WCM Educational Recap #2: The Economic Cycle

Recapped by Alyssa Choi & Morgan Tannis

The Economic Cycle

This week, we dive into billionaire Ray Dalio’s template for understanding how the economy works!

Topic Spotlight

This week’s topic spotlight tied together container shipping, supply-crunch inflation, and central banking

Ray Dalio

Ray Dalio is the manager and co-chief investment officer at Bridgewater Associates

The Economy

In an economy, the production and consumption of goods and services are used to fulfill the needs of those living and operating within it.

Transactions

Transactions between buyers and sellers are the building blocks of the economy

Markets

A market is the aggregate of all transactions involving the exchange of money or credit for a single type of good or service

Central Banking

Some of the most important players in the economy are central banks

Interest Rates

Central banks control interest rates by setting the FFR (Federal Funds Rate)

Money Supply

To increase the money supply, central banks print money and purchase government bonds

Lenders and Borrowers

Borrowing occurs when a buyer exchanges a promise to repay a seller’s cash

Collateral

Why Debt is Important

When debt is used properly, it enables individuals and businesses to purchase productive assets that they wouldn’t otherwise be able to

Interest Rates and Spending

Think about the interest rate on a loan as the price of the loan

Productivity With Credit

Debt allows us to consume more than we produce, and forces us to consume less when we have to pay it back in the future

Short-Term Debt Cycle (5–8 years)

Expansion:

Recession:

Long-Term Debt Cycle (75–100 years)

Causes

Deleveraging: Reducing the Debt Burden

Cut Spending

Reduce Debt

Redistribute Wealth

Print Money

Previous Economic Cycle

Drivers of Rapid Expansion (2009–2015)

Quantitative Easing (QE)

Low Interest Rates

Corporate Tax Cuts

Drivers of Slower Expansion (2015–2020)

Problem:

Solutions:

Now:

Macroeconomic Tools

Monetary Policy

Ex. Bank of Canada’s Response to COVID-19

Fiscal Policy

Ex. Government Response to COVID-19

Future Growth Estimations

Many factors aside from credit affect growth.

Key Takeaways

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