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The pattern of boom/bust cycles over the past century is alarmingly consistent, especially for a field like economics that is famously unpredictable. Just look

The pattern of boom/bust cycles over the past century is alarmingly consistent, especially for a field like economics that is famously unpredictable. Just look at the graph in Exhibit 7 of this article. It's almost perfectly periodic. According to investopedia [0], "there have been 11 business cycles from 1945 to 2009, with the average length of a cycle lasting about 69 months, or a little less than six years." By this logic, we're definitely "due" for a downturn very soon. Does anyone who understands finance have any insight on why this pattern seems so predictable? Is it due to fundamental economic drivers, or is it merely correlated with major historical events (internet 2000s, globalization 1990s, deregulation 1980s, post-WW2 society 1950s, etc)? If technological society does not continue to innovate at the pace of the last few decades, will boom/busts smooth out at a point of slower growth? [0] http://www.investopedia.com/terms/b/businesscycle.asp http://www.investopedia.com/terms/b/businesscycle.asp

dthakur 9y ago
Some explanations as per Ray Dalio https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
- Fredej 9y ago
  Thank you! I've been looking for this video for quite a while! It's a fantastic video for explanation for how the economy actually works.
  - splintercell 9y ago
    I just want to point out that what it explains relies upon the Keynesian or Saltwater School of Economics. The assumption being "Spending drives the economy", the Chicago, Austrian and other free market schools of economics believe that "Savings drive the economy". Based on this distinction lies the distinction between the policy proposals advocated by Liberals and Conservatives, Democrats and Republicans. Irrespective of which of the above statements "Savings drive the economy" vs "Spending drives the economy" sounds right to you, it's important for people to understand that this distinction exists on a fundamental level in economics (and in today's political climate, even more important than holding an opinion on which two statements are right, it's important to understand that the difference exists).
    - Fredej 9y ago
      Thank you for the clarification. Does a similar video exist from the "Savings drive the economy" point of view?
      - deleted 9y ago
        [deleted]
      - owebmaster 9y ago
        Probably not because that never happened.
        didgeoridoo 9y ago
        Where do you think the money for business investments and commercial loans comes from? And do you think that either of these has anything to do with economic growth?
        owebmaster 9y ago
        They ALL comes from governmental mechanism and spending.
      - _joel 9y ago
        I'd lookup Hayek, who has a different take on it compared to Keynes
        deleted 9y ago
        [deleted]
        wavefunction 9y ago
        Hayek, Friedman and Keynes provide a good starting point for three main strains of modern economic thought. While Friedman is often portrayed as a 'synthesis' or mid-point between the philosophies of Keynes or Hayek on a linear plot, I found him to be closer to Hayek philosophically.
      - 9y ago
- rememberlenny 9y ago
  This is a great presentation. I was going to link this.
- zeep 9y ago
  He says that interests rates can't be lowered when they are at 0%, but they technically could go negative... looks like Denmark has a negative interest rate, I wonder how it's working out for them. (https://en.wikipedia.org/wiki/List_of_countries_by_central_bank_interest_rates https://en.wikipedia.org/wiki/List_of_countries_by_central_b...)
  - scarlac 9y ago
    > I wonder how it's working out for them Dane here. We're fine. It's not affecting consumers directly. The negative rates are locking at zero or close to zero. Government has talked about intervening if it would go negative, which I would tend to believe. I honestly don't know the exact consequences of what would happen in any case. I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal.
    - googletazer 9y ago
      >I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal. Would that be your first apartment? It seems to me that the programs of low interest rates are motivating the wrong people - people who already have significant assets and can borrow against them to buy another/several properties.
  - yellowstuff 9y ago
    The argument against negative interest rates was that people could simply store cash in a vault and get a 0% return, rather than lend it for a negative return. In practice very slightly negative rates seem to work out because storing large amounts of cash in a vault is hard. However, it's probably still right to assume that if interest rates are meaningfully negative for a while everyone will switch to storing cash.
    - mikhailfranco 9y ago
      ... hence the War on Cash. They can also convert bank deposits into 'yellowstuff' and put that in a vault, or safe at home. However, the mining inflation rate in 'yellowstuff', plus fees for storage, come to a depreciation of about 1.5%. So if the WoC is successful, and NIRP policies demand less than about -1.5% interest rate, then there has to be a War on Yellowstuff too.
Retric 9y ago
It's mostly a feedback loop. The more stable the economy the more risk companies and people take on. However, the actual graph looks a lot more random without coloring various parts of it or all the other lines. Notice how the time spent below -1.0 varies a lot.
dboreham 9y ago
It's driven by the human brain : Fear | Greed
- refurb 9y ago
  Not sure why this was downvoted. It's quite true. As others have mentioned, when the economy grows, people get more comfortable with risk. When the bubble pops, people freak out. This behavior goes a long way in mangnifying the boom/bust cycle.
  - sangnoir 9y ago
    > When the bubble pops, people freak out. What's the causal relationship? You're suggesting the bubble causes fear, but what causes the bubble to pop?
    - warrenm 9y ago
      >suggesting the bubble causes fear, but what causes the bubble to pop? too much fear / too much greed
    - drabiega 9y ago
      Basically, people expect momentum. During a boom, people expect values to keep going up which serves to drive values up but eventually they'll get past what is reasonable. Once they start correcting downward, people expect them to keep going down which drives them further down until the opposite phenomena occurs and the cycle restarts. As I recall this has been experimentally verified but I can't remember enough to find a citation.
      - collyw 9y ago
        I would love to read some "experimentally verified" economics, as it is something that economics seems to be lacking.
        drabiega 9y ago
jseliger 9y ago
Not the pattern specifically, but something in the short-termism of human psychology seems to be at work: https://www.theatlantic.com/magazine/archive/2008/12/why-wall-street-always-blows-it/307147/ https://www.theatlantic.com/magazine/archive/2008/12/why-wal... . Although it's always popular to blame some group ("bankers" "irresponsible borrowers..." you could devise the others, and "the government" is almost always seen by someone as at fault), it appears that the answer is often "in all of us."
- ahhhhhhhhhh 9y ago
  I wonder if this is something that can be "evolved" out of by relying more on AI? We're breeding human biases into our systems, but at some point they'll need to grow beyond our shortcomings, right?
- padobson 9y ago
  I sometimes wonder if the best economic system is the one the people living under that system believe in the most.
eru 9y ago
Which country are you talking about? Different countries have different business cycles. Eg Australia and Israel barely noticed the Great Recession.
- gonzo41 9y ago
