business cycle

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Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, asset allocation, backtesting, Black-Scholes formula, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

Switching returns are defined as the returns to an investor who switches from stocks to bills a given number of months before (or after, if his or her predictions are not accurate) a business cycle peak and switches back to stocks a given num- CHAPTER 12 Stocks and the Business Cycle 215 ber of months before (or after) a business cycle trough. Buy-and-hold returns are defined as the returns from holding the market through the entire business cycle. Excess returns are defined as switching returns minus the returns from the buy-and-hold strategy.7 Over the entire period from 1802 through 2006, the excess returns are minimal over a buy-and-hold strategy if investors switch into bills exactly at the business cycle peak and into stocks exactly at the business cycle trough. In fact, investors switching into bills just one month after the business cycle peak and back into stocks just one month after the business cycle trough would have lost 0.6 percent per year compared to the benchmark buy-and-hold strategy.

Interestingly, it is more important to be able to forecast troughs of the business cycle than it is peaks. An investor who buys stocks before the trough of the business cycle gains more than an investor who sells stocks an equal number of months before the business cycle peak. The maximum excess return of 4.8 percent per year is obtained by investing in bills four months before the business cycle peaks and in stocks four months before the business cycle troughs. The strategy of switching between bills and stocks gains almost 30 basis points (30⁄100 of a 7 The returns of the buy-and-hold strategy are adjusted to reflect the same level of market risk as the buy-and-hold strategy. TABLE 12–4 Switching Returns (Percent) Minus Buy-and-Hold Returns (Percent) around Business Cycle Turning Points, 1802 through December 2006 Switching from Bills to Stocks before Trough Switching from Stocks to Bills before Peaks 4 month 3 month 2 month 1 month Switching from Stocks to Bills after Peaks 1 month 2 month 3 month 4 month 4 month 4.8 4.0 4.2 4.1 3.3 2.7 2.1 2.2 1.9 3 month 4.0 3.3 3.5 3.3 2.6 1.9 1.4 1.5 1.3 2 month 3.3 2.6 2.8 2.6 1.9 1.2 0.7 0.8 0.7 1 month 2.5 1.8 2.0 1.8 1.1 0.5 0.0 0.1 0.0 1.9 1.2 1.4 1.2 0.5 -0.2 -0.7 -0.6 -0.7 1 month 1.5 0.8 1.0 0.8 0.1 -0.6 -1.1 -1.0 -1.1 2 month 0.9 0.2 0.4 0.2 -0.5 -1.1 -1.7 -1.6 -1.7 3 month 0.5 -0.2 0.0 -0.2 -0.9 -1.5 -2.1 -2.0 -2.1 4 month 0.3 -0.4 -0.2 -0.3 -1.1 -1.7 -2.2 -2.1 -2.2 At Trough Switching from Bills to Stocks after Trough At Peak 216 PART 3 How the Economic Environment Impacts Stocks percentage point) in average annual returns for each week during the four-month period in which investors can predict the business cycle turning point.

-Based Companies 182 PART 3 HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 11 Gold, Monetary Policy, and Inflation 187 Money and Prices 189 The Gold Standard 191 The Establishment of the Federal Reserve 191 The Fall of the Gold Standard 192 Postdevaluation Monetary Policy 193 Postgold Monetary Policy 194 The Federal Reserve and Money Creation 195 How the Fed’s Actions Affect Interest Rates 196 Stocks as Hedges against Inflation 199 Why Stocks Fail as a Short-Term Inflation Hedge 201 Higher Interest Rates 201 Nonneutral Inflation: Supply-Side Effects 202 Taxes on Corporate Earnings 202 Inflationary Biases in Interest Costs 203 Capital Gains Taxes 204 Conclusion 205 Chapter 12 Stocks and the Business Cycle 207 Who Calls the Business Cycle? 208 Stock Returns around Business Cycle Turning Points 211 Gains through Timing the Business Cycle 214 How Hard Is It to Predict the Business Cycle? 216 Conclusion 219 CONTENTS CONTENTS xi Chapter 13 When World Events Impact Financial Markets 221 What Moves the Market? 223 Uncertainty and the Market 226 Democrats and Republicans 227 Stocks and War 231 The World Wars 231 Post-1945 Conflicts 233 Conclusion 235 Chapter 14 Stocks, Bonds, and the Flow of Economic Data 237 Economic Data and the Market 238 Principles of Market Reaction 238 Information Content of Data Releases 239 Economic Growth and Stock Prices 240 The Employment Report 241 The Cycle of Announcements 243 Inflation Reports 244 Core Inflation 245 Employment Costs 246 Impact on Financial Markets 246 Central Bank Policy 247 Conclusion 247 PART 4 STOCK FLUCTUATIONS IN THE SHORT RUN Chapter 15 The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 251 Exchange-Traded Funds 252 Stock Index Futures 253 Basics of the Futures Markets 255 xii Index Arbitrage 257 Predicting the New York Open with Globex Trading 258 Double and Triple Witching 260 Margin and Leverage 261 Using ETFs or Futures 261 Where to Put Your Indexed Investments: ETFs, Futures, or Index Mutual Funds?


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

Sector Allocation Around the World Private and Public Capital Conclusion PART III HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 14 Gold, Monetary Policy, and Inflation Money and Prices The Gold Standard The Establishment of the Federal Reserve The Fall of the Gold Standard Postdevaluation Monetary Policy Postgold Monetary Policy The Federal Reserve and Money Creation How the Fed’s Actions Affect Interest Rates Stock Prices and Central Bank Policy Stocks as Hedges Against Inflation Why Stocks Fail as a Short-Term Inflation Hedge Higher Interest Rates Nonneutral Inflation: Supply-Side Effects Taxes on Corporate Earnings Inflationary Biases in Interest Costs Capital Gains Taxes Conclusion Chapter 15 Stocks and the Business Cycle Who Calls the Business Cycle? Stock Returns Around Business Cycle Turning Points Gains Through Timing the Business Cycle How Hard Is It to Predict the Business Cycle? Conclusion Chapter 16 When World Events Impact Financial Markets What Moves the Market? Uncertainty and the Market Democrats and Republicans Stocks and War Markets During the World Wars Post-1945 Conflicts Conclusion Chapter 17 Stocks, Bonds, and the Flow of Economic Data Economic Data and the Market Principles of Market Reaction Information Content of Data Releases Economic Growth and Stock Prices The Employment Report The Cycle of Announcements Inflation Reports Core Inflation Employment Costs Impact on Financial Markets Central Bank Policy Conclusion PART IV STOCK FLUCTUATIONS IN THE SHORT RUN Chapter 18 Exchange-Traded Funds, Stock Index Futures, and Options Exchange-Traded Funds Stock Index Futures Basics of the Futures Markets Index Arbitrage Predicting the New York Open with Globex Trading Double and Triple Witching Margin and Leverage Tax Advantages of ETFS and Futures Where to Put Your Indexed Investments: ETFS, Futures, or Index Mutual Funds?

To make money by predicting the business cycle, one must be able to identify peaks and troughs of economic activity before they actually occur, a skill very few if any economists possess. Yet business cycle forecasting is a popular Wall Street endeavor not because it is successful—most of the time it is not—but because the rewards are so large if you can identify the turning point of the business cycle. WHO CALLS THE BUSINESS CYCLE? It is surprising to many that the dating of business cycles is not determined by any of the myriad government agencies that collect data on the economy. Instead, the task falls to the National Bureau of Economic Research (the NBER), a private research organization founded in 1920 for the purpose of documenting business cycles and developing a series of national income accounts. In the early years of its existence, the bureau’s staff compiled comprehensive chronological records of the changes in economic conditions in many of the industrialized economies.

In particular, the bureau developed monthly series on business activity for the United States and Great Britain back to 1854. In a 1946 volume entitled Measuring Business Cycles, Wesley C. Mitchell, one of the founders of the bureau, and Arthur Burns, a renowned business cycle expert who later headed the Federal Reserve Board, gave the following definition of a business cycle: Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansion occurring at about the same time in many economic activities, followed by similarly general recessions, or contractions, and revivals that merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years and they are not divisible into shorter cycles of similar character.3 It is commonly assumed that a recession occurs when real gross domestic product, the most inclusive measure of economic output, declines for two consecutive quarters.


pages: 470 words: 130,269

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman

Albert Einstein, American Legislative Exchange Council, anti-communist, battle of ideas, Berlin Wall, Bretton Woods, business cycle, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, different worldview, Donald Trump, experimental economics, Fall of the Berlin Wall, floating exchange rates, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, housing crisis, Internet Archive, invisible hand, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liberal capitalism, market fundamentalism, mass immigration, means of production, Menlo Park, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, RAND corporation, random walk, rent control, road to serfdom, Robert Bork, rolodex, Ronald Coase, Ronald Reagan, Silicon Valley, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, union organizing, urban planning, Vilfredo Pareto, Washington Consensus, zero-sum game, éminence grise

Kaufmann and Voegelin saw great promise in the subjectivist approach for social theory, with Voegelin especially appreciative of the Austrian focus on the dynamism of human communities and the role of time in human affairs.44 Austrian School scholars revealed their intellectual breadth, especially in their embrace of international developments in economic thought. After a fifteen-month stint in the United States, Hayek published on US banking policy, as he began to make a name for himself in business cycle theory. In particular, he challenged the advisability of the US Federal Reserve’s discretionary banking policy, which was based on maintaining a stable price level to counteract the fluctuations of the business cycle. Hayek thought these policies were often mistimed and disruptive. Martha Stephanie Braun and Fritz Machlup wrote about British banking history and Knut Wicksell’s theories of neutral money, following in Mises’s footsteps.45 The new cohort of Austrians helped reawaken economic discussions in German-speaking lands after a fallow period occasioned by the Great War.

In a scathing critique of economic forecasting, he rejected the possibility of prediction in macroeconomics and business cycle theory. He was the first of the younger Austrians to evince the skepticism about forecasting that became one of the school’s calling cards.54 Likely encouraged by Hayek and Morgenstern, the complete Geist-Kreis began attending Mises’s seminar, constituting half of the seminar’s number. The lines between the two gatherings blurred. Haberler and Machlup, who both entered Mises’s orbit at this time, displayed the elder’s influence in their earliest efforts. They also showed their growing knowledge of international economic trends regarding statistics, business cycles, and monetary theory. Haberler’s first book cast doubt on the utility of “index numbers,” aggregate data used to better model economic developments.

Fundamentally, the two sides disagreed on the nature and composition of capital, which led to divergent theories about production and the business cycle. Knight believed that the starting point of all Austrian School research, Böhm’s capital theory, was erroneous. In a letter to Morgenstern, Knight argued that “any theory of cycles or any other phase of economic life based on Bohm Bawerk’s [sic] theory of capital is necessarily and egregiously wrong.”37 As we saw, Böhm predicated his theory of capital on the roundaboutness of production. The more time allotted for production processes, the greater the output and return on investment. Knight saw this approach as unrealistic and untenable methodologically. One could not measure the period of production with any accuracy and hence could not explain capital growth or the business cycle using it. Hayek defended the Austrian time preference and the period of production in his response.


Globalists: The End of Empire and the Birth of Neoliberalism by Quinn Slobodian

Asian financial crisis, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collective bargaining, David Ricardo: comparative advantage, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, full employment, Gunnar Myrdal, Hernando de Soto, invisible hand, liberal capitalism, liberal world order, market fundamentalism, Martin Wolf, Mercator projection, Mont Pelerin Society, Norbert Wiener, offshore financial centre, oil shock, open economy, pattern recognition, Paul Samuelson, Pearl River Delta, Philip Mirowski, price mechanism, quantitative easing, random walk, rent control, rent-seeking, road to serfdom, Ronald Reagan, special economic zone, statistical model, The Chicago School, the market place, The Wealth of Nations by Adam Smith, theory of mind, Thomas L Friedman, trade liberalization, urban renewal, Washington Consensus, Wolfgang Streeck, zero-sum game

By finding the right aspects of economic life to capture and compile in numbers, would it be pos­si­ble not only to comprehend but also to forecast what Columbia University economist Wesley Clair Mitchell called in his foundational work from 1913 “the complicated pro­cesses by which seasons of business prosperity, crisis, depression, and revival come about in the modern world”?17 Although research into the business cycle began before the First World War, it boomed afterward. The U.S. government funded its study, and business 60 GLOBALISTS The spiral of decline in world trade. Monthly Report of the Austrian Business Cycle Research Institute, November 1933. cycle research institutes ­were established throughout Eu­rope and in the Soviet Union.18 One of the preoccupations of researchers was how to express the business cycle visually—­how to make the invisible market vis­i­ble. Techniques of illustrating the business cycle had originated with private ser­ vices for investors. As the stock market boomed in the 1920s and ever more Americans had wealth bound up in finance, ­there was a ready market for advice that might offer an advantage.

A related meta­phor of the time, originating with the British economist (and l­ ater architect of the welfare state) William Beveridge, cast graphic depictions of the cycle as the “pulse of the nation.”26 Dutch researcher Willem Einthoven had been granted the Nobel Prize for Medicine in 1924 for his pioneering development of electrocardiography, creating a means for mea­sur­ing the pulse of the ­human heart on a line chart over time.27 Business cycle research—­and the visual technique of the business barometer—­helped place the economist alongside the medical doctor as the master of an esoteric branch of knowledge amenable to a mode of repre­sen­ta­tion comprehensible to the average person. As one historian has observed, the 1920s ­were a time when economics became understood as a domain of technical expertise beyond politics.28 The chart was an accessory in this shift. The suffering and thriving national economy was made vis­i­ble in the line of the chart, and the root ­causes of individuals’ pain or prosperity could be seen too. BUSINESS CYCLE RESEARCH AND THE MODERN STATE Institutes responsible for studying the business cycle became standard features of the modern state between the two world wars.

