How the Economy Works by Ray Dalio of BridgeWater Associates

[SeattleSun]

Ray has published his How the Economy Works before but a few days ago he put out this 30 minute video on the subject for the general public as Bloomberg said probably as a "public service".

Video 30 minutes
http://www.youtube.com/watch?v=PHe0bXAIuk0" class="bbc_link" target="_blank">http://www.youtube.com/watch?v=PHe0bXAIuk0

below the first section of this text covers the video in words.

Economic Principels - Section 1 How the Economic Machine Works
http://www.bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf" class="bbc_link" target="_blank">http://www.bwater.com/Uploads/FileManager/research/how-the-economic-machine-works/ray_dalio__how_the_economic_machine_works__leveragings_and_deleveragings.pdf



Ray Dalio
Ray Dalio (born August 1, 1949) is an American businessman and founder of the investment firm Bridgewater Associates.  In 2012, Dalio appeared on the annual Time 100 list of the 100 most influential people in the world.  In 2011 and 2012 he was listed by Bloomberg Markets as one of the 50 Most Influential people. Institutional Investor's Alpha ranked him No. 2 on their 2012 Rich List.

Bridgewater Associates
Bridgewater Associates is an American investment management firm founded by Ray Dalio in 1975. The firm serves institutional clients including pension funds, endowments, foundations, foreign governments and central banks.

It utilizes a global macro investing style based on economic trends, such as inflation, currency exchange rates, and U.S. gross domestic product. Bridgewater Associates began as an institutional investment advisory service, graduated to institutional investing and pioneered the risk parity investment approach in 1996.

In 1981 the company moved its headquarters from New York City to Westport, Connecticut and currently engages 1,200 employees. It embraces a corporate culture that encourages transparency and the elimination of the decision making hierarchy,[3] and in 2011 was the world's largest hedge fund company with US$122 billion in assets under management.

[TravelingPennies]

I found Ray's table of Fed Fund Rates from 1919 to present very interesting but hard to "read" so I marked it up with some notes and am just sharing by posting here. 

IMO rates will be low for a very extended period of time.  I projected a 2% to 2.5% high FFR by 2028.  LOL


The table below shows each of the cyclical peaks and troughs in the Fed funds rate, when they
occurred, the magnitudes of changes up and the magnitudes of the changes down (in both basis point terms and
percentage terms), since 1919. These are the interest rate changes that caused all of the recessions and
expansions over the last 90 years. This table shows 15 cyclical increases and 15 cyclical decreases. Note that
these swings were around one big uptrend and one big downtrend. Specifically, note that from the September
1932 low (at 0%) until the May 1981 high (at 19%), every cyclical low in interest rates was above the prior
cyclical low and every cyclical high was above the prior cyclical high – i.e., all of the cyclical increases and
decreases were around that 50-year uptrend. And note that from the May 1981 high in the Fed funds rate (at
19%), until the March 2009 low in the Fed funds rate (0%), every cyclical low in the Fed funds rate was lower
than the prior low and every cyclical high in interest rates was below the prior cyclical high – i.e., all of the cyclical
increases and all of the cyclical decreases were around a 27-year downtrend. Each cyclical decline in interest
rates incrementally reduced debt service payments, lowered the de-facto purchase prices of items bought on
credit to make them more affordable and boosted the value of assets a notch (having a positive wealth effect).
So, debt continued to rise relative to income and money, though the trend in debt service payments was
essentially flat, until interest rates hit 0% and this could not longer continue, at which time the government had
to print and spend a lot of money to make up for the reduced private sector credit creation and spending.



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[TravelingPennies]

And as I posted that just below along comes Bill Gross with this:


Pimco's Gross: Low interest rates may persist for decades
http://www.reuters.com/article/2013/10/02/us-funds-investing-pimco-idUSBRE9900YV20131002" class="bbc_link" target="_blank">http://www.reuters.com/article/2013/10/02/us-funds-investing-pimco-idUSBRE9900YV20131002


Survival of the Fittest?
http://www.pimco.com/EN/Insights/Pages/Survival-of-the-Fittest.aspx#" class="bbc_link" target="_blank">http://www.pimco.com/EN/Insights/Pages/Survival-of-the-Fittest.aspx#

''..... the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a "beautiful deleveraging." That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!"