  We are going to notice it when people come to the realization that a 3 bedroom house isn't actually worth a million bucks. Also one of the big reasons Australia skipped a few downturns is we got lucky having a ton of iron ore in the ground. In addition to this when the GFC hit the government just poured money at regular people, (trickle Up! Economics). I got $900 bucks for nothing, with a clear signal from the government that I was to spend that money keeping things ticking over. We got lucky.
  - googletazer 9y ago
    Not lucky, you guys just played your cards right. Other nations squandered their chance.
  - eru 9y ago
    The iron ore made China pay Australia lots. But the iron ore wasn't preventing any downturn. Just the opposite: commonly countries that rely on commodity exports have crazy volatile economies, since global commodity prices are volatile. Give your central bank some credit!
- vram22 9y ago
  >Eg Australia and Israel barely noticed the Great Recession. Do you know why? AFAIK India too did not get very affected by it, maybe because it has a large internal market with both domestic suppliers and consumers. Or I may be thinking of the Asian crisis in 1997-1999 or so - not sure. Had been to S.E. Asia at that time and they were just recovering from it, IIRC.
  - nopassrecover 9y ago
    Our (Australian) government at the time provided significant consumer stimulus (most taxpayers got up to $950 to spend, people on welfare and/or with children got even more) and it also invested heavily in infrastructure and construction projects (http://www.smh.com.au/articles/2009/02/04/1233423265116.html http://www.smh.com.au/articles/2009/02/04/1233423265116.html). Like other countries, our central bank also dropped interest rates. As a consequence we now, apparently, lay claim to the longest period of uninterrupted growth in modern history. However, we've had uncharacteristicaly flat growth since, narrowly avoided recession a couple of times, and are battling low wage growth which, in combination with rising energy and property costs, is beginning to undermine consumer demand. This has been unhelped by the end of a mining boom, related decrease in Chinese growth and demand for commodities, structural taxation challenges (income taxes were reduced during the boom, and we struggle to tax multinational companies), and a huge speculative property bubble (fuelled by lower interest rates, favourable taxation schemes, currency flight from foreign investors, and ultimately the self-reinforcing returns). I'm sure demographics are playing a role too. Considering most of our pension schemes ("superannuation") are invested in either property, mining, or banking (itself dependent on property), there's huge uncertainty ahead.
aantix 9y ago
The fact that the pattern exists doesn't make it "predictable".
- chki 9y ago
  Isn't that the very definition of something being predictable? That there is a pattern which predicts a certain outcome? For example a certain simplified weather pattern (e.g. "if it rains for three consecutive days 9/10 times it rains a fourth day") makes it possible to predict a certain weather ("it has rained the last three days so there will be rain tomorrow as well") Obviously that is not a prediction with absolute certainty but nonetheless a prediction.
  - ajross 9y ago
    It's a semantic argument over the meaning of "pattern". Your example is mathematical, the meaning in the linked article is more along the lines of "statistical model". I mean, to provide a counterexample: we have about as good a model for beta decay of H3 as we are ever going to get[1], but we still can't tell you when your geiger counter is going to click. [1] Pause for some physiscist to jump in and tell me this is totally not true and there remain deep theoretical holes here.
- 1_2__4 9y ago
  Unless you have some unique definition of what a pattern is: yes, it does.
- justforFranz 9y ago
  David Hume's Problem of Induction strikes again! But that's not how science works.
krisives 9y ago
Cycle is driven by printing money or increasing supply
- splintercell 9y ago
  This is a misunderstanding of Austrian Business Cycle Theory. Business cycles are driven by artificial fueling of interest rates (which is technically done by printing money, or increasing the money supply by other means).
  - unknown_apostle 9y ago
    A sidenote to ABC-like theories: entrepreneurs always end up with clusters of malinvestments, even without interest rate manipulation. Simply because humans always exaggerate. The difference is that without e.g. interest rate manipulation, we'd probably have a lot of "rolling waves" of small recessions. These small recessions would be frequent but also limited in duration, scale and scope. With suppression of interest rates, the malinvestment becomes bigger and broader. Meaning their unraveling is much more traumatic. 9 years into the latest boom, with ZIRP and NIRP and QE and mark to unicorn accounting and all the other oxycodon shots necessary to abort and forget the 2008 run on the system, we can only wonder what has been built up in terms of malinvestment and what the unraveling will be like. Not just in the world of finance and credit, but also in the real economy, where much of the recent competition and "disruption" is really based on venture capital backed companies not worrying about profitability for years on end.
  - ringaroundthetx 9y ago
    Why would you call the parent post a misunderstanding? It was merely a reduction of the same thing you said.
sol_remmy 9y ago
Driven by government regulations which are too inelastic to respond to changes in the economy. Easy example: governments, by definition, will spend more money year after year. Governments rarely 'scale back' their expenditures. When 1) taxes cannot be raised and 2) money cannot be raised through treasury bonds, then there is a crash. Government is bound to follow the boom/bust cycle and brings the rest of the economy with it. Sectors of the economy that heavily rely on government spending like: health care, defence, banking, education, transportation, will crash and it will be sudden.
- ajross 9y ago
  Boom/bust speculation cycles predate government regulation by centuries. Somewhere around here I have a tulip farm to sell you cheap...
  - sol_remmy 9y ago
    The Economist disagrees with you: https://www.economist.com/blogs/freeexchange/2013/10/economic-history https://www.economist.com/blogs/freeexchange/2013/10/economi... Was tulipmania irrational? Tulipmania was not just crazy speculation
    - ajross 9y ago
      The point was that it wasn't caused by government regulation. And it was a quip, anyway, pointing out that even late renaissance "investors" in a completely new market would see a boom/bust cycle.
      - sol_remmy 9y ago
        Please read the article, it explicitly states that the Dutch tulip boom/bust was caused by government regulation. > Earl Thompson, formerly of UCLA, takes a different approach. He reckons that the market for tulips was an efficient response to changing financial regulation—in particular, the anticipated government conversion of futures contracts into options contracts. This ruse was dreamt up by government officials, who themselves were keen to make a quick buck from the tulip trade. > In plain English, investors who had bought the right to buy tulips in the future were no longer obliged to buy them. If the market price was not high enough for investors’ liking, they could pay a small fine and cancel the contract. The balance between risk and reward in the tulip market was skewed massively in investors’ favour. The inevitable result was a huge increase in tulip options prices. (The price of options collapsed when the government saw sense and cancelled the contracts.)
tgb 9y ago
I dunno. If you take a random walk and label the parts that go up as "growth" and the parts that go down as "recession" don't you get a similarly compelling 'narrative'? The picture looks far from periodic to me other than the basic generalization that "it goes up for some time until it stops going up at which point it goes down and also it doesn't get too far from 0." (And what is the vertical axis supposed to be labelled as? I don't even know what the chart is of.)