He also met Charles Bullock, the director of the Harvard Economic Ser­v ice, who recalled being favorably impressed by the young Hayek.31 Hayek brought the idea of business cycle research back to Austria with him.32 In his words, he imported “from Amer­i­ca a new idea of ­great predictions.”33 He wrote to Mitchell in 1926 that his efforts then embodied “some of the slowly ripening fruits of my sojourn in the United States.”34 Mises and Hayek led the campaign to establish a permanent home for business cycle research in Vienna. “In a time when the entire civilized world makes decisions and arrangements on the basis of the knowledge of economic and business cycle institutes,” they wrote, Austria “would demonstrate to the world e­ ither a shameful, indolent backwardness to its own disadvantage or a mistrust-­producing insincerity and secretiveness that would surely place its creditworthiness in question.”35 To be against the institute, they wrote, would be to be “against pro­gress.” ­


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

The evidence in this chapter may also help in understanding rational risk premia or procyclical sentiment, and it may give some clues for market timing, style timing, or factor timing—suggesting good and bad environments for various asset classes and dynamic strategies. 26.1 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX ANTE INDICATORS THROUGH THE BUSINESS CYCLE Business cycles describe broad fluctuations in aggregate economic activity. The U.S. government considers the National Bureau of Economic Research (NBER) to be the final arbiter of the U.S. business cycle. Evaluating a variety of economic series, the NBER’s Business Cycle Committee officially dates—often after a significant delay—the peaks and troughs of economic activity. (I assume that the last recession ended in July 2009.) The periods between these are called expansions (or recoveries) and contractions (or recessions). Among more journalistic definitions, the most popular is to call two consecutive quarters of negative real GDP growth a recession. Business cycles in other countries are even more loosely defined. Business cycles are not regular (e.g., recessions became shorter and shallower after World War II).

While average dividend yield near cyclical peaks is only slightly lower than that near troughs, the yield curve is typically at its flattest at the business cycle trough and steepest near the business cycle peak. Figure 26.3. Mean spreads and valuation ratios across the business cycle, 1927–2009. Sources: Robert Shiller’s website, Haver Analytics, Federal Reserve Board, Moody’s, Ibbotson Associates (Morningstar), Bloomberg, Citigroup, Barclays Capital, National Bureau of Economic Analysis, own calculations. Figure 26.4. Mean rates across the business cycle, 1927–2009. Sources: Robert Shiller’s website, Federal Reserve Board, Bloomberg, National Bureau of Economic Analysis, own calculations. Finally, Figure 26.4 shows that while the long Treasury yield level exhibits almost no cyclical variation, the short rate and the inflation rate clearly vary with the business cycle. Traditionally, the monetary policy cycle and the business cycle were closely related.

Near-substitutes to Treasuries also benefited from this demand, but to a lesser extent. Cyclical factors Yield curve shape is closely related to (interrelated) business cycles, credit cycles, and monetary policy cycles. YC inversions predict recessions as defined by the National Bureau of Economic Research, but the YC tends to steepen fast during recessions and peak near business cycle troughs. A steep YC coincides with a high unemployment rate (correlation +0.45) and predicts fast economic growth. YC countercyclicality may explain its ability to predict near-term bond and stock returns: high required premia near business cycle troughs result in a steep YC, while low required premia near business cycle peaks result in an inverted YC (see Figure 9.11). In addition, Cochrane–Piazzesi or C-P BRP measure is distinctly countercyclic.


pages: 494 words: 132,975

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

"Robert Solow", airport security, banking crisis, Bretton Woods, British Empire, business cycle, collective bargaining, complexity theory, creative destruction, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, Gunnar Myrdal, if you build it, they will come, Isaac Newton, Joseph Schumpeter, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, means of production, Mont Pelerin Society, mortgage debt, New Journalism, Northern Rock, Paul Samuelson, Philip Mirowski, price mechanism, pushing on a string, road to serfdom, Robert Bork, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

Behind these thoughts were Wicksell’s postulations on the difference between the “natural interest rate,” where personal savings equal investment, and the “market rate of interest,” or the price of credit fixed by banks. For members of the Austrian School, the business cycle was thought to be set in motion by the difference between the natural and the market rate of interest. The problem for central bankers was that it was impossible to determine exactly what the natural interest rate was, so they inevitably set the market rate of interest at an inappropriate level, thereby setting off the booms and busts of the business cycle. Hayek believed that by staying true to the natural interest rate, money in an economy could be made “neutral” and that fluctuations of the business cycle in those circumstances would be caused by changes in other factors, such as the development of new products and new discoveries. The battle lines between Keynes and Hayek were thus drawn.

Magee, a professor of economics; gate-crashed lectures by Wesley Clair Mitchell, an established authority of business cycles,42 the phenomenon whereby economic booms (periods of fast economic growth) were followed by slumps (periods of contracting economic activity); and attended seminars by the German socialist J. B. Clark at Columbia. Hayek was intrigued by the secretive workings of the Federal Reserve Board, whose gold hoarding and money manipulation Keynes had addressed at length. Hayek went on to work briefly for Willard Thorp, an economic adviser to President Wilson at the Paris peace talks, during which time he mined information about fluctuations in the industrial performance of Germany, Austria, and Italy, which led him to consider the nature and predictability of the business cycle. In May 1924, short of money and out of luck, Hayek set sail back across the Atlantic.

While Mises tried to find Hayek a government-funded research post, Hayek began writing an account of what he had learned in America, reporting that cheap credit there was leading to a boom in capital goods industries that he believed would prove unsustainable. He extrapolated on the nature of the business cycle, what he called “industrial fluctuations,” which would become essential to his contribution to economic theory and the battleground on which he would skirmish with Keynes. To become a paid university lecturer, Hayek had to publish a piece of original work. To this end he began assembling facts and arguments for what he hoped would be an important contribution to the theory of money. This, too, would bring him into conflict with Keynes. While in America, Hayek concluded that the business cycle—in which an economy regularly switches between a period of high activity and prosperity to a period of business bankruptcies and unemployment—was a worthy subject for study.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

They are lost at sea and don’t know what else they can do. The Business Cycle Although economists disagree on many subjects, there are three things they do agree on. First, it is clear that economic output has risen sharply (but not steadily) since the Industrial Revolution began in the late eighteenth century. Second, it is agreed that an economy tends to move toward a state of general equilibrium in which prices adjust until supply meets demand. The French economist Leon Walras (1834–1910) developed the theory of general equilibrium during the 1870s. Finally, economists agree that the tendency toward equilibrium is disrupted by business cycles—periods of unusual prosperity (booms) followed by periods of economic depression (or busts). There is widespread disagreement, however, about the causes of the business cycle. Wesley Mitchell (1874–1948), Columbia University professor and director of research at the National Bureau of Economic Research, did perhaps more than any other economist to develop a comprehensive understanding of the phenomena or, as he put it, to explain “the interrelations among cyclical fluctuations in the production of raw materials, industrial equipment and consumers’ goods; in the volume of savings and investments; in the promotion of new enterprises, in banking, in the disbursement of incomes to individuals and the spending of incomes, in prices, costs, profits and the emotional aberrations of business judgments.”2 Mitchell provided a useful and interesting overview of many of the most well known business cycle theories in the first chapter of his book, Business Cycles: The Problem and Its Setting, which was published in 1927.

Balance of payments: asset prices and currencies and foreign central banks’ creation of fiat money and foreign exchange reserves global imbalances government finance and quantitative easing and U.S. and foreign exchange reserves Banking sector: commercial banks, credit creation, and decline in liquidity reserves commercial banks’ credit structure current financial health of in Mitchell’s theory of business cycles New Great Depression scenarios and Bank of America Baruch, Bernard Bear Stearns Bernanke, Ben: global savings glut theory of on Milton Friedman policy responses to credit expansion and New Depression Bodin, Jean Bonds: in diversified portfolio effect of stimulus on quantitative easing and Bush, George W. Business cycles, theories of Business Cycles: The Problem and Its Setting (Mitchell) Capital adequacy ratio (CAR) Capitalism, evolution to credit-based, government-directed economic system China: fiat money creation and foreign exchange reserves New Great Depression scenarios and possibility of end to buying of U.S. debt Citibank Commercial banks.

See also Inflation and deflation consequences of policy options to prevent scenarios leading to Nixon, Richard Obama, Barack Oil prices. See Energy and energy prices Overproduction, in Mitchell’s theory of business cycles Paul, Ron People’s Bank of china (PBOC) Perot, Ross Primary dealer credit facility (PDCF) Private sector debt: contraction of effect of stimulus on Production incomes, in Mitchell’s theory of business cycles Profits: credit expansion’s effect on in Mitchell’s theory of business cycles Property rights, debt-deflation and Protectionism: inflation and New Great Depression scenarios and Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises, The (Fisher) Quantitative easing: asset prices and balance of payments and beginning of QE1 QE2 QE3 Quantity theory of credit banking sector crisis and monetarism and principles of quantity theory of money contrasted uses of Quantity theory of money Rational investment option, for U.S.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, business cycle, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

As I’ve highlighted, they are best thought of as a scaffolding. The Theory of Business Cycles and Unemployment Ever since Paul Samuelson’s doctoral dissertation, published in 1947 as Foundations of Economic Analysis, economics has been split between microeconomics and macroeconomics. The domain of microeconomics is price theory, the ideas covered in the previous section. Macroeconomics deals with the behavior of economic aggregates—inflation, total output, and employment, in particular. Macroeconomics takes as its central questions the up-and-down fluctuations in economic activity that economists call the “business cycle.” Here, too, there has been no shortage of grand theorizing. We have learned considerably with each successive wave. But the attempts to develop a grand unified theory of what determines the business cycle have to be judged a failure.

Along similar lines, the overall level of prices in the economy was determined by the quantity of money and liquidity in the system. Sustained price inflation was the result of too much money being in circulation. The classical economists’ approach to the business cycle was typified by their view that the macroeconomy, to use the term anachronistically, was self-stabilizing. Unemployment would eventually be eliminated as the shortage of jobs brought wages down. A burst of inflation similarly would be cured on its own: the resultant loss in international competitiveness would produce a trade deficit, financed by the outflow of gold abroad, which in turn would lead to a corrective reduction in the domestic money supply. These supposedly automatic adjustment mechanisms ensured that the business cycle, inflation, and unemployment would all take care of themselves. The Gold Standard epitomized this economic orthodoxy and stood well into the twentieth century.

., 1n Boulding, Kenneth, 11 bounded rationality, 203 Bowles, Samuel, 71n Brazil: antipoverty programs of, 4 globalization and, 166 Bretton Woods Conference (1944), 1–2 Britain, Great, property rights and, 98 bubbles, 152–58 business cycles, 125–37 balanced budgets and, 171 capital flow in, 127 classical economics and, 126–27, 129, 137 inflation in, 126–27, 133, 135, 137 new classical models and, 130–34, 136–37 butterfly effect, 39 California, University of: at Berkeley, 107, 136, 147 at Los Angeles, 139 Cameron, David, 109 capacity utilization rates, 130 capital, neoclassical distribution theory and, 122, 124 capital flow: in business cycles, 127 economic growth and, 17–18, 114, 164–67 globalization and, 164–67 growth diagnostics and, 90 speculation and, 2 capitalism, 118–24, 127, 144, 205, 207 carbon, emissions quotas vs. taxes in reduction of, 188–90, 191–92 Card, David, 57 Carlyle, Thomas, 118 carpooling, 192, 193–94 cartels, 95 Cartwright, Nancy, 20, 22n, 29 cash grants, 4, 55, 105–6 Cassidy, John, 157n Central Bank of India, 154 Chang, Ha-Joon, 11 chaos theory, butterfly effect and, 39 Chicago, University of, 131, 152 Chicago Board of Trade, 55 Chile, antipoverty programs and, 4 China, People’s Republic of, 156, 163, 164 cigarette industry, taxation and, 27–28 Clark, John Bates, 119 “Classical Gold Standard, The: Some Lessons for Today” (Bordo), 127n classical unemployment, 126 climate change, 188–90, 191–92 climate modeling, 38, 40 Cochrane, John, 131 coffee, 179, 185 Colander, David, 85 collective bargaining, 124–25, 143 Colombia, educational vouchers in, 24 colonialism, developmental economics and, 206–7 “Colonial Origins of Comparative Development, The” (Acemoglu, Robinson, and Johnson), 206–7 Columbia University, 2, 108 commitment, in game theory, 33 comparative advantage, 52–55, 58n, 59–60, 139, 170 compensation for risk models, 110 competition, critical assumptions in, 28–29 complementarities, 42 computable general equilibrium (CGE) models, 41 computational models, 38, 41 computers, model complexity and, 38 Comte, Auguste, 81 conditional cash transfer (CCT) programs, 4, 105–6 congestion pricing, 2–3 Constitution, U.S., 187 construction industry, Great Recession and, 156 consumers, consumption, 119, 129, 130, 132, 136, 167 cross-price elasticity in, 180–81 consumer’s utility, 119 contextual truths, 20, 174 contingency, 25, 145, 173–74, 185 contracts, 88, 98, 161, 205 coordination models, 16–17, 42, 200 corn futures, 55 corruption, 87, 89, 91 costs, behavioral economics and, 70 Cotterman, Nancy, xiv Cournot, Antoine-Augustin, 13n Cournot competition, 68 credibility, in game theory, 33 “Credible Worlds, Capacities and Mechanisms” (Sugden), 172n credit rating agencies, 155 credit rationing, 64–65 critical assumptions, 18, 26–29, 94–98, 150–51, 180, 183–84, 202 cross-price elasticity, 180–81 Cuba, 57 currency: appreciation of, 60, 167 depreciation of, 153 economic growth and, 163–64, 167 current account deficits, 153 Curry, Brendan, xv Dahl, Gordon B., 151n Darwin, Charles, 113 Davis, Donald, 108 day care, 71, 190–91 Debreu, Gerard, 49–51 debt, national, 153 decision trees, 89–90, 90 DeLong, Brad, 136 democracy, social sciences and, 205 deposit insurance, 155 depreciation, currency, 153 Depression, Great, 2, 128, 153 deregulation, 143, 155, 158–59, 162, 168 derivatives, 153, 155 deterrence, in game theory, 33 development economics, 75–76, 86–93, 90, 159–67, 169, 201, 202 colonial settlement and, 206–7 institutions and, 98, 161, 202, 205–7 reform fatigue and, 88 diagnostic analysis, 86–93, 90, 97, 110–11 Dijkgraaf, Robbert, xiv “Dirtying White: Why Does Benn Steil’s History of Bretton Woods Distort the Ideas of Harry Dexter White?”


