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Understanding Where the Loan Officers Fit In the Macro Universe

Ray Dalio is a jedi and understanding the macro (big picture) and how to apply to to the daily (practical engagement). If you aren't reading his posts, you should: Full Post Here




From Ray in Blue, my comments in white.


Think about these in the context of what you do. How would this impact your business? In other words, where do you fit in the bigger picture financial universe.

There are five major parts that make up my simplified model of the economic machine. They are:

  1. goods, services, and investment assets,

  2. money used to buy these things,

  3. credit issued to buy these things, and

  4. debt liabilities (e.g., loans) and

  5. debt assets (e.g., deposits and bonds) that are created when purchases are made with credit.

There are four major types of players in this economic machine. They are:

  1. those that borrow and become debtors that I call borrower-debtors,

  2. those that lend and become creditors that I call lender-creditors,

  3. those that intermediate the money and credit transactions between the lender-creditors and the borrower-debtors that are most commonly called banks, and

  4. government-controlled central banks that can create money and credit in the country’s currency and influence the cost of money and credit.


In the first part, lenders lend money in the form of credit to buy houses, and these liabilities are repaid over time - pulling future buying power forward today, but that buying power is offset if houses appreciated which gives you more buying power in the future.

We discuss this in my book, but essentially there are those that borrow out of need, and those that borrow out of necessity. We operate as an intermediary to help those that need credit to borrow in the most efficient way possible.


In summary and to reiterate:

  1. Goods, services, and investment assets can be produced, bought, and sold with money and credit. (like mortgages)

  2. Central banks can produce money and can influence the amount of credit in whatever quantities they want. (more liquidity or less liquidity - as available money to be lent)

  3. Borrower-debtors ultimately require enough money and low enough interest rates for them to be able to borrow and service their debts. ( the amount of money and cost of money are key to our lending economy)

  4. Lender-creditors require high enough interest rates and low enough default rates from the debtors in order for them to get adequate returns to lend and be creditors. (as rates go up there is more return for the bank but also more risk of default)

  5. This balancing act becomes progressively more difficult as the sizes of the debt assets and debt liabilities increase relative to the incomes. (if wages don't go up and house prices keep going up, default increase)

  6. A “beautiful deleveraging” can be engineered by central governments and central banks to reduce debt burdens if the debt is in their own currencies. (the US has a big advantage over any other country)

  7. Over the long term, being productive and having healthy income statements (i.e., earning more than one is spending) and healthy balance sheets (i.e., having more assets than liabilities) are the markers of financial health. (this is true for the country and the individual)

  8. If you know where in the credit-debt cycle each country is and how the players are likely to behave, you should be able to navigate these cycles pretty well. (do you know where we are today?)

  9. The past is prologue. (history rhymes, but it doesn't repeat)


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