- thomasahle 9y ago
  Exhibit 3 looks somewhat like a random walk. Exhibit 7 doesn't. I assume the y-axis is gdp growth.
JKCalhoun 9y ago
> It's almost perfectly periodic. And yet the underlying cause of the busts has varied. People bring up the "due for a bust" observation and they may be right. But I have to ask, "What is going to be the economic trigger this time?"
- chrismealy 9y ago
  Nine out of those eleven recessions were triggered by the Fed raising interest rates for the purpose of controlling inflation.
  - lawless123 9y ago
    interesting, i wonder how cryptocurrencies will react. Som are clearly booming like the regular stocks are. But some are also built to resist inflation.
- warrenm 9y ago
  >People bring up the "due for a bust" observation and they may be right And it can be a self-fulfilling prophecy .. expect a bust, look for a bust, have a bust: declare you "knew" it was coming
dalbasal 9y ago
The only honest answer (IMO) is We don't know at this point. Explaining business cycles has been a primary motivation for macroeconomics' existence as a field. There are many theories, but theories are hard to disprove in economics. The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools." Austrian economics has Hayek & Mises' nobel prize winning theories, and built on by monetarists like Milton Friedman. These theories revolve around credit/money supply. Too much money is available at too low a rate, causing bad investments. When these undertperform, a downturn occurs. Keynsian explanations revolve around "aggregate demand." When people and businesses are worried, they borrow/spend less and save more. This leads to less stuff being made, the definition of economic contraction. The Austrian explanations are a little more straightforward to understand in a simple form. Keynesian is s bit harder. I recommend starting from the "paradox of thrift" concept, if you're interested in Keynesian.
- conistonwater 9y ago
  Milton Friedman wasn't Austrian, as far as I can tell: http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html http://economistsview.typepad.com/economistsview/2006/01/mil... https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-the-austrians/ https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-th... Usually people compare with Chicago school macroeconomics (freshwater/saltwater economics), Austrian is not really mainstream.
  - wavefunction 9y ago
    OP didn't claim Friedman was an Austrian, merely a monetarist.
    - conistonwater 9y ago
      He wasn't "building on" Austrian school either. I think you're being pedantic, that sentence seems relatively clear to me.
      - 9y ago
pjc50 9y ago
Anyone with a control systems background or even just audio experience will recognise what happens when you have an undamped feedback loop: it oscillates. Technology can make the problem worse by reducing the time taken to economic changes, exaggerating the feedback loop. However there has been one big success of formal macroeconomic control modelling: inflation. Almost all the Western economies have a good system for controlling interest rates in order to maintain an inflation target. I don't think anyone has really invalidated Keynes' work on business cycle theory, although it is recognised that it doesn't quite cope with a heavily financialised economy and there is huge political opposition to counter-cyclical fiscal policy.
- dalbasal 9y ago
  The problem in economics is that it's very hard to invalidate a theory. What would you consider an invalidation of the theory?
  - RobertoG 9y ago
    Not the original commenter, but, a negative correlation between government investment and economic growth?
  - ekidd 9y ago
    The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong. One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation. Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008. IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries. Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed. For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coop.pdf http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic. Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give. I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.
trcollinson 9y ago
I'm going to be honest, economics and finance has never been my strong suit. But a long time ago I did study a lot of math and one of the more intriguing parts of mathematics was the theories by Paul Levy (alpha-stable distributions), Gaston Julia (patterns under iteration), and of course Benoit Mandelbrot (it's kind of hard to talk about one without talking about all three). Mandelbrot is rather well known for the Mandelbrot Set. But interestingly he started his study down this path as he looked at markets and the apparent predicability in such a chaotic and unpredictable environment. He studied wool markets but extrapolated that out further to many financial markets and then economics as a whole. He would say that financial markets are anything but quite unpredictable, just that the models we use are rather wrong. I would suggest checking out the book "The Misbehavior of Markets: A Fractal View of Financial Turbulence". It's quite good.
petraeus 9y ago
Its pretty obvious, just look at alberta, they had a surplus for decades when oil prices were high, spent it all away plus even more, and now the rooster has come home. Every industry falls to this basic lack of fiscal discipline. Over-spend and over-leverage when times are good, thus inflating the bubble(s) even further and socialize the losses through bail-outs when the check comes due.
xcasperx 9y ago
This is known as Elliot wave principle - https://en.m.wikipedia.org/wiki/Elliott_wave_principle#Foundation https://en.m.wikipedia.org/wiki/Elliott_wave_principle#Found...
- charlieflowers 9y ago
  And it is complete horseshit. no evidence whatsoever, but a great way to sell newsletters to suckers. Pseudoscience.
hl5 9y ago
exhibit A: we are all connected through love and war exhibit B: macro human behavior never changes, we pretty much all desire and react the same way. exhibit C: history repeats because too few learn from other's mistakes. exhibit D: it has never ever been a good idea to trust anything a bank says. they don't love you and are at war with you. they are counting on you to fall in love with the wrong girl, again. exhibit E: 100 years of data is not enough.
raiflip 9y ago
The business cycle may look perfectly cyclic to the point where it appears predictable, but a closer look at the data shows that it is not. Exhibit 7 is not a great way to show the data because the compressed x axis gives the optical illusion that the cycles occur within the same amount of time and that each cycle's shape is roughly the same. For example, the two right after 1980 look similar, but their shape does not match any other cycle (particularly the 2008 recession). Likewise the three around 1960 to before 1980 all look different. The expansion after 1960 is unusually long and even though it dips at one point before 1970 does not go negative until after. With that classification we already have 4 categories of recessions (3 between 1960 and 1980, and one for two recessions after 1980). The reason is prior to the 1980s recessions were generally driven by political events or changes in government policy exogenous to the private sector. According to this link: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... the 1961 is because of FR interest rate move, 1969- government tightens budget and interest rates go up 1973- Stagflation starting with OPEC tightening oil supply You'll notice all of those are caused by events outside the control of the private sector or in other words the cause of someone's deliberate policy rather than an event of the system. Economic policy cannot predict these nor should it try to predict human behavior. Which brings up the point again that they are not predictable because I don't think anyone would say they can predict the behavior of an individual or a conglomerate like OPEC with great certainty. That said post 1980 many of the recessions are caused by financial crisis that are endogenous to the private sector, so that is worth looking at. But the claim that the business cycle from 1945 to 2009 is predictable does not hold up.