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Nicolò De Vecchi, 2006, ‘Hayek and the General Theory ’, European Journal of the History of Economic Thought, 13(2), pp. 233–58. 21.  Schumpeter, Business Cycles, vol. I, p. vi. 22.  Schumpeter, Capitalism, p. 83. 23.  Schumpeter, Business Cycles, vol. I, pp. 104–7. 24.  Schumpeter, Capitalism, pp. 93, 99–100. 25.  Ibid., pp. 99–100. 26.  Schumpeter, Business Cycles, vol. I, pp. 243–4. 27.  Ibid., pp. 100–102. 28.  Schumpeter, Capitalism, pp. 167, 170, 190–91. 29.  Ibid., p. xiv. 30.  Joseph Schumpeter, 1955, ‘Social Classes in an Ethnically Homogeneous Environment’, trans. Heinz Norden, in Imperialism, Social Classes: Two Essays by Joseph Schumpeter, New York: Meridian Books, pp. 120–22. 31.  Joseph Schumpeter, 1928, ‘The Instability of Capitalism’, Economic Journal, 38, pp. 361–86. 32.  Schumpeter, Business Cycles, vol. I, pp. 103–4. 33.  World Bank, 1993, The East Asian Miracle: Economic Growth and Public Policy, Washington, DC: World Bank. 34.  

However, this theory gave Fisher scope to see how money and prices might affect national output, and how these short-run fluctuations influenced the business cycle. He believed it was possible for the public to confuse rising prices as being driven by increased demand from a growing economy rather than an increase in the amount of money in circulation. In this instance, a rising price level might temporarily stimulate purchases if consumers believed the economy was doing well, a misconception he called ‘money illusion’. In order to test this proposition, he looked for short-term correlations between prices and output. He introduced the distributive lag model, where current output movements are modelled on seven monthly lags of price changes. He concluded that 90 per cent of short-term output movements were accounted for by recent changes in prices. His findings convinced him he had dealt a blow to all other business-cycle theories, as only around 10 per cent of cyclical movements were not explained by fluctuations in prices.

At the age of twenty-eight, he left to become the youngest professor of political economy in the empire at the University of Graz, which was second in size only to the University of Vienna. Schumpeter’s Theory of Economic Development was published soon after, in 1911. This was the book that made his name and it was to become one of the classics in economics. An English edition was later published by Harvard University Press in 1934 with the subtitle: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. The ideas in this very early work formed the core of Schumpeterian economics, which were later developed in Business Cycles (1939) and the most popular of his books, Capitalism, Socialism and Democracy (1942). Schumpeter spent five months lecturing in America, which raised his profile, but soon after his return home the First World War broke out. Gladys had returned to England so was cut off from her husband. By 1920 he began to describe himself as unmarried, though the couple had not divorced.


The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Asian financial crisis, asset-backed security, backtesting, bank run, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, debt deflation, distributed ledger, diversification, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, labor-force participation, Long Term Capital Management, Lyft, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk/return, sharing economy, short selling, sovereign wealth fund, Uber and Lyft, uber lyft, yield curve

For it to do this, central bank action must increase the money supply enough to accommodate the sharply increased demand to hold true money and also further increase the sense that debt and risk are socialized. Once market participants believe that it is more likely that the returns from carry will accrue to them, while losses will be protected or spread around the economy as a result of central bank and government action, then they will resume carry trade activity. A new carry bubble can begin. 8 Carry, Financial Bubbles, and the Business Cycle The Business Cycle in the Carry Regime There have always been different theories about the business cycle, the cycle of recovery, boom, and recession that economies typically experience. A conventional perspective would be that as an economic expansion matures, the economy’s unused capacity is gradually diminished and the “output gap” narrows. Wage growth tends to pick up as unemployment falls. Gradually, inflationary pressures build and interest rates rise.

Later in the book, in Chapter 8, we argue that carry in broad terms is the driving force today in the business cycle. But financial markets have become increasingly complex, and carry trades—volatility-selling trades—can be implemented in all the various markets: stock markets, credit markets, commodities markets, even housing markets, as well as currency markets. The correlations between the various carry trades are not necessarily fixed over time; it is possible, for example, for carry trades in the commodities markets to be crashing even as the S&P 500 carry trade is expanding—at least for a period. There is no certainty that any one type of carry trade will be very clearly correlated with the economy, even as carry in the broadest sense now determines, or at the very least strongly influences, the business cycle. We explore this in much more depth later in the book.

The growth in the economy—which is ultimately mostly reversible—is also the result of carry, which produces high profit share and tends to bring GDP from the future, as described in the previous chapter. Carry, Financial Bubbles, and the Business Cycle 127 In the world of extreme carry, high financial asset prices do not guarantee that the economy is “good for now.” The carry crash can occur suddenly—at the point when leverage has reached too great an extreme to be sustainable— and the carry crash means an economic crash and almost certainly a financial and economic crisis. The concept of the business cycle no longer describes a somewhat smooth pattern of oscillations in the economy over time; rather it is a progression of steady but unspectacular growth interrupted by violent shocks—exactly like the pattern of carry trade returns described in this book.


pages: 162 words: 51,473

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

"Robert Solow", Bonfire of the Vanities, Bretton Woods, business cycle, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, price stability, rent control, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

And we are not being taken advantage of: In fact, the imbalance is actually a sign that America is taking advantage of opportunities that other advanced countries are passing up. Part 4 Delusions of Growth Few subjects in economics are as contentious as the business cycle—those fluctuations of output and unemployment around the long-run upward trend. A generation ago economists were all pretty much agreed on what caused business cycles. Then, partly as a result of “stagflation”—the unexpected and unpleasant combination of inflation and unemployment that emerged in the 1970s—but mainly as a result of differences in methodological tastes, economists studying the business cycle divided into rival factions. Some argued for an updated version of the old, mainly Keynesian approach; others wanted to reject it entirely. The great business cycle theory wars did huge damage to the prestige of economics as a profession; they also created a sense that nobody knew anything, which opened the door for various crank doctrines—most notably supply-side economics.

And they are surely right: We will not have the same problems in the future that we had in the past. We will have different problems. And because the problems are new, we will handle them badly, and the business cycle will endure. But this is not a message business pundits want to hear; and for them Fischer’s book is the perfect answer. Of course, they can now say, the business cycle has been with us for the last 150 years—but the long view tells us that while instability is the norm while you are passing through a price revolution, it is smooth sailing once you pass through the crisis and reach the new “equilibrium.” And guess what—we have just arrived at the promised land. But the modern business cycle bears no more resemblance to the economic fluctuations that afflicted preindustrial Europe than NATO does to the Holy Roman Empire. It may be tempting to ignore the very real lessons of the last century because of some alleged parallels with the distant past.

While the factions still tend to use different language, their actual views have converged—to something not very different from the consensus view of a generation ago. But the damage has proved hard to repair: many people still think that economics has nothing useful to say about the business cycle, and crank doctrines continue to flourish. The crank doctrine du jour is something widely known as the “New Paradigm” it amounts to the assertion that new forces such as globalization and technological change have cancelled all the old rules, that old speed limits on growth have been repealed, perhaps that the business cycle itself has been abolished. There are many things wrong with that story line, among them the question of whether globalization and technology are really proceeding as dramatically as its adherents claim. “We Are Not the World” already described my doubts about globalization; the first essay here describes some similar doubts about technology.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Nicolò De Vecchi, 2006, ‘Hayek and the General Theory’, European Journal of the History of Economic Thought, 13(2), pp. 233–58. 21. Schumpeter, Business Cycles, vol. I, p. vi. 22. Schumpeter, Capitalism, p. 83. 23. Schumpeter, Business Cycles, vol. I, pp. 104–7. 24. Schumpeter, Capitalism, pp. 93, 99–100. 25. Ibid., pp. 99–100. 26. Schumpeter, Business Cycles, vol. I, pp. 243–4. 27. Ibid., pp. 100–102. 28. Schumpeter, Capitalism, pp. 167, 170, 190–91. 29. Ibid., p. xiv. 30. Joseph Schumpeter, 1955, ‘Social Classes in an Ethnically Homogeneous Environment’, trans. Heinz Norden, in Imperialism, Social Classes: Two Essays by Joseph Schumpeter, New York: Meridian Books, pp. 120–22. 31. Joseph Schumpeter, 1928, ‘The Instability of Capitalism’, Economic Journal, 38, pp. 361–86. 32. Schumpeter, Business Cycles, vol. I, pp. 103–4. 33. World Bank, 1993, The East Asian Miracle: Economic Growth and Public Policy, Washington, DC: World Bank. 34.

However, this theory gave Fisher scope to see how money and prices might affect national output, and how these short-run fluctuations influenced the business cycle. He believed it was possible for the public to confuse rising prices as being driven by increased demand from a growing economy rather than an increase in the amount of money in circulation. In this instance, a rising price level might temporarily stimulate purchases if consumers believed the economy was doing well, a misconception he called ‘money illusion’. In order to test this proposition, he looked for short-term correlations between prices and output. He introduced the distributive lag model, where current output movements are modelled on seven monthly lags of price changes. He concluded that 90 per cent of short-term output movements were accounted for by recent changes in prices. His findings convinced him he had dealt a blow to all other business-cycle theories, as only around 10 per cent of cyclical movements were not explained by fluctuations in prices.

At the age of twenty-eight, he left to become the youngest professor of political economy in the empire at the University of Graz, which was second in size only to the University of Vienna. Schumpeter’s Theory of Economic Development was published soon after, in 1911. This was the book that made his name and it was to become one of the classics in economics. An English edition was later published by Harvard University Press in 1934 with the subtitle: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. The ideas in this very early work formed the core of Schumpeterian economics, which were later developed in Business Cycles (1939) and the most popular of his books, Capitalism, Socialism and Democracy (1942). Schumpeter spent five months lecturing in America, which raised his profile, but soon after his return home the First World War broke out. Gladys had returned to England so was cut off from her husband. By 1920 he began to describe himself as unmarried, though the couple had not divorced.


pages: 263 words: 75,455

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, forensic accounting, hindsight bias, intangible asset, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, survivorship bias, systematic trading, The Myth of the Rational Market, time value of money, transaction costs

First, we seek stocks with a franchise proven over a business cycle. Our CFOA measure seeks to identify stocks that generate masses of cash after capital investments over an average business cycle. The eight-year geometric mean of ROA and ROC measures seek stocks that earn consistently high returns on capital over the business cycle. These metrics are intuitive and identify stocks that we would commonly assume to possess a franchise. Firms possessing a franchise will also maintain growing, or high, stable profit margins. We propose measures that capture these two elements of profit margin strength. Margin growth identifies a stock's profit margin growth. Margin stability identifies a stock's profit margin stability. These measures seek stocks that have increased profit margins over a business cycle or stocks that have maintained high profit margins over a business cycle.

NORMALIZED EARNING POWER In Security Analysis, Graham advocated the use of “normalized” earnings over a single-year earnings ratio, suggesting that “[earnings] should cover a period of not less than five years, and preferably seven to ten years.” By “normalizing” earnings, Graham sought to adjust for the impact of the business cycle, which pushes earnings up in the boom and down in the bust. The rationale is that the extremes found at the peak and trough of the business cycle do not represent the “normal” earning power of the business, which is likely lower than at the peak and higher than at the trough. Earnings tend to be mean reverting, so we need to normalize the extremes to make them less attractive at the peak and more attractive at the trough. We can achieve this taking an average of earnings over the business cycle. We can't know how long a business cycle will last, so Graham recommended using an average of between 5 and 10 years. More recently, Robert Shiller, author of the book Irrational Exuberance, which took for its title the phrase then-chairman of the Federal Reserve Alan Greenspan used to warn of the dot-com bubble in 1996, collaborated with John Campbell to argue2 that annual earnings are too “noisy” to use as the denominator in price-to-earnings (P/E) ratios.

For most stocks, returns on capital are highly mean reverting. A sample of stocks with high returns will contain few with a genuine franchise, and many at the peak of the business cycle. Luck and competition will act to drive the high returns on capital to the cost of capital. Teasing out the genuine franchises from the peaking businesses is no easy task. Stocks that cannot maintain high returns over the business cycle do not possess a franchise. We can make an argument that stocks that have maintained high returns over the long term may possess a franchise. Stocks with high, stable returns maintained over the business cycle have demonstrable persistence, and are therefore good candidates for franchises. We use long-term, geometric measures to separate out those stocks with high, stable returns on capital.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

For an overall view across individual countries see Kindleberger, C.P. 7 But by late 1960s the long boom had lasted a long time and economists were talking about the end of business cycles. See Bronfenbrenner (1969) Is the Business Cycle Obsolete? References Adelman, F. and Adelman, I. (1959) ‘The dynamic properties of the Klein-Glodbeger Model’, Econometrica, XXVII, October. Allen, F. and Gale, D. (2003) ‘Asset price bubbles and monetary policy’, in Meghnad Desai and Yahia Said (eds), Global Governance and Financial Crises, Routledge, London. Financial crises and global governance 17 Baranzini, M. and Cencini, A. (1996) Inflation and Unemployment, Routledge, London. Barro, R. (1989) Modern Business Cycle Theory, Basil Blackwell, Oxford. Benhabib, J. (ed.) (1992) Cycles and Chaos in Economic Equilibrium, Princeton University Press, Princeton, NJ. Bronfenbrenner, M. (1969) Is the Business Cycle Obsolete?/based on a Conference of the Social Science Research Council Committee on Economic Stability, Wiley-Interscience, New York.

