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This post is largely based off of this 30 minute video by Ray Dalio. I tried my best to consolidate the concepts in this post to make it faster to absorb. I recommend watching the video if you have the patience. Moving on.
The ‘economy’ of any state, country, city, is the sum of all of the transactions that occur there. Whenever someone buys a car, buys groceries, or sells a secondhand iPhone, that is a transaction and is added to this total number.
A transaction can be conducted with money (I give you 10 dollars, bitcoins, etc. for a product or service), or with credit (I promise to give you 10 dollars, bitcoins, etc. at some time in the future). Credit is the most important part of the economic machine for two reasons.
- The volume of credit in the US economy is roughly 10x of the volume of “M2 Money” in the economy, so shifts in credit availability is more impactful than shifts in money supply
- Credit is the main driver behind economic cycles, which consist of recessions and expansions
As soon as credit is created it immediately becomes debt — that is, if you buy a house with borrowed money, you’ve actually created credit and debt out of thin air.
Credit creation is cyclical, so if more people in the economy are creating credit/debt, then the…