mathattack 9y ago
Generally credit (leverage) cycles. There's momentum in people borrowing more, until people are too levered, and then the same in the other direction. You can look up some of what Ray Dalio has to say on Youtube for more on this. (Not his organizational principles - his views on credit) https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
justforFranz 9y ago
My pet theory is that there's a recession in the first term of any new president. Although, you'd have to give an allowance for Bush Sr. sharing one with the first term of Bill Clinton. If a president could time a recession, it would make sense to ensure that it was over before the next election. For a certain class of people, recessions aren't a problem, but a tool which allows you to write off your more speculative investments.
anonu 9y ago
> Does anyone who understands finance have any insight on why this pattern seems so predictable? I think the only thing that is predictable is that there is some sort of cyclical event - where neither the frequency nor the amplitude is known. The peak-to-trough or trough-to-peak magnitude is not predictable and neither is the timing - unless you have some crystal ball. The doomsday-ers will always beat the drums of fear. People will ignore them until there's an actual downturn - then we'll all point to them and marvel at their genius. Being a bit cynical, but I've seen this play out twice before in my professional career.
bradly 9y ago
When buying on leverage is actively encouraged to the masses, a crash usually follows. Before the 1929 crash, buying stock/equites on extreme margins became normal; Before the 2008 crash, buying real estate on extreme margins became normal; today we are seeing higher education being purchased on extreme margins. Now higher education is a different beast than the others, so it is hard to say how a economic event stemmed from student loans will manifest itself, but it is a real concern. I highly recommend JL Collins Stock Series blog posts and specifically this article on market events of the past 100 years: http://jlcollinsnh.com/2017/07/26/time-machine-and-the-future-returns-for-stocks/ http://jlcollinsnh.com/2017/07/26/time-machine-and-the-futur...
- padobson 9y ago
  Huge increases in student loans will certainly have effects on future borrowing - mortgages, car loans, business loans. What happens when fewer people are buying houses? Cars? Starting businesses?
MarkMc 9y ago
> Does anyone who understands finance have any insight on why this pattern seems so predictable? I would look to psychology in addition to economics. There are several well-known psychological factors that suggest there will always be a boom/bust cycle: 1. People copy other people. Fear and greed are infectious. People become envious when their neighbour or brother-in-law continue to make quick profits from investments. 2. People make irrational judgements when affected by emotions like fear and stress. 3. People tend to make overoptimistic judgements about future events and their own business acumen. Conversely people often deny reality and do not critically assess their past performance. 4. In judging the future, people place too great emphasis on recent experience and discount events which occurred before they were born.
Spooky23 9y ago
Most of the unpredictability is for things on the margins. Fundamentally cheap capital available for too long lets dumb behavior sustain itself longer. People stop questioning absurd market conditions, particularly in real estate. When growth slows down at all, over leveraged enterprises miss growth target, the cash spigot turns off and bust follows. In my area, it's blindingly obvious that real estate is fubar. Single family home prices have been stagnant, and there are dozens of medium density apartment and condo developments going up that are only sustainable because of tax abatements and foreign money laundering.
jonathanfoster 9y ago
Ray Dalio gives the best explanation to why the business cycle exists [1]. I wish I could provide a TLDR that does the video justice, but there's just too much great insight in this video to condense it any further (it's only 30 minutes anyways). In my opinion, this should be required viewing for all financially literate adults. [1] https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
perseusprime11 9y ago
The one thing to note is most of these boom and bust cycles were also engineered during Greenspan's time. It will be interesting to see what happens in the coming months and years
BatFastard 9y ago
Is it possible in the Age of Big Data that we have enough indicators to slow things down before they bust?
AndyMcConachie 9y ago
> Does anyone who understands finance have any insight on why this pattern seems so predictable? https://en.wikipedia.org/wiki/Karl_Marx https://en.wikipedia.org/wiki/Karl_Marx
ata6187 9y ago
These cycles are not as consistent nor as predictable as your comment suggests. Your link and the bloomberg article both mention how cycles have been changing (e.g. lengthening on average recently) and how once important economic correlations of the past continue to break down toward being uncorrelated. There are many reasons for a cycle, some we think we understand, some we clearly do not. Everyone agrees we cannot predict the future. By the way, books are written about cycles, people writes their thesis on this topic, it is difficult to summarize. The short answer is we have a list of things that have caused cycles in the past. And we have a calculation how often and how likely a new cause is to be added to that list (tech bubble was not on the list in the 80s, now it is). From this list of known causes and calculating the odds a new cause will come along, economics try to predict cycle peaks and valleys as best they can. Their track record is atrocious and a joke at best. Despite what is reported in the press sometimes, economics are actually getting worse at analyzing cycles. Ray Dalio is mentioned in a few comments, Dalio does not have a good track record when it comes to macro economics though his hedge fund has performed well in some years (don't believe marketing BS). No one knows how innovation will effect boom and busts. Research on this is heavily manipulated. One can find strong connections between innovation and cycles if you want to AND one can find almost no connection between innovation and cycles. So unfortunately the real answer to this one is "it depends", all else equal (ceteris paribus) if innovation in tech slows it is likely part of many things slowing down and hence the lengthening of cycles we have seen MAY continue (again ceteris paribus). TL;DR pattern is not predictable nor consistent. Tech and innovation has little to no effect except in extreme cases, the pace of innovation should not have a major impact. Demographics and population factors show strong evidence for warranting a majority factor weight. Lastly, analogy: have you heard of yo-yo dieting? How long do most dieters last on a diet before failing that diet? What is the common causes of failing a diet? How long after failing to diet do they try again? Why do some people succeed when dieting on the first try and never regain the weight, why some on the 5th try? why some never? The economy acts just a person trying to yo-yo diet but it's 300 million people making and losing money instead of fat (well also fat).
mikevm 9y ago
I thought that this was a nice explanation: http://www.economicprinciples.org/ http://www.economicprinciples.org/