There were great efforts at measuring business cycles and economists got used to speaking of short – Kitchin – cycles around three years in length, ten-year – Juglar – cycles and the longer fifty years – Kondratieff – cycles. (For an early survey of cycle theories Haberler (1936), for cycles of different lengths and historical data Schumpeter (1940); the classic writings on cycles are covered in Gordon and Klein (1966). Cycles disappear from the literature in the 1960s.) In a Walrasian model, cycles cannot happen as the efficient markets are perpetually in equilibrium. Generating a fully endogenous theory of business cycles in a Walrasian context was a programme that Hayek took up in the early 1930s but abandoned later (Hayek 1933, 1939). More recently, the theory of Real Business Cycles has argued that cycles are caused by random shocks to technology and tastes in a Walrasian system which in absence of these shocks would be cycle free (Barro 1993).

Mitchell (1941), for example, writes (p. 74) when prosperity merges into crisis … heavy failures are likely to occur, and no one can tell what enterprises will be crippled by them. The one certainty is that the banks holding the paper of bankrupt firms will suffer delay and perhaps a serious loss on collection. In other words, panics are an integral part of the business cycle. Asset price bubbles and monetary policy 31 Gorton (1988) conducts an empirical study of the panics that occurred in the United States during the National Banking Era (1865–1914) to differentiate between the “sunspot” view and the business-cycle view of banking panics. He finds evidence which is consistent with the view that banking panics are related to the business cycle and which is difficult to reconcile with the notion of panics as “random” events. The five worst recessions were accompanied by panics. In all, panics occurred in 7 out of the 11 cycles. Using the liabilities of failed businesses as a leading economic indicator, Gorton finds that panics were systematic events: whenever this leading economic indicator reached a certain threshold, a panic ensued.


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, plutocrats, Plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Instead, let's look at the behavior of the major markets in more normal times. Shown nearby are idealized — idealized by averaging, not by imagination — representations of the behavior of the stocks and interest rates around business cycle peaks and troughs. Interest rates fall sharply as a recession matures; because the average post-World War 11 recession has lasted about nine months, you can say that short-term rates begin drop- WALL STREET financial markets and the business cycle 105 95 90 85 peaks -9 -6 -3 T +3 +6 +9 -9 -6 -3 P +3 +6 +9 These charts show the behavior of interest rates and stock prices around business cycle peaks and troughs, based on the average of nine U.S. business cycles between 1948 and 1995, with either the peak or trough month indexed to 100. "Bills" are three-month U.S. Treasury bills; "bonds" are long-term U.S. Treasury bonds (maturity greater than 10 years); and "stocks" are the Standard & Poor's 500 average, all as reported by the Federal Reserve.

These pages were a residue of another casualty of budget constraint, the Business Conditions Digest, snuffed in 1990; the BCD's yellow pages were folded into the Survey. (The BCD was origianlly known as the Business Cycle Digest, but in the optimistic days of the late 1960s, when it was thought the business cycle had been conquered by adept Keynesian management, the Cycle was changed to Conditions.) They join in death the Survey's "blue pages," another compendium of useful indicators, snuffed in 1994. No doubt, the Conference Board will do a fine job in assembling and distributing the indicators. But they apparently feel no sense of public duty in pricing their new service, Business Cycle Indicators; a year will go for $95 and up. A subscription to the Survey of Current Business, however, was $41 in 1996, and the journal also contains huge amounts of original information. 9.

On the Accuracy of Economic Observations (Princeton: Princeton University Press). Mueller, Dennis C. (1989). "Mergers: Causes, Effects, Policies," International Journal of Industrial Organizations!, pp. 1-10. Mullin, John (1993). "Emerging Equity Markets and the Global Economy," Federal Reserve Bank of New York Quarterly Review 18 (Summer), pp. 54-83. Mullineux, A.W. (1984) The Business Cycle After Keynes: A Contemporary Analysis (Toto-wa., N.J.: Barnes & Noble Books). — (1990). Business Cycles and Financial Crises (New York and London: Harvester WheatsheaO. Munnell, Alicia H., and Nicole Ernsberger (1987). "Pension Contributions and the Stock Market," New England Economic Review Novemher/Decemher, pp. 3-14. Munnell, Alicia H., Geoffrey M.B. Tootell, Lynn E. Browne, and James McEneaney (1996). "Mortgage Lending in Boston: Interpreting HMDA Data," American Economic Review 86 (March), pp. 25-53.


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

"Robert Solow", Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Certainly investment in consumer goods would expand, but increased expenditures for consumer goods would do little or nothing to construct a bridge, build a hospital, pay for a research program to cure cancer, or provide funds for a new invention or a new production process. According to business-cycle analysts, retail sales and other measures of current consumer spending are lagging indicators of economic activity. Almost all of the components of the U.S. Commerce Department's Index of Leading Economic Indicators are production and investment oriented, for example, contracts and orders for plant equipment, changes in manufacturing and trade inventories, changes in raw material prices, and the stock market, which represents long-term capital investment (Skousen 1990, 307-12). Typically in a business cycle, consumption starts declining after the recession has already started; similarly, consumer spending picks up after the economy begins its recovery stage.

As Paul Samuelson concludes, "The immiserization of the working class . . . simply never took place. As a prophet Marx was colossally unlucky and his system colossally useless" (1967, 622). 3. There is little evidence of increased concentration of industries in advanced capitalist societies, especially with global competition. 4. Socialist Utopian societies have not flourished, nor has the proletarian revolution inevitably occurred. 5. Despite business cycles and even an occasional great depression, capitalism appears to be flourishing as never before. Update: Marxists as Modern-Day Doomsdayers In The Communist Manifesto, Marx and Engels warned, "It is enough to mention the commercial crises that by their periodical return put on its trial, each time more threatening, the existence of the entire bourgeois society" (1964 [1848], 11-12). Following their leader's footsteps, modern-day Marxists are constantly predicting the collapse of capitalism, only to be rebuffed time and again.

Yet, entering a new century, capitalism is even more dynamic than ever before. The modern-day Marxists, always the pessimists, have been proved wrong again. The Curious Case of Nikolai Kondratieff One famous Russian economist to contradict the official Marxist prediction of capitalism's inevitable demise was Nikolai Kondratieff (1892-1938). In 1926, he delivered a paper before the prestigious Economic Institute in Moscow, making the case for a fifty- to sixty-year business cycle. Based on price and output trends since the 1780s, Kondratieff described two-and-a-half upswing and downswing "long wave" cycles of prosperity and depression. Kondratieff found no evidence of an irreversible collapse in capitalism; rather, a strong recovery always succeeded depression. In 1928, Kondratieff was removed from his position as head of Moscow's Business Conditions Institute and his thesis was denounced in the official Soviet encyclopedia (Solomou 1987, 60).


End the Fed by Ron Paul

affirmative action, Bernie Madoff, Bernie Sanders, Bretton Woods, business cycle, crony capitalism, currency manipulation / currency intervention, fiat currency, Fractional reserve banking, hiring and firing, housing crisis, illegal immigration, invisible hand, Khyber Pass, Long Term Capital Management, market bubble, means of production, moral hazard, Ponzi scheme, price mechanism, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, too big to fail, tulip mania, Y2K

There have been many consequences of the Fed that were unforeseen even by its architects. They might have imagined that the Fed would indeed help smooth out the business cycle, provided you think of the real problem of the cycle as its bust phase when credit contracts. The Fed can indeed provide liquidity in these times by a simple operation of printing more paper money to cover deposits. But if you think of the cycle as beginning in the boom phase—when money and credit are loose and lending soars to fund unsustainable projects—matters change substantially. In 1912, Ludwig von Mises wrote a book called The Theory of Money and Credit12 that was widely acclaimed all over Europe. In it he warned that the creation of central banks would worsen and spread business cycles rather than eliminate them. It works as follows. The central bank on a whim can reduce the interest rate that it charges member banks for loans.

But I assure you, especially in this post-meltdown world, that it is irresponsible, ineffective, and ultimately useless to have a serious economic debate without considering fundamental issues about money and its quality, as well as the Fed’s massive role in manipulating money to our economic ruin. What is the Fed and what does it do? To answer these questions, you can read books, study pamphlets issued by the Fed, or attend economics lectures at your local college. You can even consult the Fed’s comic books on its own Web site. 1 You will be told how the Fed serves to stabilize the business cycle, control inflation, maintain a solvent banking system, regulate the financial system, and more. Certainly, the Fed’s spokes-men claim that they do all this and do it well. I disagree on each point. After all is said and done, the Fed has one power that is unique to it alone: it enables the creation of money out of thin air. Sometimes it makes vast new amounts. Sometimes it makes lesser amounts.

Essentially you take away from the government the capacity to use financial trickery to expand without limit. It is the first step to restoring constitutional government. Without the Fed, the federal government would have to live within its means. It would still be too big and too intrusive, just like all state governments are today, but the outrageous empire at home and abroad would have to come to an end. There are other benefits as well, such as stopping the business cycle, ending inflation, building prosperity for all Americans, and putting an end to the corrupt collaboration between government and banks that virtually defines the operations of public policy in the post-meltdown era. Ending the Fed would put the American banking system on solid financial footing. The industry would thrive without the moral hazard of banks that are “too big to fail.” Its loan operations would take a more realistic account of risks, and the bank’s capital would not be put at risk in the service of politically driven priorities.


pages: 756 words: 120,818

The Levelling: What’s Next After Globalization by Michael O’sullivan

"Robert Solow", 3D printing, Airbnb, algorithmic trading, bank run, banking crisis, barriers to entry, Bernie Sanders, bitcoin, Black Swan, blockchain, Boris Johnson, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, capital controls, Celtic Tiger, central bank independence, cloud computing, continuation of politics by other means, corporate governance, credit crunch, cryptocurrency, deglobalization, deindustrialization, disruptive innovation, distributed ledger, Donald Trump, eurozone crisis, financial innovation, first-past-the-post, fixed income, Geoffrey West, Santa Fe Institute, Gini coefficient, global value chain, housing crisis, income inequality, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, pattern recognition, Peace of Westphalia, performance metric, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

The good ones, at least, will adapt their rhetoric to it: upturns will be carefully managed to channel animal spirits, whereas downturns are caused by wild speculators who need to be reined in. In seeking to understand business cycles, Minister Chidley might be interested to know that the NBER of the United States has a dedicated business cycle website.5 To noneconomists, this may seem like a very quirky, specialized undertaking, but the business cycle can govern our lives and can make or break political careers. The NBER has collected business cycle data going back to the 1850s and breaks business cycles into phases of expansion and contraction. Cycles have lasted for about five years on average (fifty-six months). Globalization has changed all that. The two business cycles that characterized this era of globalization (July 1990 to March 2000 and November 2001 to December 2007) are by a decent stretch two of the longest in economic history.

Compared to most other business cycles through history, this one has been odd and ugly. How Long Is a Cycle? The business cycle is a straightforward but boring economic concept. From the point of view of a politician, however, it lurks beneath many career successes and failures. Politicians elected at the beginning of a recovery can claim all the credit for it, and those elected at the start of a contraction struggle to distance themselves from its negative consequences. George H. W. Bush, for example, was elected president at the top of a long economic boom. As this gave way to recession in 1990, his 1988 pledge of “Read my lips, no new taxes” left him struggling politically, and he failed to win reelection. At times policy makers will feel they are masters of the business cycle, but most of the time they are simply its passengers.

What can often happen is that toward the later part of a long expansion, expectations rise that high levels of growth will persist for even longer. Bank managers, investors, and companies can become overconfident and can overinvest (often taking on debt to do so). Historically, shorter business cycles had the opposite effect: indebtedness was lower and more frequent, and recessions had the habit of clearing out imbalances, by which I mean, for instance, uneconomic loans, zombie companies (a company—state owned or private—that needs bailouts in order to survive), and asset bubbles. Business cycles, as the saying goes, don’t die of old age but, rather, are usually brought to an end by the consequences of imbalances, most often ignited by rising interest rates. Not only is the current business cycle very long by historical standards, but it is peculiarly marked by an unprecedented amount of monetary and fiscal stimulus internationally, in return for relatively low growth, meager investment, and slowing productivity, to the extent that nearly six years through this “expansion,” academics spoke of “lower for longer” and “secular stagflation.”6 The notion of lower growth for longer periods has, at least in the United States, been pushed to the sidelines by President Trump.


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

I concentrate on Schumpeter’s 1942 volume rather than his 1939 two-volume set, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process (London: McGraw Hill, 1939) because Business Cycles is much more a restatement of his earlier work than a reaction to contemporary developments. That is, except for one line, where he states that “there seems in fact to be an element of truth in the popular opinion that there must be help from outside of the business organism, from government action or some favorable chance or event for instance, if there is to be a recovery at all.” It remains, however, one line. Schumpeter, Business Cycles, 1:154. I thank Bill Janeway for drawing my attention to this aspect of Business Cycles. 112. Ibid. 132. 113. Ibid., 32. 114. Ibid.., 83. 115.

One1 of Joseph Schumpeter’s lasting contributions to economic thought was his concept of gales of “creative destruction” that sweep through the economy.2 Torn asunder by the entrepreneurial utilization of technology, continual organizational innovation, and the rigors of competition, businesses rise and fall, driving the business cycle over time. It is, then, hard to imagine a less Schumpeterian economy than Germany’s. Consider, for example, when some of Germany’s flagship companies, which are still with us today, were founded: BASF (chemicals), 1865; Krups (appliances), 1846; ThyssenKrupp (metalworks), 1891 and 1811; Daimler/Mercedes Benz (automotive), 1901 and 1926; Siemens (engineering), 1847, to name but a few. These firms have survived two world wars, occupation, partition, the Cold War, and reunification—let alone conglomeration and the ups and downs of the business cycle. Unlike in Schumpeter’s world of entrepreneurs and competitive small firms, these companies in many cases started as large-scale concerns made possible by the complex state and banking linkages typical of late-industrializing states.

