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Tuesday, September 24, 2013

Investing Fundas: How The Economy Works

Ray Dalio's explanation is very simple.. 
It say's the same thing except for a very important point (According to me)
Dalio ji says that.. as Debt cycle goes down.. "Credit" reduces.. and its quite possible that the rate of "Credit reduction is so fast that .. it will result in Deflation and economic downturn..

The key it seems is to strike a balance.. Rate of "Credit Reduction" should be balanced by "monetary printing" so that the economy (which consist of credit + printed money) does not contract too fast else.. the asset prices will fall too fast.

Best to see the video.. Really good !!

=happy investing!!


Anonymous said...

WhatsUP Ji,

Interesting and simple explanation.

People say, mother nature abhors straight lines. It is full of curves. Anything linear is a straight line. Economic cycles are also curves. Trick is to identify the peaks and crufts and then decide action accordingly.

What'sUp Prahalad said...

Anonymous ji:

one thing is for sure.. for US to come out of downturn.. interest rates will have to be lower than growth rates.. else the debt burden will continue to grow..

reducing the free cash to be used to create assets/pay debt..
So its given that US interest rates will remain low.. ultra low!!
India on the other hand has growth.. but there is inflation.. so we need to reduce credit (to contain inflation) as well as try and direct credit in required areas.. ie infrastructure, productive assets..
I think govt needs to provide incentive's for investment in infrastructure.. and the "tax free" bonds is a great instrument..
also real estate has really exploded (bubble territory) and hope there is no hard landing..

=happy investing