How the economic machine works, in 30 minutes. The economy works like a simple machine. But many people don't understand it â€” or they don't agree on how it works â€” and this has led to a lot of needless economic suffering. I feel a deep sense of responsibility to share my simple but practical economic template.
Though it's unconventional, it has helped me to anticipate and sidestep the global financial crisis, and has worked well for me for over 30 years. Let's begin. Though the economy might seem complex, it works in a simple, mechanical way. It's made up of a few simple parts and a lot of simple transactions that are repeated over and over again a zillion times. These transactions are above all else driven by human nature,
and they create 3 main forces that drive the economy. Number 1: Productivity growth Number 2: The Short term debt cycle and Number 3: The Long term debt cycle We'll look at these three forcesand how laying them on top of each other creates a good template for tracking economic movements and figuring out what's happening now. Let's start with the simplest part of the economy:
Transactions. An economy is simply the sum of the transactions that make it up and a transaction is a very simple thing. You make transactions all the time. Every time you buy something you create a transaction. Each transaction consists of a buyer exchanging money or credit with a seller for goods, services or financial assets.
Credit spends just like money, so adding together the money spent and the amount of credit spent, you can know the total spending. The total amount of spending drives the economy. If you divide the amount spent by the quantity sold, you get the price. And that's it. That's a transaction.
It is the building block of the economic machine. All cycles and all forces in an economy are driven by transactions. So, if we can understand transactions, we can understand the whole economy. A market consists of all the buyers and all the sellers making transactions for the same thing. For example, there is a wheat market,