The Economy

For the average American, this may seem like another economic down cycle, albeit one more serious than previous. It’s not. And while it’s said that history is cyclical, it isn’t. There’s no guarantee that what goes down will ever go back up again (notice much of a demand for wooden wagon wheels these days?). There’s ample evidence that some things that go up will never come back down (check gas prices lately?). Oh, there are cycles – things do happen over and over. But they rarely repeat. There are natural cycles to the economy, to the political system, to the seasons. However, just like each winter is different, so economic cycles differ as well. Many of the events people call cycles, as we will see, are not cycles at all, but rather unique single-cause events.

The difference is easy to see and explain, but for some reason, somewhat difficult to separate. A cycle goes up and down or round and round. A true cycle, then, is born of only a few things such as weather or normal business changes. A single-cause event, on the other hand, while it may feed into the duration or severity of a cycle, is born of one cause and has a singular life. Pricing bubbles are the best example of these.

It could be argued that pricing bubbles are cyclical. Housing prices seem to bubble every fifteen or twenty years and, particularly in the latest bubble, contribute to the ups and downs of the economy. Too, the reason behind housing pricing bubbles is almost always the same: demand. The reasons behind the demand, though, are, in many cases, very different. This last bubble, again in particular, had reasons that were utterly unique,

The important take-away here is the difference between a cycle and a single-cause event. When the discussion turns to the current economy, it’s critical to understand that what we are in is the result of the latter and not the former. Why?

Political decisions are the impetuous for some cycles, though they rarely occur within the reign of the leader responsible. This has been born out through 200 plus years of American existence, yet somehow each election we expect it to be different. Of course, the more frequent result is that the economic policies imposed/expounded by each leader have little or no effect at all. We ignore that, too. Naturally, every once in a while, a political decision does make a tremendous impact on the economy. The New Deal and social security and welfare are examples of decisions that have had lasting effects. The TARP and QE bailouts are examples of others where the effects have not been fully felt yet. But it’s difficult to call these effects cycles. A cycle tends to be something that repeats. While these types of events cause ups and downs, they don’t exactly fit the description of a cycle.

More often, it’s the normal boom-and-bust of business that causes true cycles. These are typified by businesses recognizing demand and building up to meet it, only to have some other event cause a drop in that demand, resulting in the downturn. These are true cycles. Wheat prices rise. Farmers plant more wheat. Wheat supplies increase. Wheat prices drop. Farmers plant less wheat. Wheat supplies fall. Wheat prices rise. That, my friends, is a cycle.

Typewriters are invented. Businesses buy typewriters. Typewriter company stock soars. Word processors are invented. Businesses buy word processors and quit buying typewriters. Typewriter company stock falls. That is a single-cause bubble.

And the single-cause bubble is what we are experiencing right now. Cycles can and are planned for. Businesses (should) expect cycles to occur. The farmer who planted wheat now plants corn. Or potatoes. The wagon-wheel manufacturer (and hopefully, the typewriter maker)

Sometimes the demand is simply short-lived, other times the ‘next big thing’ takes the demand – and then industry tries to meet those new demands. If industry senses a demand for say, cars and builds more plants and hires more workers and produces more cars and then the demand drops off, resulting in layoffs and plant closures, only to have demand surge again a few years later, now that would be a true cycle.

Lumped in with those types of true cycles are other, single-event or single-product rise and falls. These are not true cycles. The most famous of these, naturally, is the Dutch tulip craze of the early 1700’s. That created a boom-bust event that took down families, towns and of course, the tulip market. There were even (what could correctly be called) derivative contracts on future values and actual physical deliveries of tulips. Fortunes were made – and destroyed. But is that an example of a true cycle? Has the tulip market ever reached such heights – or lows – again? No. If a cycle is indeed defined as something that happens over and over, the tulip craze does not qualify.

Single-cause bubble events are often called cycles to obscure the truth. While the true economic cycles are more or less planned for (and still have very painful impacts on most people, especially those below the ‘wealthy’ label), the bubbles are not. What’s more, they are often encouraged and allowed by those who should not only know better, but are in positions to prevent them from happening. It’s true that, since these single-cause bubbles are not repeated that each is unique, it’s not true, as if often claimed, that they can’t be prevented nor foreseen. Indeed, like the true business cycles that influence the economy, the bubbles have distinctive features that both foreshadow their arrival and allow their progress.

Given that truth, it’s no wonder those in charge would seek to abstract these bubbles into looking like cycles. After all, if they can be foreseen and prevented and their are folks charged with doing just that, shouldn’t those people be held accountable? True enough, people like Madoff are held to the fire for their doings (though his example isn’t directly related to the single-cause bubble that we have just been through), they are more likely to have been those who took advantage of the situation rather than those who allowed or created it.

Sometimes, it’s the “killer app” that causes a cycle. The internet craze of the late 90’s is a perfect example. The move to computerization of industry is another. Even weather can be blamed for causing a cycle.

In the past fifty years, the wizards of Wall Street have found ways to exploit every financial market available. Some exploitations were the result of innovations, like computers. Some were the result of paradigm shifts, like the move to the internet. The rest, like commodity prices or mortgages, were pure exploitation – without regard to the effect on the world. However, there were differences between those exploitations and what has transpired this time.

This time, much like the downturn (if you can call it that) of 1929, it’s global. Now, no doubt, arguments can be made that the internet blowout of the 90’s and Black Monday in the 1980’s both had global effects, neither took out entire country’s economies. It could also be argued that this particular runup took much longer – and that’s a legitimate call. The 1990’s began the mortgage/derivative bubble and it continued, unabated, unregulated and uncontrolled, till late 2007.


2 Responses to “The Economy”

  1. I liked this indepth look at the cycles and one-time events of the economy. I enjoyed being educated.

    • Thank you for your kind words – and taking the time to read this. It’s really unfinished and I need to do cites and such, but thank you!

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