dthakur 9y ago

Some explanations as per Ray Dalio https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0

Fredej 9y ago
Thank you! I've been looking for this video for quite a while! It's a fantastic video for explanation for how the economy actually works.
- splintercell 9y ago
  I just want to point out that what it explains relies upon the Keynesian or Saltwater School of Economics. The assumption being "Spending drives the economy", the Chicago, Austrian and other free market schools of economics believe that "Savings drive the economy". Based on this distinction lies the distinction between the policy proposals advocated by Liberals and Conservatives, Democrats and Republicans. Irrespective of which of the above statements "Savings drive the economy" vs "Spending drives the economy" sounds right to you, it's important for people to understand that this distinction exists on a fundamental level in economics (and in today's political climate, even more important than holding an opinion on which two statements are right, it's important to understand that the difference exists).
  - Fredej 9y ago
    Thank you for the clarification. Does a similar video exist from the "Savings drive the economy" point of view?
    - deleted 9y ago
      [deleted]
    - owebmaster 9y ago
      Probably not because that never happened.
      - didgeoridoo 9y ago
        Where do you think the money for business investments and commercial loans comes from? And do you think that either of these has anything to do with economic growth?
        owebmaster 9y ago
        They ALL comes from governmental mechanism and spending.
    - _joel 9y ago
      I'd lookup Hayek, who has a different take on it compared to Keynes
      - deleted 9y ago
        [deleted]
      - wavefunction 9y ago
        Hayek, Friedman and Keynes provide a good starting point for three main strains of modern economic thought. While Friedman is often portrayed as a 'synthesis' or mid-point between the philosophies of Keynes or Hayek on a linear plot, I found him to be closer to Hayek philosophically.
    - 9y ago
rememberlenny 9y ago
This is a great presentation. I was going to link this.
zeep 9y ago
He says that interests rates can't be lowered when they are at 0%, but they technically could go negative... looks like Denmark has a negative interest rate, I wonder how it's working out for them. (https://en.wikipedia.org/wiki/List_of_countries_by_central_bank_interest_rates https://en.wikipedia.org/wiki/List_of_countries_by_central_b...)
- scarlac 9y ago
  > I wonder how it's working out for them Dane here. We're fine. It's not affecting consumers directly. The negative rates are locking at zero or close to zero. Government has talked about intervening if it would go negative, which I would tend to believe. I honestly don't know the exact consequences of what would happen in any case. I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal.
  - googletazer 9y ago
    >I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal. Would that be your first apartment? It seems to me that the programs of low interest rates are motivating the wrong people - people who already have significant assets and can borrow against them to buy another/several properties.
- yellowstuff 9y ago
  The argument against negative interest rates was that people could simply store cash in a vault and get a 0% return, rather than lend it for a negative return. In practice very slightly negative rates seem to work out because storing large amounts of cash in a vault is hard. However, it's probably still right to assume that if interest rates are meaningfully negative for a while everyone will switch to storing cash.
  - mikhailfranco 9y ago
    ... hence the War on Cash. They can also convert bank deposits into 'yellowstuff' and put that in a vault, or safe at home. However, the mining inflation rate in 'yellowstuff', plus fees for storage, come to a depreciation of about 1.5%. So if the WoC is successful, and NIRP policies demand less than about -1.5% interest rate, then there has to be a War on Yellowstuff too.

Retric 9y ago

It's mostly a feedback loop. The more stable the economy the more risk companies and people take on. However, the actual graph looks a lot more random without coloring various parts of it or all the other lines. Notice how the time spent below -1.0 varies a lot.

dboreham 9y ago

It's driven by the human brain : Fear | Greed

refurb 9y ago
Not sure why this was downvoted. It's quite true. As others have mentioned, when the economy grows, people get more comfortable with risk. When the bubble pops, people freak out. This behavior goes a long way in mangnifying the boom/bust cycle.
- sangnoir 9y ago
  > When the bubble pops, people freak out. What's the causal relationship? You're suggesting the bubble causes fear, but what causes the bubble to pop?
  - warrenm 9y ago
    >suggesting the bubble causes fear, but what causes the bubble to pop? too much fear / too much greed
  - drabiega 9y ago
    Basically, people expect momentum. During a boom, people expect values to keep going up which serves to drive values up but eventually they'll get past what is reasonable. Once they start correcting downward, people expect them to keep going down which drives them further down until the opposite phenomena occurs and the cycle restarts. As I recall this has been experimentally verified but I can't remember enough to find a citation.
    - collyw 9y ago
      I would love to read some "experimentally verified" economics, as it is something that economics seems to be lacking.
      - drabiega 9y ago

jseliger 9y ago

Not the pattern specifically, but something in the short-termism of human psychology seems to be at work: https://www.theatlantic.com/magazine/archive/2008/12/why-wall-street-always-blows-it/307147/ https://www.theatlantic.com/magazine/archive/2008/12/why-wal... . Although it's always popular to blame some group ("bankers" "irresponsible borrowers..." you could devise the others, and "the government" is almost always seen by someone as at fault), it appears that the answer is often "in all of us."

ahhhhhhhhhh 9y ago
I wonder if this is something that can be "evolved" out of by relying more on AI? We're breeding human biases into our systems, but at some point they'll need to grow beyond our shortcomings, right?
padobson 9y ago
I sometimes wonder if the best economic system is the one the people living under that system believe in the most.

eru 9y ago

Which country are you talking about? Different countries have different business cycles. Eg Australia and Israel barely noticed the Great Recession.

