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The Credit Cycle "Explained"


I was recommended to watch a 30-minute video by Bridgewater Associates available at EconomicPrinciples.org explaining How the Economic Machine Works. The phrasing “economic machine” should be enough to raise the blood pressure of anyone with the slightest economic literacy. And sure enough, while there are some truths in the video, it is a masterpiece in no-says and well disguised fallacies.

The video sets out and purportedly succeeds in explaining how the economy works, describing the roles of productivity, credit/debt, credit cycles, and transactions. It is beautifully produced, and is in fact a masterpiece in making assertions and unfounded statements sound like “obvious” causal explanations. For instance, we learn that “a cycle that goes up must come down” and this supposedly explains why a credit-infused boom comes to an end. Anyone dumbfounded by the complexity of the modern economy (or the nice graphics of it) might be tricked into thinking such a statement has to do with causality, while it obviously doesn’t.

The economy, the video notes, consists of three tendencies: a stable increase in productivity, which somehow is fixed and doesn’t change (!); the long-term credit cycles almost a century long; and the short-term credit cycles of 5-8 years. I guess we are supposed to take their word for it, but an explanation would be nice. Oh, sorry, there is an explanation provided: when people are offered credit, it becomes a problem because “people push it” since it is in “human nature” to push for more. This creates an unsustainable credit-infused and credit-fueled boom. Why?

Explanation: “this obviously cannot continue forever, and it doesn’t” - “the cycle reverses itself.” Oh, okay.

Then what? Well, the economy goes in reverse, credit is cut and incomes fall because there is deflation (yikes, everybody take cover!). This is when the central bank steps in to lower interest rates so that people can get back to spending. Because, remember, “spending drives the economy,” so getting people to spend again saves the day. More credit, happier people.

But when we reach the end of a long-term credit cycle, such as in 1929 and 2008, lowering interest rates to zero (0) doesn’t cut it. So the central banksters must print money “out of thin air” and counteract the deflationary pressure by creating inflation. But this is tricky, so we must have really smart people on Capitol Hill and on the Federal Reserve board. Thanks to these great people, the central bank and the rest of the government can perfectly balance the economy’s horrible deflationary pressure with measures to create beautiful releasing inflation. When this is done, ”there can be a beautiful deleveraging” (emphasis in the narration) that sets the economy back on track again.

Phew, imagine what kind of situation we would be in if the government did not step in to refuel, service, and grease the “economic machine.” We are obviously very fortunate to have the central planners, because otherwise we would all be extremely poor - if not dead.

It’s just one thing that is missing from this beautifully made propaganda video. But this is also what makes it propaganda rather than educational: an explanation. There is not one single explanation for any of the phenomena discussed in the video. And this is how the economic machine works…?

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.

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