BUSINESS CYCLE: a cycle of economic activity usually consisting of recession, recovery, growth, and decline (Merriam-Webster)
The words “cycle” and “business cycle” have the appearance of inevitability about them.
We are led to believe a recession must automatically be followed by a recovery, which must lead to growth, and then the whole thing must crash down into decline and recession.
That is the cycle, and there’s nothing we can do to prevent it. All we can do is prepare for it.
Or so the theory goes:
By: John Detrixhe (John covers the future of finance for Quartz. He previously wrote about markets and trading for Bloomberg News in New York and London.)
Despite bumper earnings, bank shares have lagged the overall market this year. The likely reason is that investors think the US, and perhaps the global economy, is getting closer to its next downturn.
That’s the common belief. Because there is a business “cycle,” growth must lead us closer to a downturn. It’s as though, in baseball, winning brings the team closer to losing. Or happiness leads you closer to sadness.
There never is a specific reason given. The notion is, the business “cycle” itself demands that success brings us closer to failure.
It has been nine years since the last recession, almost double the average for the US economic cycle.
The bull market in US stocks is also nine years old, the second-longest run on record.
Unemployment is near historic lows following an unprecedented stretch of job gains.
One would think the good news would lead to more good news. After all, doesn’t low unemployment, together with more job growth, indicate a healthy economy?
Why should healthiness cause future sickness?
There’s an escalating trade war between the US and the rest of the world, or the fact the Federal Reserve is raising rates while other central banks keep them at historic lows.
The trade war has nothing to do with any sort of business “cycle.” It’s the arbitrary work of a fool, who believes cutting off your nose to spites China’s face.
And raising interest rates is merely an inflation preventative. Contrary to popular myth, raising interest rates does not bring on recessions.
As you can see, lowering interest rates is associated with recessions, partly because reduced rates require the federal government to pump less T-security, interest money into the economy.
In a recent conference call with JPMorgan, a banking analyst said she’s getting a lot of pushback from investors because “we’re long in the tooth in the economic cycle.”
The bank’s CFO, Marianne Lake, countered that there are no signs of fragility so far, but noted that the biggest US bank by assets is preparing for the inevitable slowdown.
Indeed, finance execs have recently been citing the “credit cycle” more than at any time since the last downturn, according to a Sentieo analysis of earnings calls.
Remarkable, isn’t it. There are “no signs of fragility,” but the biggest bank is preparing, not for growth, but rather for a slowdown.
What do businesses do to “prepare for a slowdown.” They cut spending. They reduce “unnecessary” expenses like Research & Development, Advertising and Marketing. They defer expansion plans. They stop investing in plant and equipment. They cut employees. They become less aggressive and instead, retreat into a protective shell.
And those are the very actions that help bring on recessions. A recession becomes “inevitable,” because it is a self-fulfilling prophesy.
In addition to the abovementioned self-fulfilling prophesy, a prime inflation cause — perhaps the prime inflation cause — is a reduction in federal deficit spending.
Gross Domestic Product (GDP) = Federal Spending + Non-federal Spending + Net Exports.
Spending cuts reduce GDP.
If the private sector and the government believe that business growth, federal deficit spending, and raising interest rates all make a recession inevitable, they will cut spending and reduce rates.
And that indeed, will make a recession inevitable.
We often have claimed that economics comes closer to being a religion than a science. And the belief in business “cycles” — that success inevitably causes failure — is a perfect example.
According to the USC Digital Folklore Archives: “Kenahora” is a curse in Yinglish (bastardized english/yiddish) that comes from three words slurred together: the Yiddish word kein, meaning “no,” ayin, which is Hebrew for “eye,” and hara, Hebrew for “evil.”
“My mother would always say ‘don’t give a ‘kenahora’ to mean ‘don’t give us bad luck.’
“If you are driving cross country let’s say, and making great time – but stupidly decide to comment ‘Oh boy we are making great time’ – BANG – you will instantly hit traffic – bumper to bumper. It always happens!
“My mother also used to spit after saying ‘Kenahora, pu-pu-pu!’ It implied spitting on the demon to stop it.”
If phony business “cycles” concern you, especially those so-called, “inevitable” recessions, perhaps saying “Kenahora,” then spitting three times will help.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell
The single most important problems in economics involve the excessive income/wealth/power Gaps between the have-mores and the have-less.
Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.
Implementation of The Ten Steps To Prosperity can narrow the Gaps:
Ten Steps To Prosperity:
1. ELIMINATE FICA
(Ten Reasons to Eliminate FICA )
Although the article lists 10 reasons to eliminate FICA, there are two fundamental reasons:
*FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
*The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.
2. FEDERALLY FUNDED MEDICARE — PARTS A, B & D, PLUS LONG TERM CARE — FOR EVERYONE
(H.R. 676, Medicare for All )
This article addresses the questions:
*Does the economy benefit when the rich can afford better health care than can the rest of Americans?
*Aside from improved health care, what are the other economic effects of “Medicare for everyone?”
*How much would it cost taxpayers?
*Who opposes it?”
3. PROVIDE A MONTHLY ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA (similar to Social Security for All)
(The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB (Guaranteed Income)) Or institute a reverse income tax.
This article is the fifth in a series about direct financial assistance to Americans:
Why Modern Monetary Theory’s Employer of Last Resort is a bad idea. Sunday, Jan 1 2012
MMT’s Job Guarantee (JG) — “Another crazy, rightwing, Austrian nutjob?” Thursday, Jan 12 2012
Why Modern Monetary Theory’s Jobs Guarantee is like the EU’s euro: A beloved solution to the wrong problem. Tuesday, May 29 2012
“You can’t fire me. I’m on JG” Saturday, Jun 2 2012
Economic growth should include the “bottom” 99.9%, not just the .1%, the only question being, how best to accomplish that. Modern Monetary Theory (MMT) favors giving everyone a job. Monetary Sovereignty (MS) favors giving everyone money. The five articles describe the pros and cons of each approach.
4. FREE EDUCATION (INCLUDING POST-GRAD) FOR EVERYONE
Five reasons why we should eliminate school loans
Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.
Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.
An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.
5. SALARY FOR ATTENDING SCHOOL
Salary for attending school. Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study.
If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.
6. ELIMINATE FEDERAL TAXES ON BUSINESS
Businesses are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the federal government (the later having no use for those dollars). Any tax on businesses reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all business taxes reduce your personal income.
7. INCREASE THE STANDARD INCOME TAX DEDUCTION, ANNUALLY. (Refer to this.) Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.
Cutting FICA and business taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.
8. TAX THE VERY RICH (THE “.1%) MORE, WITH HIGHER PROGRESSIVE TAX RATES ON ALL FORMS OF INCOME.
There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.
But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.
9. FEDERAL OWNERSHIP OF ALL BANKS
(Click The end of private banking and How should America decide “who-gets-money”?)
Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.
Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.
10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% (Federal agencies)Browse the agencies. See how many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%.
Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.