gonzo41 9y ago
We are going to notice it when people come to the realization that a 3 bedroom house isn't actually worth a million bucks. Also one of the big reasons Australia skipped a few downturns is we got lucky having a ton of iron ore in the ground. In addition to this when the GFC hit the government just poured money at regular people, (trickle Up! Economics). I got $900 bucks for nothing, with a clear signal from the government that I was to spend that money keeping things ticking over. We got lucky.
- googletazer 9y ago
  Not lucky, you guys just played your cards right. Other nations squandered their chance.
- eru 9y ago
  The iron ore made China pay Australia lots. But the iron ore wasn't preventing any downturn. Just the opposite: commonly countries that rely on commodity exports have crazy volatile economies, since global commodity prices are volatile. Give your central bank some credit!
vram22 9y ago
>Eg Australia and Israel barely noticed the Great Recession. Do you know why? AFAIK India too did not get very affected by it, maybe because it has a large internal market with both domestic suppliers and consumers. Or I may be thinking of the Asian crisis in 1997-1999 or so - not sure. Had been to S.E. Asia at that time and they were just recovering from it, IIRC.
- nopassrecover 9y ago
  Our (Australian) government at the time provided significant consumer stimulus (most taxpayers got up to $950 to spend, people on welfare and/or with children got even more) and it also invested heavily in infrastructure and construction projects (http://www.smh.com.au/articles/2009/02/04/1233423265116.html http://www.smh.com.au/articles/2009/02/04/1233423265116.html). Like other countries, our central bank also dropped interest rates. As a consequence we now, apparently, lay claim to the longest period of uninterrupted growth in modern history. However, we've had uncharacteristicaly flat growth since, narrowly avoided recession a couple of times, and are battling low wage growth which, in combination with rising energy and property costs, is beginning to undermine consumer demand. This has been unhelped by the end of a mining boom, related decrease in Chinese growth and demand for commodities, structural taxation challenges (income taxes were reduced during the boom, and we struggle to tax multinational companies), and a huge speculative property bubble (fuelled by lower interest rates, favourable taxation schemes, currency flight from foreign investors, and ultimately the self-reinforcing returns). I'm sure demographics are playing a role too. Considering most of our pension schemes ("superannuation") are invested in either property, mining, or banking (itself dependent on property), there's huge uncertainty ahead.

aantix 9y ago

The fact that the pattern exists doesn't make it "predictable".

chki 9y ago
Isn't that the very definition of something being predictable? That there is a pattern which predicts a certain outcome? For example a certain simplified weather pattern (e.g. "if it rains for three consecutive days 9/10 times it rains a fourth day") makes it possible to predict a certain weather ("it has rained the last three days so there will be rain tomorrow as well") Obviously that is not a prediction with absolute certainty but nonetheless a prediction.
- ajross 9y ago
  It's a semantic argument over the meaning of "pattern". Your example is mathematical, the meaning in the linked article is more along the lines of "statistical model". I mean, to provide a counterexample: we have about as good a model for beta decay of H3 as we are ever going to get[1], but we still can't tell you when your geiger counter is going to click. [1] Pause for some physiscist to jump in and tell me this is totally not true and there remain deep theoretical holes here.
1_2__4 9y ago
Unless you have some unique definition of what a pattern is: yes, it does.
justforFranz 9y ago
David Hume's Problem of Induction strikes again! But that's not how science works.

krisives 9y ago

Cycle is driven by printing money or increasing supply

splintercell 9y ago
This is a misunderstanding of Austrian Business Cycle Theory. Business cycles are driven by artificial fueling of interest rates (which is technically done by printing money, or increasing the money supply by other means).
- unknown_apostle 9y ago
  A sidenote to ABC-like theories: entrepreneurs always end up with clusters of malinvestments, even without interest rate manipulation. Simply because humans always exaggerate. The difference is that without e.g. interest rate manipulation, we'd probably have a lot of "rolling waves" of small recessions. These small recessions would be frequent but also limited in duration, scale and scope. With suppression of interest rates, the malinvestment becomes bigger and broader. Meaning their unraveling is much more traumatic. 9 years into the latest boom, with ZIRP and NIRP and QE and mark to unicorn accounting and all the other oxycodon shots necessary to abort and forget the 2008 run on the system, we can only wonder what has been built up in terms of malinvestment and what the unraveling will be like. Not just in the world of finance and credit, but also in the real economy, where much of the recent competition and "disruption" is really based on venture capital backed companies not worrying about profitability for years on end.
- ringaroundthetx 9y ago
  Why would you call the parent post a misunderstanding? It was merely a reduction of the same thing you said.

sol_remmy 9y ago

Driven by government regulations which are too inelastic to respond to changes in the economy. Easy example: governments, by definition, will spend more money year after year. Governments rarely 'scale back' their expenditures. When 1) taxes cannot be raised and 2) money cannot be raised through treasury bonds, then there is a crash. Government is bound to follow the boom/bust cycle and brings the rest of the economy with it. Sectors of the economy that heavily rely on government spending like: health care, defence, banking, education, transportation, will crash and it will be sudden.

ajross 9y ago
Boom/bust speculation cycles predate government regulation by centuries. Somewhere around here I have a tulip farm to sell you cheap...
- sol_remmy 9y ago
  The Economist disagrees with you: https://www.economist.com/blogs/freeexchange/2013/10/economic-history https://www.economist.com/blogs/freeexchange/2013/10/economi... Was tulipmania irrational? Tulipmania was not just crazy speculation
  - ajross 9y ago
    The point was that it wasn't caused by government regulation. And it was a quip, anyway, pointing out that even late renaissance "investors" in a completely new market would see a boom/bust cycle.
    - sol_remmy 9y ago
      Please read the article, it explicitly states that the Dutch tulip boom/bust was caused by government regulation. > Earl Thompson, formerly of UCLA, takes a different approach. He reckons that the market for tulips was an efficient response to changing financial regulation—in particular, the anticipated government conversion of futures contracts into options contracts. This ruse was dreamt up by government officials, who themselves were keen to make a quick buck from the tulip trade. > In plain English, investors who had bought the right to buy tulips in the future were no longer obliged to buy them. If the market price was not high enough for investors’ liking, they could pay a small fine and cancel the contract. The balance between risk and reward in the tulip market was skewed massively in investors’ favour. The inevitable result was a huge increase in tulip options prices. (The price of options collapsed when the government saw sense and cancelled the contracts.)

tgb 9y ago

I dunno. If you take a random walk and label the parts that go up as "growth" and the parts that go down as "recession" don't you get a similarly compelling 'narrative'? The picture looks far from periodic to me other than the basic generalization that "it goes up for some time until it stops going up at which point it goes down and also it doesn't get too far from 0." (And what is the vertical axis supposed to be labelled as? I don't even know what the chart is of.)

thomasahle 9y ago
Exhibit 3 looks somewhat like a random walk. Exhibit 7 doesn't. I assume the y-axis is gdp growth.

