Wednesday, October 2, 2013

Discourse on the great recession – Cycles

We accept cycles in nature – spring, summer, fall, winter – the predator prey cycle, etc. People not only accept these cycles, they want to preserve and protect them. Cycles are an inevitable element in the interface with the environment, the economy is an extension of the environment - ergo, the economy will have cycle's – this is a good thing. The challenge arises when there is inappropriate intervention or a random circumstance that impedes a cycles “normal” course, when this occurs the cycle becomes more extreme. Dear government, better to have ten corrections than one train wreck – the great recession has as causation both government intervention and happenstance.

Business cycle

The business cycle, depending on events, runs about seven years in duration and change is prompted by any number of factors; public sentiment, economic contraction, ancillary cycle convergence – perhaps a real estate cycle etc. Business cycles happen, there are leading indicators to warn us of their onslaught so they are, to some degree, predictable. Governments tend to associate their performance with economic performance, so the threat of a downturn in the business cycle prompts governmental counter cyclical actions. This can, at times delay, but rarely avert, a downturn in the business cycle. It is really a matter of mass, the federal government budget is about 220 billion, the Canadian economy is possibly 5 or 10 fold that, depending calculation and inclusions. Government’s long term commitment to reduced red tape and an agreeable regulatory environment are the best solution to economic stability – hopefully generating a circumstance where a downturn means reduced growth rather than a contraction.  Government intervention can have short term affect, however, often in the delaying of the cycle, the delaying makes the cycle’s path back to the eventual and certain norm more extreme than it might otherwise have been.

Real Estate Cycle – Prolonged

In the US Real Estate Market in 2006  there were a number of factors that contributed to a fervent and extended up swing, setting the scene for a more violent correction; they include: foreign exchange factors that countered somewhat the US central banks actions, low general inflation due to influx  of “cheaper goods” from China, the new mechanisms for distributing risk, the isolation of lending institutions from lending risk, the obscene exploitation of people pursuing the dream of home ownership by ethically devoid lenders, the tacit understanding that via Freddy Mac & Fanny May the US government was effectively underwriting mortgage risk – the aforementioned plus all the typical dynamics that contribute to a damaging escalation of real estate inventory and price. Massive secular inflation was left un-addressed by the government, in effect; a blind eye was turned to the impending housing dome. Once again, due in part to government programming and in part to other dynamics the cycle was lengthened and the correction was more sever.      

Technological Cycle

The technology cycle runs a similar pattern as the typical product cycle. There is the period of innovation, gradual absorption of the technology in to society at large, then a steep curve as the technology gains critical mass and lastly the plateau and decline or end due to disruption. As a technology enters the “critical mass” stage and begins to be rapidly accepted, it generates a vortex which draws in users and providers at a rapid pace, once the plateau is reached there is often an overrun of suppliers, additionally, there is large scale redundancy generated due to the new technology’s efficiency, as well as, the casualties of the incumbent technologies. At the close of the technology cycle, absent a replacement, inevitably there is a downturn. We have just passed through the maturing of the “the computer technology cycle” and as when the “rail” technology cycle ended, we are experiencing all the negative affects that emanate from a technology cycle ending. The mobile market, or the other “adjuncts” to the computer cycle are essentially drawing on plateau resources to access the market – no real “new blood” of sufficient mass to effect a unique cycle.

Macro-economic cycle

There are macro-economic cycles running 60 to 80 years in duration, the contraction is normally effect by the ending of a technology cycle, or demographics - their existence have an inherent reality of the ebb and flow of large civilizations, these cycles are apparent in various duration throughout history. The last one contracted in the late 1920’s and we are nearing the end of a similar one now. 

There has been a confluence of cycles in the contraction phase; the “crisis of confidence” that precipitated the beginning of the great recession was really a collective realization that due to a number of factors the music was about to stop – at that point even the rats  jumped ship. The good news about a cycle is that inherent in a downswing, there is an upswing – it’s never a question of if, but rather when.   

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