World Model
Mechanisms
Mechanisms explain how reality works. Adopted mechanisms form the current World Model.
Credit Creation Creates Matching Asset And Liability
Credit is created when a lender believes a borrower will repay principal plus interest. Once credit is created, it becomes debt: an asset for the lender and a liability for the borrower. When repayment happens, the...
adopted
Credit Pulls Spending Forward And Repayment Reverses It
Borrowing lets a borrower spend more than current income allows. That spending is pulled forward from the future. Later, repayment forces the borrower to spend less than income. The initial boost and later reversal...
adopted
Creditworthiness Feeds On Income And Collateral
Creditworthiness depends on ability to repay and collateral. Higher income makes borrowers look more able to repay. Higher asset values increase collateral. Both make lenders more willing to lend, which can support...
adopted
Deleveraging Contraction Cycle
When debt burdens become too large, borrowers cut spending, incomes fall, credit availability contracts, asset prices fall, collateral weakens, and borrowers become less creditworthy. Forced asset sales can push...
adopted
Deleveraging Policy Balance
Debt burdens can fall through four broad channels: spending cuts, debt reduction, wealth redistribution, and money creation. Spending cuts and debt reduction are deflationary. Money creation is inflationary and...
adopted
Economic Activity Is Made Of Transactions
An economy can be modeled as the sum of transactions across markets. In each transaction, a buyer exchanges money or credit with a seller for goods, services, or financial assets. Total spending, quantity sold, and...
adopted
Long-Term Debt Cycle
Across repeated short-term cycles, debt can rise faster than income because people and institutions tend to borrow and spend more rather than repay debt fully. As long as incomes and asset prices rise, debt burdens...
adopted
Productivity Growth Drives Long-Run Living Standards
Over time, accumulated knowledge and productive capacity raise living standards. Productivity changes slowly compared with credit. It matters most over the long run, while credit drives many short-run swings. Dalio...
adopted
Short-Term Debt Cycle
When credit is easily available, borrowing and spending rise. If spending and income rise faster than production, prices rise. Central banks respond to excessive inflation by raising interest rates, which reduces...
adopted
Spending Is Someone Else's Income
One person's spending becomes another person's income. When spending rises, incomes elsewhere rise. When spending falls, incomes elsewhere fall. This creates propagation: local changes in spending can feed through...
adopted