JKCalhoun 9y ago

> It's almost perfectly periodic. And yet the underlying cause of the busts has varied. People bring up the "due for a bust" observation and they may be right. But I have to ask, "What is going to be the economic trigger this time?"

chrismealy 9y ago
Nine out of those eleven recessions were triggered by the Fed raising interest rates for the purpose of controlling inflation.
- lawless123 9y ago
  interesting, i wonder how cryptocurrencies will react. Som are clearly booming like the regular stocks are. But some are also built to resist inflation.
warrenm 9y ago
>People bring up the "due for a bust" observation and they may be right And it can be a self-fulfilling prophecy .. expect a bust, look for a bust, have a bust: declare you "knew" it was coming

dalbasal 9y ago

The only honest answer (IMO) is We don't know at this point. Explaining business cycles has been a primary motivation for macroeconomics' existence as a field. There are many theories, but theories are hard to disprove in economics. The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools." Austrian economics has Hayek & Mises' nobel prize winning theories, and built on by monetarists like Milton Friedman. These theories revolve around credit/money supply. Too much money is available at too low a rate, causing bad investments. When these undertperform, a downturn occurs. Keynsian explanations revolve around "aggregate demand." When people and businesses are worried, they borrow/spend less and save more. This leads to less stuff being made, the definition of economic contraction. The Austrian explanations are a little more straightforward to understand in a simple form. Keynesian is s bit harder. I recommend starting from the "paradox of thrift" concept, if you're interested in Keynesian.

conistonwater 9y ago
Milton Friedman wasn't Austrian, as far as I can tell: http://economistsview.typepad.com/economistsview/2006/01/milton_friedman.html http://economistsview.typepad.com/economistsview/2006/01/mil... https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-the-austrians/ https://krugman.blogs.nytimes.com/2013/08/11/friedman-and-th... Usually people compare with Chicago school macroeconomics (freshwater/saltwater economics), Austrian is not really mainstream.
- wavefunction 9y ago
  OP didn't claim Friedman was an Austrian, merely a monetarist.
  - conistonwater 9y ago
    He wasn't "building on" Austrian school either. I think you're being pedantic, that sentence seems relatively clear to me.
    - 9y ago

pjc50 9y ago

Anyone with a control systems background or even just audio experience will recognise what happens when you have an undamped feedback loop: it oscillates. Technology can make the problem worse by reducing the time taken to economic changes, exaggerating the feedback loop. However there has been one big success of formal macroeconomic control modelling: inflation. Almost all the Western economies have a good system for controlling interest rates in order to maintain an inflation target. I don't think anyone has really invalidated Keynes' work on business cycle theory, although it is recognised that it doesn't quite cope with a heavily financialised economy and there is huge political opposition to counter-cyclical fiscal policy.

dalbasal 9y ago
The problem in economics is that it's very hard to invalidate a theory. What would you consider an invalidation of the theory?
- RobertoG 9y ago
  Not the original commenter, but, a negative correlation between government investment and economic growth?
- ekidd 9y ago
  The easiest way to invalidate a theory is to see what predictions it makes, and to figure out where those predictions were wrong. One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation. Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008. IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries. Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed. For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coop.pdf http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic. Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give. I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.

trcollinson 9y ago

I'm going to be honest, economics and finance has never been my strong suit. But a long time ago I did study a lot of math and one of the more intriguing parts of mathematics was the theories by Paul Levy (alpha-stable distributions), Gaston Julia (patterns under iteration), and of course Benoit Mandelbrot (it's kind of hard to talk about one without talking about all three). Mandelbrot is rather well known for the Mandelbrot Set. But interestingly he started his study down this path as he looked at markets and the apparent predicability in such a chaotic and unpredictable environment. He studied wool markets but extrapolated that out further to many financial markets and then economics as a whole. He would say that financial markets are anything but quite unpredictable, just that the models we use are rather wrong. I would suggest checking out the book "The Misbehavior of Markets: A Fractal View of Financial Turbulence". It's quite good.

petraeus 9y ago

Its pretty obvious, just look at alberta, they had a surplus for decades when oil prices were high, spent it all away plus even more, and now the rooster has come home. Every industry falls to this basic lack of fiscal discipline. Over-spend and over-leverage when times are good, thus inflating the bubble(s) even further and socialize the losses through bail-outs when the check comes due.

xcasperx 9y ago

This is known as Elliot wave principle - https://en.m.wikipedia.org/wiki/Elliott_wave_principle#Foundation https://en.m.wikipedia.org/wiki/Elliott_wave_principle#Found...

charlieflowers 9y ago
And it is complete horseshit. no evidence whatsoever, but a great way to sell newsletters to suckers. Pseudoscience.

hl5 9y ago

exhibit A: we are all connected through love and war exhibit B: macro human behavior never changes, we pretty much all desire and react the same way. exhibit C: history repeats because too few learn from other's mistakes. exhibit D: it has never ever been a good idea to trust anything a bank says. they don't love you and are at war with you. they are counting on you to fall in love with the wrong girl, again. exhibit E: 100 years of data is not enough.

raiflip 9y ago

The business cycle may look perfectly cyclic to the point where it appears predictable, but a closer look at the data shows that it is not. Exhibit 7 is not a great way to show the data because the compressed x axis gives the optical illusion that the cycles occur within the same amount of time and that each cycle's shape is roughly the same. For example, the two right after 1980 look similar, but their shape does not match any other cycle (particularly the 2008 recession). Likewise the three around 1960 to before 1980 all look different. The expansion after 1960 is unusually long and even though it dips at one point before 1970 does not go negative until after. With that classification we already have 4 categories of recessions (3 between 1960 and 1980, and one for two recessions after 1980). The reason is prior to the 1980s recessions were generally driven by political events or changes in government policy exogenous to the private sector. According to this link: https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... the 1961 is because of FR interest rate move, 1969- government tightens budget and interest rates go up 1973- Stagflation starting with OPEC tightening oil supply You'll notice all of those are caused by events outside the control of the private sector or in other words the cause of someone's deliberate policy rather than an event of the system. Economic policy cannot predict these nor should it try to predict human behavior. Which brings up the point again that they are not predictable because I don't think anyone would say they can predict the behavior of an individual or a conglomerate like OPEC with great certainty. That said post 1980 many of the recessions are caused by financial crisis that are endogenous to the private sector, so that is worth looking at. But the claim that the business cycle from 1945 to 2009 is predictable does not hold up.