Kahn asked, “If I went out tomorrow and bought a new overcoat, that would increase unemployment?” “Yes,” said Hayek, “but … it would take a very long mathematical argument to explain why.”41 By 1944, Hayek found himself similarly ignored, in semiretirement, writing on the dangers of socialism in his epic The Road to Serfdom. Hayek’s earlier Prices and Production, his Meisterwerk on business cycle theory, like Schumpeter’s 1939 Business Cycles, arrived dead at the presses. First ignored and then defeated in Europe, Austrian ideas survived in America, where their popularity has ebbed and flowed for nearly a century. Although battered and beaten-down by the Keynesian revolution after World War II, Austrian ideas never quite disappeared from the American scene. They staged something of a comeback in the 1970s when Hayek was awarded the Nobel Prize in economics and served as a popular justification for Reagan’s supply-side policies, but they disappeared again until the current crisis brought them back to the fore.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, market clearing, Martin Wolf, means of production, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

The British Classical economists of the so-called Currency School (David Ricardo, Lord Overtone, and others) demonstrated this in the middle of the nineteenth century. But it was the economists of the Austrian School of Economics, in particular Ludwig von Mises and Friedrich August von Hayek, who from 1912 to 1932 developed this insight into a complete theory of the business cycle. This theory is known today as the Austrian theory of the business cycle. Although it is probably the most compelling theory of economic fluctuations in modern times, it did not obtain a prominent place in the developing macroeconomic mainstream of the twentieth century. That mainstream was shaped by Keynesianism and later Monetarism, schools of thought that, despite their ideological differences, both embrace state-issued elastic money.

To allow unlimited inflationism, the time-honored alternative to state paper money, gold, had to be ostracized. Per executive order, Roosevelt confiscated all privately held gold in the United States and banned private ownership of it. In what should have been the shining hour of the Austrian theory, as it was by the early 1930s not only practically uncontested in the realm of business cycle theory but had also proven useful for predicting and explaining an economic disaster, it was instead ignored. By 1933, the major contributions from Mises and Hayek on the origins of business cycles had been published and the theory had found its way into the English-speaking world.36 Yet, it had practically no impact on policy. The political mainstream now embraced state action, mistrusted the market, and harked back to old mercantilist ideas, which found a popular restatement in the 1930s in the works of John Maynard Keynes.

It is also evident that the recession will not go on forever, as is often feared. There is no reason to assume that the recessionary forces will somehow feed on themselves and lead to ever worsening conditions. The recession will end when structures are again more closely aligned with the preferences of consumers. Policy Implications of the Austrian Theory As mentioned previously, what we describe here is a business cycle theory, usually called the Austrian theory of the business cycle. I give a stylized and compressed version of the theory, which should be sufficient for our purposes but necessarily neglects some of the finer points of the theory. This theory is called the Austrian theory because it was first formulated by Viennese economists working in the methodological tradition of Carl Menger (1840–1921), who elaborated the principles of what became the Austrian School of Economics in the latter part of the nineteenth century.8 Building on Menger’s methodological foundation, Eugen von Boehm-Bawerk (1851–1914) made crucial advances in the theory of capital and interest,9 and Ludwig von Mises (1881–1973), who became the leading intellectual light of the Austrian School in the twentieth century, did seminal work in several areas, among them notably the theory of money.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

"Robert Solow", 3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

There were short lapses from full employment, but these were quickly corrected thanks to the “built-in” stabilizers – unemployment compensation, social security, old age pensions – which kept demand up even when unemployment was rising. The result of the continuous full employment was that any interest in business cycles disappeared from academia just 20 years after Schumpeter had written his two-volume classic, Business Cycles. The view that business cycles of the prewar type were a thing of the past gained popularity. There would be small recessions which would be short-lived, but not cycles which the policy-makers could not control. In 1970, a collection of articles came out with the title Is the Business Cycle Obsolete?7 It seemed prophetic, though it proved to be hasty. During the 1950s and even into the 1960s, Keynesian economics informed the economic thinking of academics, especially of the generation born since 1920.

The trend and cycles in the share of wages turn out to be one of the keys to understanding the Great Recession. Riding the Waves with Eugen Slutsky If you plot the course of income or sales or investment, it will look like a wave. The literature on business cycles often uses the term long waves to describe the data. There are often systematic reasons why there are cycles. Indeed, as we’ve seen, Marx, Wicksell and Schumpeter among others looked for explanations of the cycles. At Columbia University in the immediate aftermath of World War I, Wesley Clair Mitchell (1874–1948) launched an extensive program of measuring business cycles. He chose a variety of time series – rail shipments, bank loans, agricultural output and prices, sales and inventories, etc. For each variable, he wanted to locate the trough and the peak and then measure the length of the cycle from peak to peak or trough to trough.

., Evidence to the Committee on the Bank of England Charter, August 2, 1832. In Selection of Reports and Papers of the House of Commons: Banking – Currency, vol. 30, p. 467, para. 5758. House of Commons, 1832. Aubrey, T., Profiting from Monetary Policy: Investing through the Business Cycle. Palgrave Macmillan, London, 2013. Bellofiore, R. and G. Vertova, eds, The Great Recession and the Contradictions of Contemporary Capitalism. Edward Elgar, Cheltenham, 2014. Black, F. and M. Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, 81.3 (May–June 1973): 637–54. Bronfenbrenner, M., ed., Is the Business Cycle Obsolete? Wiley, New York, 1970. Corry, B., Money, Saving and Investment in English Economics 1800–1850. Macmillan, London, 1962. Crosland, C. A. R., The Future of Socialism. Jonathan Cape, London, 1956. Darling, A., Back from the Brink: 1000 Days at Number 11.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

The Lucas Critique and the introduction of Rational Expectations (following a seminal paper by Muth in 1961), led to demise of neo-Keynesian models. In its stead, DSGE models came into being. The first DSGE models were known as Real Business Cycle (RBC) models were introduced in the early 1980’s and were based on the concepts detailed by Finn E. Kydland and Edward C. Prescott in 1982. RBC models were based on the assumptions of perfect competition on the goods and labor markets and flexible prices and wages, and increasingly gained traction thanks to their success in matching some business cycle patterns (Slanicay, 2014). These models saw business cycle fluctuations as the efficient response to exogenous changes which implied that business cycles were created by ‘real’ forces and that productivity shocks were created by technological progress. But in spite of the theoretical underpinning that technology was the main source of business fluctuations, after a period of use, the RBC model began to lose favour with academics and policy makers.

This was a period during which the relative stability of the economy allowed for policy approaches that could only rely in the use of monetary policy (i.e.: the rate of interest). This was because the Chicago led thought considered that all that was needed to face business cycles and/or recessive trends was an active monetary policy. Some thought that not even that was needed since they believed that free market adjustment will always find the way out (Garcia, 2011). This belief was also shared by the new‐neo‐Keynesians, who believed that fiscal policy was not needed to deal with business cycle or recessive trends. Hence both schools of thought converged in the idea that all that was needed to avert the risks of business cycles or recessive trends was a clever monetary policy guided by a monetary rule (García,2010). The result was the gradual crowding out of fiscal policy and even less attention to fiscal policy alternatives.

The authors state that their model allows for central bank digital currency to be held by the non-bank private sector (which is not the case today) and unlike regular cash, this digital currency is interest-bearing. As a result, it can compete with endogenously created commercial bank-issued money. The New Keynesian model is the most popular alternative to the real business cycle theory among mainstream economists and policymakers. Whereas the real business cycle model features monetary neutrality and emphasizes that there should be no active stabilization policy by governments, the New Keynesian model builds in friction that generates monetary non-neutrality and gives rise to a welfare justification for activist economic policies (Sims, 2012) 11 124 Chapter 3 ■ Innovating Capitalism Having created the digital monetary framework based on these assumptions, the next question was the quantity of digital currency to be issued.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

In response to the observation that there was no change in behavior over the business cycle, proponents of the tighter monetary policy explanation argued that the earlier work looking at the business cycle had not included measures of inflation expectations. They argued that it was the anticipation of low and stable future inflation that was the main conduit through which tighter monetary policy had lowered inflation and reduced output fluctuations. Under this view the surprise was less that a different monetary policy altered the business cycle, but that it could simultaneously improve outcomes for growth and inflation. It was already well established that the conduct of monetary policy could affect the business cycle. Indeed, a growing body of evidence measured how much the Federal Reserve and other central banks hiked or lowered policy rates in response to higher or lower inflation and growth.

* * * The Way We Were The pre-crisis macroeconomic orthodoxy had a precise and relatively narrow view of policy challenges. It focused on business cycle fluctuations around a slowly evolving path for underlying output (underlying output was determined by technology and was thus not part of the analysis). These fluctuations were primarily ascribed to wages and prices being sticky in the sense that they responded slowly to changes in economic slack. The challenge for policymakers was to minimize these temporary deviations from a slowly moving baseline. The central bank of each country was viewed as the main institution responsible for responding to such business cycle fluctuations. Its policies were ideally guided by an inflation target, since an overheating economy would generate upward inflationary pressures while an economy with too much slack would exhibit downward inflationary pressures.

For example, there appears to be an increasing consensus that financial stability and macroeconomic stability should be treated as separate objectives and assigned to separate policies—macro-prudential policies for financial risks and monetary policy for the business cycle. This reflects an evolving belief that monetary policy is too blunt an instrument to support financial stability, which is better left to more focused and specialized policies and policymakers.2 Hence, while macroprudential policies have been elevated to new macroeconomic instrument, the basic pre-crisis assignment that financial regulators should take care of financial risks and that monetary policymakers should focus on stabilizing the business cycle has been largely maintained. Equally strikingly, central banks continue to use inflation targets as their basic framework, even though in the run-up to the crisis it was asset prices and trade deficits rather than inflation that most clearly pointed to overheating in the United States and the Euro area periphery.


pages: 353 words: 88,376

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, fixed income, implied volatility, index fund, intangible asset, interest rate swap, inventory management, London Interbank Offered Rate, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

When the trend is up, it’s a bull market; when the trend is down, it’s a bear market. Related Terms: • Bear Market • Fundamental Analysis • Uptrend • Downtrend • January Barometer Business Cycle What Does Business Cycle Mean? The recurring and fluctuating levels of economic activity that an economy experiences over a long period; the five business cycles are growth (expansion), peak, recession (contraction), trough, and recovery. At one time business cycles were thought to occur on a regular and predictable basis, but today they are thought of as being more irregular, varying in frequency, magnitude, and duration. Investopedia explains Business Cycle Since World War II, most business cycles have lasted three to five years from peak to peak. The average duration of an expansion has been 44.8 months; the average duration of a recession has been 11 months.

The best examples of gearing ratios include the debt-to-equity ratio (total debt/total equity), times interest earned (EBIT/total interest), equity ratio (equity/assets), and debt ratio (total debt /total assets). A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because it must continue to service its debt regardless of how bad sales are. A larger proportion of equity provides a cushion and is seen as a measure of financial strength. Related Terms: • Business Cycle • Debt/Equity Ratio • Leverage • Debt Ratio • Equity Generally Accepted Accounting Principles (GAAP) What Does Generally Accepted Accounting Principles (GAAP) Mean? The overriding accounting principles, standards, and procedures that companies follow when compiling their financial statements.

Technically, a recession is said to have occurred when there have been two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP). Investopedia explains Recession Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. A recession generally lasts from 6 to 18 months. Interest rates usually fall are lowered in recessionary times to stimulate the economy by offering cheap rates at which to borrow money. Related Terms: • Bear Market • Consumer Price Index—CPI • Gross Domestic Product—GDP • Business Cycle • Market Economy Record Date What Does Record Date Mean? The date established by an issuer of a security for the purpose of determining the holders who are entitled to receive a dividend or distribution. Investopedia explains Record Date On the record date, a company checks its records to see who its shareholders or “holders of record” are.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

"Robert Solow", affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, plutocrats, Plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

Occasionally we have used statistics, but for the most part we have relied on history and on stories. We believe that there is an easy and simple test to prove that what we are saying is correct—not only correct, but also more correct than the modeling that fails to deal with the three blank questions in current mainstream macroeconomics. We think that our description of how the economy operates fits almost any business cycle. If we take the most recent business cycle, starting in 2001 and continuing to the present day, we think that our description of the economy, with animal spirits at center stage, gives a remarkably good rendition of what has actually occurred. Let’s review the current U.S. economic cycle (we could do this as well for other countries) and see how the themes in this book have played themselves out. The role of animal spirits is central to our description.

As we write this concluding chapter we do not know the extent to which the problems of the various non-bank banks—the investment houses and the hedge funds, all but unsupervised and holding literally trillions of dollars of assets and liabilities—will contribute to this problem.9 This is the story of our time. It is the story of the business cycle that began in 2001. When the current downturn will end, we do not know. But the point of our book, and the test of our theory, is that we could have told this same story, or a similar story, using our description of the animal spirits and how they operate, to describe almost any other business cycle. For the United States, we could have gone back to the collapse of 1837, with its land speculation and state bank collapses, and told a similar story. Or we could have gone back to the Great Depression; or to the recession of 1991, when the challenger Bill Clinton accused the incumbent George H.

