How the Economic Machine Works

Questions and Answers

Human nature

A comprehensive picture of the economy's movements

Money or credit for goods, services, or financial assets Signup and view all the answers

Unconventional and simple Signup and view all the answers

Because it is the biggest part of the economy Signup and view all the answers

The asset and liability disappear Signup and view all the answers

Because the borrower has valuable assets to use as collateral Signup and view all the answers

Increased spending Signup and view all the answers

5 to 8 years and 75 to 100 years Signup and view all the answers

Study Notes

The economy works like a simple machine with a few simple parts and repetitive transactions driven by human nature.
Three main forces drive the economy: Productivity growth, Short-term debt cycle, and Long-term debt cycle.

An economy is the sum of transactions, and a transaction consists of a buyer exchanging money or credit with a seller for goods, services, or financial assets.
Credit spends like money, and understanding credit is crucial as it's the most important and volatile part of the economy.
Credit is created when lenders and borrowers engage in transactions, and it immediately turns into debt, becoming an asset to the lender and a liability to the borrower.

Credit allows borrowers to increase spending, which drives the economy, as increased income leads to increased borrowing, and subsequently, increased spending.
Credit enables consumption beyond production, and debt repayment forces consumption below production, leading to economic swings.

Debt swings occur in two significant cycles: a short-term cycle lasting 5 to 8 years and a long-term cycle lasting 75 to 100 years.
These cycles are often overlooked due to their frequency and proximity, but understanding them is essential for tracking economic movements.