.300 | You have an IOU and the IOU says you're going to get a certain number of dollars, let's

00:04:19.740 | say, or yen or euros.

00:04:22.420 | And that is what the IOU is.

00:04:24.820 | And so the question is, will you get that money and what will it be worth?

00:04:30.020 | And then also you have a government, which is a participant in that process because they

00:04:35.340 | want, they are on the hook, they owe money.

00:04:38.620 | And then will they print the money to make it easy for everybody to pay?

00:04:43.060 | So you have to pay attention to those two.

00:04:45.060 | I would suggest like you, you recommend to other people, just take that 30 minutes and

00:04:51.220 | it, and it, and it comes across pretty clearly.

00:04:53.700 | But my conclusion is that of course you want it.

00:04:57.500 | And even if you understand it and the cycles well, you can benefit from those cycles rather

00:05:04.660 | than to be hurt by those cycles.

00:05:07.860 | Because I don't know the way the cycle works is somebody gets over indebted, they have

00:05:12.700 | to sell an asset.

00:05:14.100 | Okay.

00:05:15.100 | Then I don't know, maybe that's when assets become cheaper.

00:05:17.840 | How do you acquire the asset?

00:05:19.560 | It's a whole process.

00:05:20.500 | Okay.

00:05:21.500 | Thank you.

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