FOURTEEN Conclusion Notes References Index Preface to the Paperback Edition * * * The worldwide recession that was raging just as the hardcover edition of this book was published in February 2009 seems to many observers, as of this writing in October 2009, to be coming to an abrupt end. There are definite signs of improvement. These observers could be right. Maybe this is just another recession that will eventually be forgotten among the annals of business-cycle history. But the theory that we lay out in this book gives us cause to worry that we may be in a sick economy over much of the world for years to come. Even the stirring success stories of the past decade or so in the developing world, notably China and India, may see their economic growth reduced to a disappointing level. We think this because we have an unusual view of the economy, a view that animal spirits, as we define them in the Introduction, drive almost everything.


The Future of Money by Bernard Lietaer

agricultural Revolution, banks create money, barriers to entry, Bretton Woods, business cycle, clean water, complexity theory, corporate raider, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, Lao Tzu, Mahatma Gandhi, means of production, microcredit, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, reserve currency, Ronald Reagan, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, Thomas Davenport, trade route, transaction costs, trickle-down economics, working poor

Fisher's equa80n therefore shows that G, the total goods and services exchanged, would necessarily increase with the introduction of a GRC, thereby improving overall economic wall-being. Last but rot least, the use of a GRC in complement with conventional national currencies would automatically tend to counteract me prevalent business cycle, thereby improving me overall stability and predictability of the world's economic system. This is so because there is always an excess of raw materials when the business cycle is weakening (weakening of raw material picas is one of the key indicators of a recession). Corporations would therefore tend at this point of the business cycle to sell more raw materials for storage to GRC Inc., which would pay for them with Terra. The Terra would be used immediately by these corporations to pay their suppliers, so as to avoid me demurrage charges. These suppliers in turn would have a similar incentive to pass on the Terra as medium of payment.

Both Keynes and Friedman have shown that with conventional money, the velocity of money is pro-cyclical (each for different masons: the former on me basis of changes in interest rates, the lathe on the basis of the predominant role of Friedman's 'Permanent Revenue' in determining the demand for money). The fact that the quantity of Terra in circulation would be counter-cyclical to me business cycle would therefore tend to counteract the pro-cyclical nature of the conventional money system. In summary, the introduction of a GRC would tend automatically to dampen the business cycle by providing additional monetary liquidity in counter-cycle with the business cycle relating to the conventional national currencies. Theoretical and practical soundness The box on 'Economic tech talk' synthesises some key effects of the Terra for those who prefer a purely economic language. Conceptually, the Terra is the combination of two ideas: a currency backed by a basket of raw materials which has been proposed by many top economists of every generation, including the contemporary Economic Nobel Prize - winner Jan Tinbergen on the one side; and sustainability fees as originally proposed by Silvio Gesell under the name of demurrage charges on the other.

Of course, a lot of new jobs are being created outside these corporations, but they usually do not measure up in terms of income level or security that people were used to and had grown to expect. What is important to realise is that these 'strategic layoffs' are of a totally different nature from the traditional cyclical layoffs. It was considered normal for example that factory workers would be let go whenever inventories of finished goods piled up as the business cycle moved into low gear. They would also be re-employed as soon as those inventories were absorbed and the good days of the cycle returned. But with strategic layoffs, there is no reason to expect that the business cycle will reverse the trend. What is going is gone forever. Growth without increased employment is not a forecast; it is an established fact. William Greider's statistic is worth repeating: the world's 500 largest corporations make and sell seven times more goods and services than 20 years ago, but have managed simultaneously to reduce their overall workforce.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Rockefeller–funded experiment in scientific education that opened its doors in 1892. Veblen was a lowly instructor in an economics department dominated by neoclassicists. But he made a big impression on Mitchell, who stayed on at Chicago for his Ph.D., then went on to become the nation’s foremost authority on the business cycle. Mitchell subscribed neither to Roger Babson’s simplistic action-begets-reaction formula nor to Fisher’s belief that the “dance of the dollar” explained all fluctuations. He seemed to subscribe to no theory at all. Instead, he saw the business cycle as a natural part of the workings of capitalism and hoped that close examination of the data would enable him to understand it better. Mitchell’s commitment to the drudgery-filled work of assembling better economic evidence so impressed Irving Fisher that he tried to lure the younger scholar to Yale, inviting the Mitchells up to New Haven one weekend in 1912 and throwing a dinner party in their honor.

When young Austrian Friedrich Hayek arrived in the United States for the first time in 1923, he was shocked to discover that his American peers no longer cared about Fisher or any of the country’s other neoclassical greats. “The one name by which the eager young men swore was the only one I had not known…Wesley Clair Mitchell,” he later wrote. “Indeed business cycles and institutionalism were the two main topics of discussion.”11 Fred Macaulay, Mitchell’s student at Columbia and one of his first hires at NBER, was said to have “worshiped Mitchell as though he were a god.”12 When the great crash and the Depression came, the moment seemed ripe for Mitchell and the institutionalists to seize control of American economics once and for all. The business cycle had asserted itself in all its ferociousness. Irving Fisher’s talk of a “permanently high plateau” for stock prices proved to be nonsense, and near-complete shutdowns of the financial system—as occurred in the early 1930s—certainly weren’t covered in Alfred Marshall’s standard neoclassical textbook.

The phrase “random walk” appears to have been coined in 1905, in an exchange in the letters pages of the English journal Nature concerning the mathematical description of the meanderings of a hypothetical drunkard.34 Most early studies of economic data had been a search not for drunken meanderings but for recognizable patterns and, not surprisingly, many were found. The purported link between the British business cycle and sunspots was one. Another famous example came in the mid-1920s when the young founder of Moscow’s Business Cycle Institute, Nikolai Kondratiev, proposed that economic activity moved in half-century-long “waves.”35 As the study of statistics progressed and the mathematics of random processes such as Brownian motion became more widely understood, those on the frontier of this work began to question these apparent cycles. In his November 1925 presidential address to Great Britain’s Royal Statistical Society, Cambridge professor George Udny Yule demonstrated that random Brownian motion could, with a little tweaking, produce dramatic patterns that didn’t look random at all.36 A few years later, a mathematician working for Kondratiev in Moscow penned what came to be seen as the definitive debunking of the pattern finders.


Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business cycle, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, different worldview, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, liberation theology, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

THE PROCYCLICAL MONEY CREATION PROCESS The economy grows or contracts in a series of repetitive expansions (booms) and contractions (busts). Referred to as the business cycle, this pattern comprises an interlude of escalation of above-average economic growth, reaching a peak, followed by a contraction to below-average economic growth, potentially all the way to a depression at the low point. Then a new business cycle begins with a new swell of growth, and the pattern repeats itself. While business cycles are recurrent, each is unique in longevity, depth of dip, and height of peak. 52 SCARCITY The way money is created, by bank debt, tends to amplify both the ups and the downs of the business cycle. Banks tend to have a herd instinct when making credit available or restricting it for particular countries or industries. When business is good, banks tend to be generous in terms of credit availability, thereby amplifying a good period into a potentially inflationary boom period.

See also Terra Trade Reference Currency Beauty, 152, 201, 223 Bell Telephone, 96 BerkShares, 75, 89– 91, 90 Bezant, 24, 65, 227n2, 230n9 251 252 INDEX Bike repair, 84 Biology, 32 Biomimicry, 102 Bioregion, 86 Biowaste, 142 Blaengarw, 159–161, 161 Blame, 216 BONUS, 170–171 Boom. See Business cycle Boulder Gaian, 113 Brazilian Network of Community Development Banks (CDB), 107 Bridge financing, 121 Bristol Credit Union, 114 Bristol Pound (BP), 114–115 Brixton pound, 75 Brünningsche Notverordnungen, 179 Bubble, 33 Bullion, 27, 113. See also Gold standard Burden of expectations, 19 Bureaucracy, 108, 126–127 Burnout, 194 Business cycle, 51; bank debt amplifying, 52; Terra and, 134 Business-to-business system, 5 Bust. See Business cycle Bus token, 141–143 Butterfly effect, 31 Capitalism, 4, 22. See also Competition Capivari, 109 Carbon-backed currency, 116, 137, 201 Carbon premium exchange (CPX), 116–117 Carebank, 84– 85 Cash crunch, 148–149 Cell phone. See Mobile phone Central bank: bank debt and, 2, 40– 41; Brazil, 107; business cycle and, 52; Swedish, 25–26, 35– 36 CEO turnover, 217 Chance, 31– 32 Chaord, 192 Chaos, 31 Charity, 150 Chicago Plan, 3, 69–71, 231n15, 231n16 Chicago School of Economics, 35 Chiemgauer, 74–75, 87– 89, 88 Child welfare, 80 Civic, 146–148; in Mae Hong Son, 205; nonprofits and, 162 Civil society, 224 Civil unrest, 145–146, 181–182, 192–193 Class, 18; bridging, 83; investing, 193–194; in krama, 190; merchant, 2; middle, 2, 50, 75, 216; underclass, 216; upper, 29, 50.

Central banks attempt to offset these fluctuations by giving countercyclical interest rate signals, meaning that in a downturning economy, interest rates are cut. The counteractions, however, usually are not very effective. Furthermore, the capacity of central banks to intervene in monetary markets has been significantly reduced in deregulated financial markets. Consequently, despite their efforts, the collective actions of the banking system tend to exacerbate the business cycle in both boom and bust directions. WHAT’S THE BOTTOM LINE? Interest is having a devastating impact on life as we know it. For example, there’s the Depression of the late 1930s; Japan since 1990; and the developments in the United States leading to the 2008 financial crisis.20 They were all generated by asset bubbles, and when those asset priced bubbles popped, huge numbers of businesses and banks failed.


pages: 287 words: 44,739

Guide to business modelling by John Tennent, Graham Friend, Economist Group

business cycle, correlation coefficient, discounted cash flows, double entry bookkeeping, G4S, intangible asset, iterative process, purchasing power parity, RAND corporation, shareholder value, the market place, time value of money

However, Gross domestic product 71 many years of observation have revealed that gdp growth rates do not change dramatically from year to year and that they generally follow a cyclical pattern – sometimes described as the business cycle. These two observations can be used to produce a simple forecast for gdp growth and gdp. The approach used assumes an average underlying gdp growth rate that has a linear trend in either a positive or a negative direction. The actual rate of growth in any one year, however, will depend on the position within the business cycle. The business cycle is modelled as a sine curve where assumptions entered by the user determine the length and amplitude of the business cycle. The use of a sine curve represents a simplifying assumption, as business cycles do not usually exhibit a constant cyclical pattern. Forecasting gdp is useful as it provides a building block for forecasting imports and exports (which can be expressed as a percentage of gdp) and for providing an indicator of economic prosperity.

The expected behaviour of gdp growth is modelled as a sine curve and is defined by the user inputs below. This example assumes a five-year business cycle. The number of years for a complete business cycle (cell E5). The stage of the business cycle for the current level of gdp, that is, 23,000 (cell E6). A figure of 25% indicates a start point at the top of the cycle; a figure of 75% implies a start point at the bottom of the cycle. It is assumed that gdp of 23,000 is at the top of the cycle, which is represented by an assumption of 25%. The size of the variations during the cycle (cell E7). This represents the difference between the highest and lowest points of the cycle. The underlying growth rate of gdp (cell E8). This represents the average growth rate over the length of the business cycle. The amount each year by which the underlying growth rate changes (cell E9).

The workings have been broken down into a number of stages: Rows 4, 5 and 6 are intermediate steps in producing the gdp growth rate that is calculated in row 8. Row 4 determines the stage of the business cycle that will help determine the gdp growth rate. Row 5 divides the full amplitude of the business cycle in half. Row 6 adjusts the average growth rate for the trend in the average growth rate using a compounding calculation. Rows 4 to 6 are combined in row 8 to produce the gdp growth rate. The adjusted growth rate of row 6 is altered up or down by the multiplication of the position within the business cycle (row 4) and half of the amplitude (row 5). The resulting gdp growth rate is then used to generate the final result for gdp in absolute terms in row 9. Chart 9.2 GDP workings spreadsheet The row headings in column A should be created first.


pages: 120 words: 33,892

The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, business cycle, cognitive dissonance, corporate governance, corporate raider, Jeff Bezos, Paul Graham, Peter Thiel, Richard Thaler, shareholder value, Tim Cook: Apple

For a business to be worth more than its invested capital, it must maintain a profit greater than the market requires. In our earlier example, the market required 10 percent. For most businesses, high profits aren’t sustainable because they attract competitors. While they may earn more over a short time, most businesses will only earn a market return—say 10 percent—on average over the full business cycle. Recall our earlier drawing of the business cycle: Business Cycle: High Returns Mean Revert Down This, says Buffett, is why the moat is so important to the business:32 A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer (GEICO, Costco) or possessing a powerful worldwide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.

Why buy an undervalued stock with a seemingly bad business? Because the markets are ruled by a powerful force known as mean reversion: the idea that things go back toward normal. Mean reversion pushes up undervalued stocks. And it pulls down expensive stocks. It pulls down fast-growing, profitable businesses, and it pushes up shrinking loss-makers. It works on stock markets, industries, and whole economies. It is the business cycle: the boom after the bust and the bust after the boom. The best investors know this. They expect the turn in a stock’s fortunes. While the crowd imagines the trend continues forever, deep-value investors and contrarians zig before it turns. Mean reversion has two important consequences for investors: 1.Undervalued, out-of-favor stocks tend to beat the market. Glamourous, expensive stocks don’t. 2.Fast-growing businesses tend to slow down.