mathattack 9y ago

Generally credit (leverage) cycles. There's momentum in people borrowing more, until people are too levered, and then the same in the other direction. You can look up some of what Ray Dalio has to say on Youtube for more on this. (Not his organizational principles - his views on credit) https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0

justforFranz 9y ago

My pet theory is that there's a recession in the first term of any new president. Although, you'd have to give an allowance for Bush Sr. sharing one with the first term of Bill Clinton. If a president could time a recession, it would make sense to ensure that it was over before the next election. For a certain class of people, recessions aren't a problem, but a tool which allows you to write off your more speculative investments.

anonu 9y ago

> Does anyone who understands finance have any insight on why this pattern seems so predictable? I think the only thing that is predictable is that there is some sort of cyclical event - where neither the frequency nor the amplitude is known. The peak-to-trough or trough-to-peak magnitude is not predictable and neither is the timing - unless you have some crystal ball. The doomsday-ers will always beat the drums of fear. People will ignore them until there's an actual downturn - then we'll all point to them and marvel at their genius. Being a bit cynical, but I've seen this play out twice before in my professional career.

bradly 9y ago

When buying on leverage is actively encouraged to the masses, a crash usually follows. Before the 1929 crash, buying stock/equites on extreme margins became normal; Before the 2008 crash, buying real estate on extreme margins became normal; today we are seeing higher education being purchased on extreme margins. Now higher education is a different beast than the others, so it is hard to say how a economic event stemmed from student loans will manifest itself, but it is a real concern. I highly recommend JL Collins Stock Series blog posts and specifically this article on market events of the past 100 years: http://jlcollinsnh.com/2017/07/26/time-machine-and-the-future-returns-for-stocks/ http://jlcollinsnh.com/2017/07/26/time-machine-and-the-futur...

padobson 9y ago
Huge increases in student loans will certainly have effects on future borrowing - mortgages, car loans, business loans. What happens when fewer people are buying houses? Cars? Starting businesses?

MarkMc 9y ago

> Does anyone who understands finance have any insight on why this pattern seems so predictable? I would look to psychology in addition to economics. There are several well-known psychological factors that suggest there will always be a boom/bust cycle: 1. People copy other people. Fear and greed are infectious. People become envious when their neighbour or brother-in-law continue to make quick profits from investments. 2. People make irrational judgements when affected by emotions like fear and stress. 3. People tend to make overoptimistic judgements about future events and their own business acumen. Conversely people often deny reality and do not critically assess their past performance. 4. In judging the future, people place too great emphasis on recent experience and discount events which occurred before they were born.

Spooky23 9y ago

Most of the unpredictability is for things on the margins. Fundamentally cheap capital available for too long lets dumb behavior sustain itself longer. People stop questioning absurd market conditions, particularly in real estate. When growth slows down at all, over leveraged enterprises miss growth target, the cash spigot turns off and bust follows. In my area, it's blindingly obvious that real estate is fubar. Single family home prices have been stagnant, and there are dozens of medium density apartment and condo developments going up that are only sustainable because of tax abatements and foreign money laundering.

jonathanfoster 9y ago

Ray Dalio gives the best explanation to why the business cycle exists [1]. I wish I could provide a TLDR that does the video justice, but there's just too much great insight in this video to condense it any further (it's only 30 minutes anyways). In my opinion, this should be required viewing for all financially literate adults. [1] https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0

perseusprime11 9y ago

The one thing to note is most of these boom and bust cycles were also engineered during Greenspan's time. It will be interesting to see what happens in the coming months and years

BatFastard 9y ago

Is it possible in the Age of Big Data that we have enough indicators to slow things down before they bust?

AndyMcConachie 9y ago

> Does anyone who understands finance have any insight on why this pattern seems so predictable? https://en.wikipedia.org/wiki/Karl_Marx https://en.wikipedia.org/wiki/Karl_Marx

ata6187 9y ago

These cycles are not as consistent nor as predictable as your comment suggests. Your link and the bloomberg article both mention how cycles have been changing (e.g. lengthening on average recently) and how once important economic correlations of the past continue to break down toward being uncorrelated. There are many reasons for a cycle, some we think we understand, some we clearly do not. Everyone agrees we cannot predict the future. By the way, books are written about cycles, people writes their thesis on this topic, it is difficult to summarize. The short answer is we have a list of things that have caused cycles in the past. And we have a calculation how often and how likely a new cause is to be added to that list (tech bubble was not on the list in the 80s, now it is). From this list of known causes and calculating the odds a new cause will come along, economics try to predict cycle peaks and valleys as best they can. Their track record is atrocious and a joke at best. Despite what is reported in the press sometimes, economics are actually getting worse at analyzing cycles. Ray Dalio is mentioned in a few comments, Dalio does not have a good track record when it comes to macro economics though his hedge fund has performed well in some years (don't believe marketing BS). No one knows how innovation will effect boom and busts. Research on this is heavily manipulated. One can find strong connections between innovation and cycles if you want to AND one can find almost no connection between innovation and cycles. So unfortunately the real answer to this one is "it depends", all else equal (ceteris paribus) if innovation in tech slows it is likely part of many things slowing down and hence the lengthening of cycles we have seen MAY continue (again ceteris paribus). TL;DR pattern is not predictable nor consistent. Tech and innovation has little to no effect except in extreme cases, the pace of innovation should not have a major impact. Demographics and population factors show strong evidence for warranting a majority factor weight. Lastly, analogy: have you heard of yo-yo dieting? How long do most dieters last on a diet before failing that diet? What is the common causes of failing a diet? How long after failing to diet do they try again? Why do some people succeed when dieting on the first try and never regain the weight, why some on the 5th try? why some never? The economy acts just a person trying to yo-yo diet but it's 300 million people making and losing money instead of fat (well also fat).

mikevm 9y ago

I thought that this was a nice explanation: http://www.economicprinciples.org/ http://www.economicprinciples.org/