3 Pieces of Advice to Avoid Crisis from Ray Dalio

Money

Source: http://www.flickr.com/photos/zieak/

Ray Dalio has worked his way into infamy as one of the best investors on the planet. He’s the founder of Bridgewater Associates, the world’s largest hedge fund with about $150 billion under management, and has a personal net worth of approximately $13 billion.

Over the years, Dalio has also become famous for his insight not just into the financial markets but into the economy as a whole. Bridgewater maintains a menagerie of educational material on its website, including a paper by Dalio first uploaded in 2008 called “How the Economic Machine Works.”

The paper explains, in detail, how Dalio perceives the economy as a mechanism with really only a few critical moving parts. He says that if the nature and function of these parts can be understood, then the entire machine can be grasped. Through his understanding of the economic machine, Dalio has been able to create one of the most successful hedge funds in history, and he has been able to avoid disaster during the financial crisis.

But the paper is not necessarily the most accessible document on the planet, so abiding by his “deep sense of responsibility to share” his “simple but practical economic template,” Dalio created a 30-minute video that covers the basics. Here are three rules of thumb from the presentation (you can find the full video at the end).

1. “Don’t have debt rise faster than income …

… because your debt burdens will eventually crush you.”

In the decade or so before the financial crisis, household debt service payments increased to as much as 14 percent of disposable personal income. This means that people were increasing borrowing at an unsustainable rate, consuming ever-larger shares of their disposable income simply to service debt instead of spending that money and contributing to real economic activity.

Debt Payments to GDP

2. “Don’t have income rise faster than productivity …

… because you’ll eventually become uncompetitive.”

In a healthy economy, there should be a strong link between gains in income and gains in productivity. Economies can experience price inflation and income growth exceeds productivity growth because people are willing and able to create more demand than there is supply. This can also encourage people to live outside their means and take on too much debt.

Income v Productivity

3. “Do all that you can to raise your productivity …

… because in the long run, that’s what matters most.”

If there are any truisms in economics, this is one of them. The ability to do more with the same amount of — or even less — capital is fundamental to the real growth of any economy and the advancement of living standards for all those involved. This, after all, is the real goal of economic growth.

Here’s the video in full.

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