Mean Reversion: Things Go Back Toward Normal Mean reversion pushes up the prices of undervalued stocks, and it pulls down the prices of expensive stocks. It returns fast-growing and high-profit businesses to earth, and it points business with falling earnings or growing losses back to the heavens. It works on stock markets, industries, and whole economies. We know it as the booms and busts of the business cycle or the peaks and troughs of the stock market. Extrapolation: We Find the Trend and Extrapolate It Mean reversion is the expected outcome. But we don’t expect mean reversion. Instead, our instinct is to find a trend and extrapolate it. We think it will always be winter for some stocks and summer for others. Instead, fall follows summer, and spring follows winter. Eventually. This is the secret to contrarian investing: the turns are hidden.


pages: 446 words: 117,660

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, market bubble, market clearing, market fundamentalism, means of production, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, working-age population

Moreover, recessions and recoveries depend far more on the Federal Reserve than on the administration in power, and happen to Republicans and Democrats alike. That is why a sensible assessment of economic trends involves comparing business cycle peaks or, even better, asking what has happened to the level of income associated with any given unemployment rate. It is therefore ironic that supply-side ideologues, who originally crusaded against the traditional Keynesian focus on the business cycle, now rest their claims for success entirely on the business cycle recovery from 1982 to 1989. But of course they must, for their program failed to produce any acceleration in long-term growth. The rise in median income from 1982 to 1989, Robert Bartley’s “seven fat years,” represented almost entirely a transitory business cycle recovery, which reached its inevitable limit at a level only 4 percent above the 1979 peak. And the subsequent recession, which is no more George Bush’s fault than the 1980 slump was Jimmy Carter’s, has probably dropped median income back to within less than 4 percent above the 1980 level.

In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation or deflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion. By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable.

THE CONSERVATIVE RESPONSE 2: TAKING CREDIT FOR GROWTH The second line of conservative defense has become a familiar one: they claim that the growth record of the Reagan years shows that supply-side policies produce gains for everyone, and that it is destructive to worry about or even to notice the distribution of income. Look again at Figure 3. It is clear that from the recession year of 1982 to the business cycle peak in 1989, median income rose substantially (12.5 percent, versus 16.8 percent for average income). If you use these years as the basis of comparison, the lag of median behind average income doesn’t look very important. The question is whether these are really the right years to compare. If there is one really solid contribution of macroeconomic theory to human knowledge, it is the distinction between the business cycle and long-term growth. Long-term growth is achieved by expanding the economy’s productive capacity; recessions and recoveries represent fluctuations in the degree to which that capacity is being utilized.


pages: 358 words: 119,272

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Albert Einstein, asset allocation, banking crisis, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, floating exchange rates, Fractional reserve banking, full employment, hindsight bias, Kickstarter, Long Term Capital Management, market bubble, mortgage tax deduction, Myron Scholes, new economy, oil shock, price stability, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

Between 1921 and 1982, the US monetary system underwent radical change with the final abandonment of any form of fixed exchange rate. One would expect adjustments in internal pricing to play a more important role in periods when the exchange rate is fixed. In this environment, internal price adjustments, given the restriction on exchange-rate adjustments, play a crucial role in driving the business cycle. Similarly, one would expect internal price alterations to be less important in the business cycle as the US moved towards the freely flexible currency. Whatever the truth of this for the economy, price changes still imparted important information for the equity investor in 1982, despite the change in the monetary framework. Despite the removal of the external anchor for monetary policy, the lessons from 1921, 1932 and 1949 remain valid in this one area where they are most likely to have been undermined by structural change.

From November 2005 to the peak of the US equity market in October 2007 inflation did rise, if not by much, but the price of the 10-year US government bond declined and the yield rose from 4.5% to 5.3%. The Fed Funds rate, the policy interest rate set by the US Federal reserve, rose steadily from 4.0% in November 2005 to 5.25% by September 2007. The first cut in the Fed Funds rate came in September 2007 and the business cycle peaked in December 2007. So, as forecast in the 2005 edition, the bear market did commence when inflation and bond yields had risen, the Fed had begun to cut interest rates and a recession had begun. This had all happened by the end of 2007 and a vicious bear market developed that was not to end until March 2009. Looking back, the greatest surprise was that the rise in inflation, bond yields and policy interest rates necessary to trigger the recession and equity bear market were remarkably low by historic standards.

[12] Price stability & the bear A phrase began to beat in my ears with a sort of heady excitement: ‘There are only the pursued, the pursuing, the busy, and the tired.’ F Scott Fitzgerald, The Great Gatsby In the summer of 1921 bullish forecasts by the WSJ, businessmen and government officials proved accurate. So what was the secret of success for those who proclaimed the bottom of the business cycle and the end of the bear market in stocks. One recurring piece of evidence cited by these commentators augured well for the end of the business contraction - the increasing stability of prices. Some of their more bullish declarations were: ‘The accumulated evidences of stabilisation at lower levels of such things as copper, cotton, wool, silk, hides and grain.’ ‘Prices in some lines apparently reaching a condition of greater stability.’


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

If, for example, business confidence drops and investment falls, the state can anticipate the multiplier effect this will cause by increasing its own spending or by cutting interest rates, making borrowing cheaper. If, on the other hand, businesses are investing too much, leading to inflation, the state can cut spending or raise interest rates to mute the upward swing of the business cycle. Managing the business cycle also required reining in the influence of finance, because lending and investment are also pro-cyclical: they rise during the good times and fall during the bad times. If the role of government was to lessen the ups and downs of the business cycle, it must properly regulate finance, which so often exacerbated these ups and downs. This kind of Keynesian economic management had a significant influence on economic policy in the post-war period. The destruction of the war, the increasing size of the state, and the arrival of Bretton Woods led to something of a rebalancing in the power of labour relative to capital within the states of the global North.9 The rising political power of domestic labour movements led to the widespread take up of Keynes’ ideas, which were, after all, aimed at preventing recessions and unemployment.

The long and slow decline of the UK’s manufacturing sector, which invests more in fixed capital than the services sector, also contributed. Falling pay, rising inequality, and low investment threatened to recreate the conditions that preceded the Great Depression. Keynes and others argued that the best way to combat the low-wage, low-investment, low-demand doom-loop was for the government to intervene at strategic points to curb the twists and turns of the business cycle. They would signal their willingness to do this by committing to maintaining full employment, whatever the stage of the business cycle. If unemployment was rising, the state would step in to pick up the slack — either by directing increasing spending or cutting interest rates to boost investment in the private sector. The problem, as outlined in Chapter one, was that this model of growth gave workers more power. Thatcher’s goal was to get back to a time when “the markets” — i.e. the bosses — were in control; a time when workers could be traded by businesses like any other input to production, rather than causing trouble by demanding bosses treat them like human beings.

This kind of uncertainty marks business’ behaviour even more than consumers’ and affects their investment decisions. If businesses’ confidence about the future turns, then they are likely to stop investing. These lower levels of investment will result in lower revenues for suppliers, who may have to lay people off, who will reduce their spending, leading to a fall in economic activity. This kind of self-reinforcing cycle of expectations is what gives rise to the business cycle: the ups and downs of the economy through time. It also shows why, over the short term, Say’s law doesn’t hold — if businesses lack confidence in future economic growth, they may choose not to spend even if they can afford to do so. And as Keynes famously stated, “in the long run we are all dead”. But Keynes’ didn’t stop with this theoretical innovation, he also offered solutions to policymakers.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

All monetary investigations, he wrote, ‘are ultimately concerned with creating and maintaining a monetary system which is reliable and elastic, in other words a medium of exchange whose purchasing power in relation to commodities changes either not at all or only very slowly in either direction’.16 Wicksell also identified himself as a quantity theorist, and agreed with Fisher about the QTM as applied to a purely cash economy – one where the only money in circulation is notes and coins. However, money in an economy with a developed banking system is mainly created by the banks, and it is disturbances to the credit system – to the supply of, and demand for, loans – not exogenous money shocks, which give rise to the business cycle. The business cycle is a ‘credit cycle’. The banks have a double role in Wicksell’s model. On the one hand they are loan intermediaries between the savings of households and the investments of business. But they also supply credit to the business sector. The ‘circular flow’ thus consists of savings and credit, both flowing in and out of the banks. Wicksell’s circular flow displays the now standard macroeconomic identity: Y=C+I S=Y−C S=I 67 H i s t ory of E c onom ic T houg h t Figure 5.

As Thomas Sargent quipped: ‘All agents inside the model, the econometrician, and God share the same model.’65 Dynamic Stochastic General Equilibrium models (DSGE) Like rational expectations, DSGE modelling takes root in New Classical economics, where the works of Lucas (1975), Kydland and Prescott (1982), and Long and Plosser (1983) were most prominent. The earlier DSGE models were pure Real Business Cycle (RBC) models, i.e. models that attempted to explain business cycles in terms of real productivity or consumption shocks, abstracting from money. The logic behind RBC models is clear. If money cannot affect real variables (because of QTM and rational expectations), the source of any disturbance to the real economy must be non-monetary; that is, business fluctuations must be caused by ‘real’ unanticipated shocks. (Notice the use of the word ‘shock’.)

One may feel that insistence on the need for short-run pain (e.g. austerity) for the sake of long-run gain, when the short-run can last decades and the long-run may never happen, testifies to a refined intellectual sadism. I V. C u r r e nc y Sc hool v e r sus Ba n k i ng Sc hool The second of the grand monetary discussions of the 1800s was really a continuation of the first, but this time in the context of the restored gold standard and a business cycle connected with railway speculation. The Currency School, led by Lord Overstone, George Norman and Robert Torrens, expanded on the arguments of the Bullionists. While the Bullionists regarded convertibility into gold as a sufficient safeguard against the over-issue of notes, the Currency School argued that the drain of gold from the central bank wouldn’t immediately curtail issue of credit by the country banks, who were not subject to specie reserve requirements. 25 The Bank of England had to have control over the whole note issue in order for domestic currency to behave like a metallic currency.


Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher

business climate, business cycle, buy and hold, El Camino Real, estate planning, fixed income, index fund, market bubble, market fundamentalism, profit motive, RAND corporation, the market place, transaction costs

However, he had then better have a somewhat greater degree of patience for it will take him longer to make this money and percentage-wise it will be a considerably smaller profit on his original investment. Does this mean that if a person has some money to invest he should completely ignore what the future trend of the business cycle may be and invest 100 per cent of this fund the moment he has found the right stocks, as defined in Chapter Three, and located a good buying point, as indicated in this chapter? A depression might strike right after he has made his investment. Since a decline of 40 to 50 per cent from its peak is not at all uncommon for even the best stock in a normal business depression, is not completely ignoring the business cycle rather a risky policy? I think this risk may be taken in stride by the investor who, for a considerable period of time, has already had the bulk of his stocks placed in well-chosen situations.

In the event that such a record had not been attained, at least all of an investor's assets would not be committed before he had had a warning signal to revise his investment technique or to get someone else to handle such matters for him. All types of common stock investors might well keep one basic thought in mind; otherwise the financial community's constant worry about and preoccupation with the danger of downswings in the business cycle will paralyze much worthwhile investment action. This thought is that here in the mid-twentieth century the current phase of the business cycle is but one of at least five powerful forces. All of these forces, either by influencing mass psychology or by direct economic operation, can have an extremely powerful influence on the general level of stock prices. The other four influences are the trend of interest rates, the over-all governmental attitude toward investment and private enterprise, the long-range trend to more and more inflation, and—possibly most powerful of all—new inventions and techniques as they affect old industries.

Therefore, it seems logical that before even thinking of buying any common stock the first step is to see how money has been most successfully made in the past. Even a casual glance at American stock mar-ket history will show that two very different methods have been used to amass spectacular fortunes. In the nineteenth century and in the early part of the twentieth century, a number of big fortunes and many small ones were made largely by betting on the business cycle. In a period when an unstable banking system caused recurring boom and bust, buying stocks in bad times and selling them in good had strong elements of value. This was particularly true for those with good financial connections who might have some advance information about when the bank-ing system was becoming a bit strained. But perhaps the most significant fact to be realized is that even in the stock market era which started to end with the coming of the Federal Reserve System in 1913 and became history with the passage of the securities and exchange legislation in the early days of the Roosevelt administration, those who used a different method made far more money and took far less risk.


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

"Robert Solow", affirmative action, banking crisis, Berlin Wall, Bretton Woods, business cycle, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Ponzi scheme, price stability, rent control, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Sam Peltzman, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

Research for A Monetary History began in 1948 as a three-year study for the National Bureau of Economic Research to investigate the “role of monetary and banking phenomena in producing cyclical fluctuations, intensifying or mitigating their severity, or determining their character,”2 Friedman wrote at the time. He does not now believe that there is a business cycle, in the sense of regular, recurrent ups and downs in economic activity: “I really don’t believe that there is a business cycle.... The notion of a business cycle is something of a regularly recurring phenomenon that is internally driven by the mechanics of the system. I don’t believe there is a business cycle in that sense. I believe that there is a system that has certain response mechanisms and that system is subject over time to external random forces.”3 He is thus a follower of Eugen Slutzky’s idea of random causes as the source of economic fluctuations.

There was some falling-out, or at least decline, in his relationship and that of his allies at Chicago generally with Koopmans and the Cowles Commission after Koopmans harshly criticized Arthur Burns and Wesley Mitchell’s 1946 National Bureau of Economic Research work, Measuring Business Cycles. Koopmans’s criticism, “Measurement Without Theory,” appeared in a prominent August 1947 review in the Review of Economic Statistics, six months after Friedman’s letter of recommendation on Koopmans’s behalf. In the review, Koopmans argued that because Burns and Mitchell had no theory of a business cycle, they had no determinate idea of what data to gather or hypotheses to test. In a contemporary conference comment, Friedman made reference to the “desultory skirmishing between what have been loosely designated as the National Bureau and the Cowles Commission techniques of investigating business cycles.”8 Robert Solow, who received the Nobel Prize in Economics in 1987, relates an anecdote about the response to Cowles Commission member Lawrence Klein’s Economic Fluctuations in the United States (1950) at a Cowles seminar, which gives an idea of relations between Friedman and the commission: “There was formal discussion.

