Kitchin cycle. Juglar cycle. Kondratiev wave. Boom-bust. A whole bunch of malarkey.
I don’t think recessions are nowadays really the result of ‘cycles,’ which is a term that sort of implies they are part of some natural order of things, like moon phases or the seasons. I think recessions are like ice ages. They are natural only in a more abstract sense. Today’s scientific understanding is that the last ice age some twelfth thousand years ago ended suddenly as a result of a cosmic impact; a radical change that would perhaps never have happened, or at least would have taken a great deal longer without such impact. Recessions we’ve seen, especially in the last century can be chalked up to unusual events, typically involving fraud (2008), or foreign trade (1973 and 1979), and catastrophic monetary deflation (1929-1932).
Probably the close we could get to something truly cyclical would be asset bubbles caused by speculative bidding effects, but these I believe are actually not all that common in the grand scheme of things. If we look through the last 100 years, there are really only three major exogenous bubbles that had any notable consequence, those being the late 1920’s global stock market, the late 1980’s Japan asset bubble, and the 2000’s housing boom in the U.S., though the latter was not so much a bubble in housing so much as housing securities, really only exploding as an inevitable consequence of rampant and structural fraud.
Exhilarant Bubbles as the Catalyst of the Boom and Bust Cycle
Of course, how we define a bubble is awfully important in this, and the definition I personally find useful and relevant is the following: a bubble occurs when the price of a good or asset class is bidded beyond the market’s ability to clear. The sellers run out of customers, or the customers run out of money.
An example would be land speculators buying up land in a hot area so they can sell it for a profit, only for the root consumers (people who buy land to use it instead of speculate) to be priced out of the market. There is a price the market cannot or will not pay for any particular commodity, and either a sudden lack of interest by or exhaustion of financial capital of the market as a whole (mostly consisting of these root consumers I speak of) will cause price appreciation to slow or halt, which burns the speculator who went all out to buy such commodities. Then you get the cascading effect of all of the speculators selling it all, only for some smart, patient guys to buy it all up at cheap prices to begin the ‘cycle’ again.
My argument is that this is not all that common, especially thanks to regulations that limit and restrict margin borrowing, the costs of short-term capital gains tax and the preference for long-term tax rates, various fees and transaction taxes imposed overseas, and of course the relative free flow and accessibility of financial and economic information in the modern age. It can also be hard to make a profit via fraudulent exploitation of regular people when charlatan business practices are strictly illegal and harshly punished.
The “Great Smoothening” and the Inevitable Economic Shock
Aside from some of these bubbles, which again I argue are already quite unlikely and becoming increasingly unlikely (or are in fact are not the result of this more cyclical exuberance but instead due to rampant fraud as in the case of the subprime mortgage crisis), events that cause recessions are almost always freak occurrences that have no grounding in any remotely predictable or regular flow of events. Oil embargoes and sector-wide fraud are more akin to car accidents than red lights and stop signs.
What is going on today is a perfect example of this phenomenon of freak accidents. Global pandemics do not occur at regular intervals as the result of some natural cycle. As has occurred this year, recessions will continue to occur in the future, however, in my estimation, they will be caused exceedingly less by so-called ‘natural business cycles.’
It might be asked, what if consumers ordinarily reduce their consumption, causing one of these occasional declines in output? Well, in real terms, that just about never occurs. Personal consumption expenditures have been extremely stable, and consistently growing, falling a grand total of 5 quarters out of the last 240. That means 98% of quarters experience growth in household spending.
And when household spending does inevitably fall? Time and time again it has been demonstrated that a sudden crash in output and demand can take many years or even decades to recover from in the absence of state intervention.
So to the question of ‘don’t you have a business cycle in the sense that demand falls, and businesses respond by laying off workers and reducing investment’— I respond with no, because that resembles not a cycle but a one-sided feedback loop.
Counteracting Shocks With Paleo-Keynesian Demand Management
To summarize, these events are irregular, uncommon, and can take a great deal of time to sort themselves out. Hardly cyclical. Perhaps, if humans were better coordinated they’d agree on collective spending increases to halt the negative feedback loop, or maybe that’s just what we try to do via ballot. If Congress and the Federal Reserve hadn’t pulled trillions in ‘free silver’ out of their magic hat this year, it’s possible our full recovery could have been prolonged three, four, or maybe five years.
The fourth-quarter 2007 peak in real household consumption per capita wasn’t surpassed until the third quarter of 2013, some 70 months later. Over the Great Recession, real household consumption per capita only fell 3.7 percent from peak to trough, and for those who remember, it was no cake walk. Millions lost their jobs and homes.
This year, from peak to trough, that same household consumption fell by 18.1 percent! It dropped so hard and so fast it actually fell below the Q2 2009 trough in real terms. However, thanks to the bold action of both this Federal Reserve and Congress, household consumption has recovered by more than four-fifths to the previous peak—— and in the same breath I will condemn, in particular, (and in the words of Harry Truman) this last-worst Congress for not even seriously considering continuing the sustenant efforts that could accelerate and finish this recovery.
But perhaps it’s necessary to delay the bulk of further stimulus, as far as to the sooner of 2021, widespread vaccination, or herd immunity. Placing trillions of dollars on the public credit will eventually bear an interest cost, so long as the Federal Reserve intends to offload it’s balance sheet onto private investors one day. We might not like to pay interest on squandered borrowings, and these trillions of dollars might very well be (or at least in part) squandered if we try to spur demand in a public health crisis that requires a temporary reduction in activity and interaction instead of an increase.
Either way, the charts are not pretty… our recovery is fading. Action must be sought, whether now or a little later, and it’s not clear just how late such action can come before permanent damage begins to accumulate in excess of what’s bearable to the national economy and its both countless and very real household consumers.
Main photo source.