Finite Earth

The Business Cycle

Anyone who believes exponential growth can continue in a finite world is either a madman or an economist. – Kenneth Boulding, Economist

The Business Cycle or as it is sometimes called the Economic Cycle is that cycle of economic boom times followed by economic busts or recessions. If the bust is especially sever then it is a depression. Several people have studies the business cycle and proposed theories for why and when they happen.

Over the last half-century bankers and economists have been trying to convince and out and out brainwash the public into believing that there is no such thing as a business cycle. Just take a look at older used textbooks and you will see volumes of misinformation about what a business cycle is and the causes behind them. In the propaganda war leading up to the creation of the Federal Reserve one of the selling points was that it would eliminate the business cycle. Herbert Hoover was one of the people who made the case for the creation of the Federal Reserve.

We shall have no more financial panics.... Panics are impossible.... Business men can now proceed in perfect confidence that they will no longer put their property in peril.... Now the business man may work out his destiny without living in terror of panic and hard times....Panics in the future are unthinkable.... Never again can panic come to the American people. – Herbert Hoover

If the purpose of the Federal Reserve was to eliminate the business cycle or at least recessions and depressions then it has failed miserably at its task. This is painfully evident in this figure.

The Contemporary View

A more contemporary view is that the business cycle is actually not a cycle but rather a monetary fluctuation. This view is held by the economist Milton Friedman whose monetarist theories were so influential to Margaret Thatcher and Ronald Reagan. The same Milton Friedman whose Chicago School of economics and "Chicago Boys' almost single handedly destroyed much of South America. Why Milton Friedman is still revered by conservatives instead of being viewed as the economist equivalent of Joseph Stalin or Adolph Hitler is beyond me. Or maybe the answer lies in the fact that only conservatives revere him and his economic theories.

Speaking of Joseph Stalin, it was Stalin who executed Nikolai Kondratieff for studying the US capitalist system and developing a theory of business cycles based on US economic data. Milton Friedman and his conservative followers never seem to mention the Kondratieff waves. Maybe because they seem to match the US business cycle fairly well as you can see in this figure.

What does the Kondratieff wave predict for the upcoming cycle? That we are well overdue for a huge crash to match the Great Depression. Alan Greenspan has already gone on record that the financial problems of 2008 are a once in a hundred year event. He should know Greenspan was instrumental in manufacturing the event.

Another School of Thought

There is yet another school of thought that the financial crisis of 2008 (front edge of a great depression) is part of a longer wave. This longer wave is that of a gigantic usury bubble that has to burst causing massive bankruptcies and elimination of debt.

As we all know by now money is created when banks make loans; mortgage loans, credit card loans, loans to the government, and loans to business to name a few. As we also know banks do not create the money to pay the interest, preferring instead to send people and companies out to fight to get that money to pay off the debt with the interest. If the debt grows at the same rate or slower than production then real goods and services will be produced fast enough to pay the money debt. But for decades now the increase in the money supply has outstripped the rate of production of news goods and services.

The banks are continually making new loans and retiring old ones as they are repaid. In the aggregate, the debts owed to banks are increasing with the mere passage of time, because interest accrues over time. The money available to repay those debts, however, can be created only by the banks as they make additional loans.

The net requirement, then, is that banks must make new loans faster than they retire old loans, that is, there must be a continual expansion of bank credit money. If there is not, the result is depression-increasing numbers of defaulted loans, greater numbers of bankruptcies, expanding unemployment-and all the human misery that comes with it. [ 1 ]

Very often the press and economists like to blame the spending too much and not saving. But the dirty little secret of many of these economists is that they were instrumental in shifting the economy away from manufacturing and toward consumerism. Consumer spending is around 70% of the economy. If people were to stop spending and save the economy would crater overnight. So they blame the consumer out of one side of their mouth and say spend spend spend out the other side. With the monetarists drive to cut real wages taking on debt is the only way consumers can possibly continue to spend.

The Dirty Little Secret

The dirty little secret they didn't tell you that the real explosion in debt isn't created by consumer debt it is created by the U.S. government and the banks themselves. This is obvious if you were to look at the growth in M3. Oh wait you can't do that anymore because the FED decided to stop publishing that number in 2006. Wonder why they did that?

Even the U.S. government isn't the largest debt generator around. It's the banks themselves with their financial instrument of choice the derivative. The BIS estimates that worldwide there is $1,000 trillion worth of derivative contracts outstanding in 2008. This is about three times more than the net worth of all the assets in the world. What happens when that bubble bursts?

I guess to understand what the banks will do if the derivative bubble bursts we only have to look at the past actions of the banks. Like when they hired lobbyists to push legislation through Congress to stop individuals from having their debts eliminated through bankruptcy. It's personal responsibility. I would imagine that if a large bank were to get into trouble then they would immediately cut CEO pay, trim expenses to the bone to take the responsibility to repay those debts. Or will they? No they will use their enormous financial might to force Congress and the Government to dig deep into taxpayer pockets and come up with a bailout.

[ 1 ] Thomas Greco, Understanding and Creating Alternatives to Legal Tender