"The machine" - previous post in this series described, more or less, Ray Dalio's trade networks.
However, Dalio's machine is even bigger than the trade networks alone.
1. The Trade Networks Are Part of the Machine
The shipping lanes, ports, payment systems, banks, contracts, insurance markets and supply chains are the plumbing.
They allow:
- Oil to move
- Food to move
- Components to move
- Money to move
- Information to move
Without them, the modern economy would seize up very quickly.
2. The Machine Includes Several Interlocking Systems
Dalio tends to view the world as a collection of interacting systems:
- The economic machine
- The credit machine
- The monetary machine
- The political machine
- The geopolitical machine
Each influences the others.
For example:
A container ship leaves Shanghai carrying goods.
That is trade.
The shipment is financed by banks.
That is credit.
The payment is settled in dollars.
That is money.
The route passes through strategic waters protected by navies.
That is geopolitics.
The legal contracts are enforced by governments.
That is politics.
All of these together form the machine.
3. Relating This to The Three Layers
The machine sits underneath all three layers.
Layer 3
- Derivatives
- Futures
- Options
depend on
Layer 2
- Shares
- Bonds
- Financial claims
which depend on
Layer 1
- Production
- Resources
- Labour
- Energy
which depend on
The Machine
- Trade routes
- Banking systems
- Energy systems
- Legal systems
- Governments
- Military protection
- Social stability
Without the machine, the layers above cannot function.
4. A Useful Analogy
Think of a theatre.
The actors on stage
- Shares
- Bonds
- Derivatives
These are what investors see every day.
Behind the stage
- Factories
- Farms
- Mines
- Energy systems
These produce the real output.
Underneath the entire building
- Shipping networks
- Banking networks
- Governments
- Laws
- Currencies
- Security arrangements
These are the foundations.
Most people watch the actors.
Dalio spends much of his time studying the foundations.
5. An Interesting Extension
- Physical assets
- Energy
- Agriculture
- Commodities
- Infrastructure
- Geopolitics
The recent series of posts have gradually moved attention downward through the layers.
Many investors spend all their time analysing Layer 3.
Some analyse Layer 2.
Dalio's framework, and these recent posts, ask:
"What supports the entire structure?"
That question leads directly to:
- Trade networks
- Energy systems
- Monetary systems
- Debt systems
- Geopolitical power
In other words, the machine itself.
Glossary
Economic Machine - Dalio's term for the interconnected system through which production, spending, credit and wealth creation occur.
Plumbing - Informal term for the underlying infrastructure that allows a financial or economic system to operate.
System - A collection of interconnected parts whose behaviour depends on their interactions rather than on any single component.
Foundation Layer - The underlying institutions and physical networks upon which economic and financial activity depends.
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