<p>I'm reading Ray Dalio's <em>How the Economic Machine Works</em>, and although I understand the role of credit in an economy, I don't understand whether credit actually <strong>adds any value</strong> to an economy.</p>

<p>Ray says that credit is what causes economic cycles (i.e. people borrow and invest when interest rates are low, and save when interest rates are high). This behavior leads to short term debt cycles in the economy. </p>

<p>However, Ray also says that these short-term cycles are centered around a long term productivity growth of around 2%.</p>

<p><a href="https://i.sstatic.net/sKcmk.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/sKcmk.png" alt="enter image description here"></a></p>

<p>So my question is as follows:
If productivity will always grow at around 2%, what is the point of credit? Aren't you simply borrowing from the future, and then subsequently paying off those debts? Would economic growth be the same without credit? Would the economy be as efficient?</p>

<p>Thanks</p>

<p>Edit: Here's the paragraph that I'm confused about. Is this paragraph saying that credit doesn't add anything to an economy (since long-term productivity growth is the same regardless?)</p>

<p><a href="https://i.sstatic.net/FRO92.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/FRO92.png" alt="enter image description here"></a></p>

CC BY-SA 4.0
2018-07-08T22:02:42.010Z
There is no reason to believe productivity must always grow at around 2%.  It may have done on average during 1950-2000 but that is a particular interval
Henry
CC BY-SA 4.0
2018-07-08T22:04:05.177Z
Doesn't really address my question: The 2% was just an example. My point is, if productivity growth is going to be similar in the long run, and credit just leads to short term fluctuations *around* the long-term productivity growth line. What is the point of credit?
bugsyb
CC BY-SA 4.0
2018-07-08T22:15:10.897Z
I am challenging your suggestion that productivity growth is going to be similar in the long run.  What happened in the 20th century was the result of a lot of things including wars and changes to credit
Henry
CC BY-SA 4.0
2018-07-08T22:17:22.353Z
My question is: why is credit important to an economy?
bugsyb
<economic-growth><productivity><credit>
Does credit really help an economy?
bugsyb
# Does credit really help an economy?

(Asked by: username_0 on 2018-07-08)

I'm reading Ray Dalio's *How the Economic Machine Works*, and although I understand the role of credit in an economy, I don't understand whether credit actually **adds any value** to an economy.

Ray says that credit is what causes economic cycles (i.e. people borrow and invest when interest rates are low, and save when interest rates are high). This behavior leads to short term debt cycles in the economy.

However, Ray also says that these short-term cycles are centered around a long term productivity growth of around 2%.

[![enter image description here](https://i.sstatic.net/sKcmk.png)](https://i.sstatic.net/sKcmk.png)

So my question is as follows:
If productivity will always grow at around 2%, what is the point of credit? Aren't you simply borrowing from the future, and then subsequently paying off those debts? Would economic growth be the same without credit? Would the economy be as efficient?

Thanks

Edit: Here's the paragraph that I'm confused about. Is this paragraph saying that credit doesn't add anything to an economy (since long-term productivity growth is the same regardless?)

[![enter image description here](https://i.sstatic.net/FRO92.png)](https://i.sstatic.net/FRO92.png)

**Tags:** economic-growth, productivity, credit
> **Comments:**
> **username_1**: There is no reason to believe productivity must always grow at around 2%.  It may have done on average during 1950-2000 but that is a particular interval  
> **username_0**: Doesn't really address my question: The 2% was just an example. My point is, if productivity growth is going to be similar in the long run, and credit just leads to short term fluctuations *around* the long-term productivity growth line. What is the point of credit?  
> **username_1**: I am challenging your suggestion that productivity growth is going to be similar in the long run.  What happened in the 20th century was the result of a lot of things including wars and changes to credit  
> **username_0**: My question is: why is credit important to an economy?  

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## 0 answers