Friedman also now writes of his “skepticism about whether there is indeed an economic phenomenon justifying the designation ‘cycle,’ or whether the economic fluctuations glorified by that title are not merely reactions to a series of random shocks, along the lines of a famous 1927 article by Eugen Slutzky.”4 Economic fluctuations do not a business cycle make. Early in his career, Friedman did not possess a particularly monetarist perspective of economic activity. Although Mints, from whom he learned monetary theory, possessed a Fisherian, quantity theory of money perspective, he was not empirical or statistical, and monetary theory was not Friedman’s focus until the 1948 National Bureau study. When he taught a course on business cycles at the University of Wisconsin in 1940, he called them an “unsolved problem.”5 In a final exam question, he did not indicate that monetary explanations for economic fluctuations were his preferred method of analysis, as they later become—indeed, his focus appears to have been fiscal policy.


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

"Robert Solow", accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

Solow’s reaction to the fact that his growth model was used as the basis of modern neoclassical macroeconomics was one of bewilderment: The puzzle I want to discuss – at least it seems to me to be a puzzle, though part of the puzzle is why it does not seem to be a puzzle to many of my younger colleagues – is this. More than forty years ago, I […] worked out […] neoclassical growth theory […] [I]t was clear from the beginning what I thought it did not apply to, namely short-run fluctuations in aggregate output and employment […] the business cycle […] [N]ow […] if you pick up an article today with the words ‘business cycle’ in the title, there is a fairly high probability that its basic theoretical orientation will be what is called ‘real business cycle theory’ and the underlying model will be […] a slightly dressed up version of the neoclasssical growth model. The question I want to circle around is: how did that happen? (Solow 2001: 19) Solow inadvertently provided one answer to his own question when he discussed the preceding IS-LM model: For a while the dominant framework for thinking about the short run was roughly ‘Keynesian.’

Consider these statements by the doyen of the freshwater or ‘New Classical’ faction of neoclassical macroeconomists, Nobel laureate Edward Prescott: the key to defining and explaining the Great Depression is the behavior of market hours worked per adult […] there must have been a fundamental change in labor market institutions and industrial policies that lowered steady-state, or normal, market hours […] [T]he economy is continually hit by shocks, and what economists observe in business cycles is the effects of past and current shocks. A bust occurs if a number of negative shocks are bunched in time. A boom occurs if a number of positive shocks are bunched in time. Business cycles are, in the language of Slutzky, the ‘sum of random causes.’ The fundamental difference between the Great Depression and business cycles is that market hours did not return to normal during the Great Depression. Rather, market hours fell and stayed low. In the 1930s, labor market institutions and industrial policy actions changed normal market hours. I think these institutions and actions are what caused the Great Depression […] From the perspective of growth theory, the Great Depression is a great decline in steady-state market hours.

Any reduction in working hours is a voluntary act, so the representative agent is never involuntarily unemployed, he’s just taking more leisure. And there are no banks, no debt, and indeed no money in this model. You think I’m joking? I wish I was. Here’s Robert Solow’s own summary of these models – initially called ‘real business cycle’ models, though over time they morphed into what are now called ‘Dynamic Stochastic General Equilibrium’ models: The prototypical real-business-cycle model goes like this. There is a single, immortal household – a representative consumer – that earns wages from supplying labor. It also owns the single price-taking firm, so the household receives the net income of the firm. The household takes the present and future wage rates and present and future dividends as given, and formulates an optimal infinite-horizon consumption-saving (and possibly labor-saving) plan […] The firm looks at the same prices, and maximizes current profit by employing labor, renting capital and producing and selling output […] (Solow 2001: 23) In the ordinary way, an equilibrium is a sequence of inter-temporal prices and wage rates that makes the decisions of household and firm consistent with each other.


pages: 611 words: 130,419

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Albert Einstein, algorithmic trading, Andrei Shleifer, autonomous vehicles, bank run, banking crisis, basic income, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, disintermediation, Donald Trump, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, full employment, George Akerlof, germ theory of disease, German hyperinflation, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, market bubble, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Plutocrats, Ponzi scheme, publish or perish, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

But like contagious disease epidemics, at any given time the narrative epidemics tend to be stronger in some countries than in others. In addition, narrative epidemics are more similar in countries that share a language or borders. The examples in this book come mostly from the United States, the country in which I have lived my life and the country about which I have the best intuition and knowledge. Also, the United States has long documented its business cycle history. The National Bureau of Economic Research (NBER) maintains a chronicle of business cycle expansions and contractions back to the year 1854. Some critics might argue that institutional changes in the United States have been so profound and transformative that there is practically nothing useful to be learned from distant history. However, the events and reactions of 50, 100, and 150 years ago are surprisingly similar to what we see and experience today.

The story of Halley’s comet is a great one that remains vivid in the popular memory. A constellation of narratives is now built around it, such as the story that Mark Twain, born in a Halley’s comet year, predicted his own death 75 years later when Halley’s comet returned again. The earliest ProQuest News & Newspapers mention of the business cycle came during the depression of 1858, and it appeared alongside a reference to weather: Some, claiming to be learned in meteorology, say the seasons ran in decades: it seems also that there is a sort of business cycle of the same length of time; and it happens very fortunately that the decimal panic comes at the same time with the mildest winter. Whether this is a coincidence or a providence, or whether it is a fact at all, I leave for others to decide.9 The idea that business fluctuations are a repetitive cyclical event with a wavelength of a decade, or any other identifiable fixed interval, has become less popular with economists, but the narrative that recessions and drops in confidence are somewhat periodic and forecastable remains entrenched in popular thinking.

Statistical Indicators of Cyclical Revivals, Bulletin 69. New York: National Bureau of Economic Research, 1938, https://www.nber.org/chapters/c4251.pdf. Reprinted in Geoffrey Moore, Business Cycle Indicators. Princeton, NJ: Princeton University Press, 1961. Mokyr, Joel. 2013. “Culture, Institutions, and Modern Growth.” In Sebastian Galiani and Itai Sened, eds., Institutions, Property Rights, and Economic Growth: The Legacy of Douglass North. Cambridge: Cambridge University Press. ________. 2016. Culture and Growth: The Origins of the Modern Economy. Princeton, NJ: Princeton University Press. Moore, Geoffrey H. 1983. “The Forty-Second Anniversary of the Leading Indicators.” In Geoffrey Moore, ed., Business Cycles, Inflation and Forecasting. 2nd ed. Cambridge, MA: Published for the National Bureau of Economic Research by Ballinger Publishing Co., https://www.nber.org/chapters/c0710.pdf.


pages: 571 words: 106,255

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

Airbnb, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, global reserve currency, high net worth, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, market bubble, market clearing, means of production, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, zero-sum game

This economy‐wide simultaneous failure of overextended businesses is what is referred to as a recession. Only with an understanding of the capital structure and how interest rate manipulation destroys the incentive for capital accumulation can one understand the causes of recessions and the swings of the business cycle. The business cycle is the natural result of the manipulation of the interest rate distorting the market for capital by making investors imagine they can attain more capital than is available with the unsound money they have been given by the banks. Contrary to Keynesian animist mythology, business cycles are not mystic phenomena caused by flagging “animal spirits” whose cause is to be ignored as central bankers seek to try to engineer recovery8. Economic logic clearly shows how recessions are the inevitable outcome of interest rate manipulation in the same way shortages are the inevitable outcome of price ceilings.

For Austrians, on the other hand, the fact that governments have to resort to coercive measures of banning gold as money and enforcing payment in fiat currencies is at once testament to the inferiority of fiat money and its inability to succeed in a free market. It is also the root cause of all business cycles' booms and busts. While the Keynesian economists have no explanation for why recessions happen other than invoking “animal spirits,” Austrian school economists have developed the only coherent theory that explains the cause of business cycles: the Austrian Theory of the Business Cycle.11 Unsound Money and Perpetual War As discussed in Chapter 4 on the history of money, it was no coincidence that the era of central bank‐controlled money was inaugurated with the first world war in human history. There are three fundamental reasons that drive the relationship between unsound money and war.

When the central bank manipulates the interest rate lower than the market clearing price by directing banks to create more money by lending, they are at once reducing the amount of savings available in society and increasing the quantity demanded by borrowers while also directing the borrowed capital toward projects which cannot be completed. Hence, the more unsound the form of money, and the easier it is for central banks to manipulate interest rates, the more severe the business cycles are. Monetary history testifies to how much more severe business cycles and recessions are when the money supply is manipulated than when it isn't. While most people imagine that socialist societies are a thing of the past and that market systems rule capitalist economies, the reality is that a capitalist system cannot function without a free market in capital, where the price of capital emerges through the interaction of supply and demand and the decisions of capitalists are driven by accurate price signals.


Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, business cycle, buy and hold, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, fixed income, intangible asset, joint-stock company, margin call, passive investing, principal–agent problem, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

The differentiator is not simply high returns on capital, which, as Graham pointed out, even an ordinary business will earn at some point in the business cycle, but sustainable high returns on capital throughout successive business cycles. The sustainability of high returns depends on the business possessing good economics protected by an enduring competitive advantage, or what Buffett describes as “economic castles protected by unbreachable ‘moats.’”39 First-Class Businesses A business’s intrinsic value turns on its ability to sustain high returns on invested capital and resist reversion to the mean. For it to be worth more than its invested capital, it must have economics that allow it to generate a return greater than its required return and to protect that super-normal return over the course of the business cycle. For most businesses, high returns on invested capital are unlikely to be sustainable for the simple reason that high returns attract competitors and competition erodes high returns (and, by extension, intrinsic value).

Reinvestment will appear most attractive in peak years, and folly in trough years, but the reverse is usually the case because trough earnings follow peak earnings, and vice versa. Capital reinvested in peak years earns sub-normal returns as the business cycle moves toward a trough, and so is typically more valuable in shareholders’ hands. Capital reinvested in trough years has the opportunity to earn super-normal returns as the business cycle moves toward a peak, but often little incremental capital can be harvested organically because earnings are in a trough. In another cruel irony, businesses find capital in abundance—both from retained earnings and outside investors—when they need it least and scarce when they need it most. Management teams can therefore distinguish themselves through the careful husbanding of capital over the business cycle, anticipating mean reversion at both peaks and troughs, and this is why Buffett insists that firstclass businesses be accompanied by first-class management.

And a business, unlike a franchise, can be killed by poor management. The so-called economic franchise is therefore a special business with unusual, naturally occurring economics that allow it to earn a naturally high return on invested capital over the course of the business cycle and to sustain that return despite the incursions of competitors. Where competition causes the return of the average business—one with a weak or no competitive advantage—to revert to the mean, franchises and first-class businesses resist mean reversion. Most businesses over the course of a full business cycle will do no ­better than earn their required return. In peak earnings years they will appear to be good businesses earning a return exceeding the required return, but in trough earnings years they will look like bad businesses generating subnormal returns.


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The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, forward guidance, Francis Fukuyama: the end of history, George Akerlof, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Although the traditional focus on cycles has related mainly to the economy, the focus in this book is on financial cycles, their drivers and different phases – a topic discussed in detail in chapter 3. The idea that there are cycles in financial markets in general, and in equity markets in particular, has been with us for a very long time. Fisher (1933) and Keynes (1936) both examined the interaction between the real economy and the financial sector in the Great Depression. Burns and Mitchell found evidence of the business cycle in 1946 and later academics argued that the financial cycle was a part of the business cycle, and that financial conditions and private sector balance sheet health are both important triggers of the cycle and factors that can amplify cycles (Eckstein and Sinai 1986). Other research has demonstrated that waves of global liquidity can interact with domestic financial cycles, thereby creating excessive financial conditions in some cases (Bruno and Shin 2015).5 More recent studies suggest that measures of slack in the economy (or output gaps – the growth rate versus potential output) can be explained partly by financial factors (Boria, Piti and Juselius 2013) that play a large part in explaining fluctuations in economic output and potential growth, as well as ‘determining which output trajectories are sustainable and which are not’,6 thereby implying a close link and feedback loop between financial and economic cycles.

Available at https://www.researchgate.net/publication/23742678_General_Purpose_Technologies_and_Productivity_Surges_Historical_Reflections_on_the_Future_of_the_ICT_Revolution Dhaoui, A., Bourouis, S., and Boyacioglu, M. A. (2013). The impact of investor psychology on stock markets: Evidence from France. Journal of Academic Research in Economics, 5(1), 35–59. Dice, C. A. (1931). New levels in the stock market. Journal of Political Economy, 39(4), 551–554. Eckstein, O., and Sinai, A. (1986). The mechanisms of the business cycle in the postwar era. In R. Gorden (Ed.), The American business cycle: Continuity and change (pp. 39–122). Cambridge, MA: National Bureau of Economic Research. The end of the Bretton Woods System. IMF [online]. Available at https://www.imf.org/external/about/histend.htm Evans, R. (2014). How (not) to invest like Sir Isaac Newton. The Telegraph [online]. Available at https://www.telegraph.co.uk/finance/personalfinance/investing/10848995/How-not-to-invest-like-Sir-Isaac-Newton.html Fama, E.

Library of Congress Cataloging-in-Publication Data Names: Oppenheimer, Peter C., author. Title: The long good buy : analysing cycles in markets / Peter Oppenheimer. Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2020. | Includes bibliographical references and index. Identifiers: LCCN 2020001577 (print) | LCCN 2020001578 (ebook) | ISBN 9781119688976 (cloth) | ISBN 9781119688983 (adobe pdf) | ISBN 9781119689003 (epub) Subjects: LCSH: Business cycles. | Investments. | Finance. Classification: LCC HB3720 .O67 2020 (print) | LCC HB3720 (ebook) | DDC 338.5/42—dc23 LC record available at https://lccn.loc.gov/2020001577 LC ebook record available at https://lccn.loc.gov/2020001578 Cover Design: Wiley Cover Image: JDawnInk/DigitalVision Vectors/Getty Images To Joanna, Jake and Mia Acknowledgements This book is about economic and financial market cycles and the factors that affect them.


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10% Less Democracy: Why You Should Trust Elites a Little More and the Masses a Little Less by Garett Jones

"Robert Solow", Andrei Shleifer, Asian financial crisis, business cycle, central bank independence, clean water, corporate governance, correlation does not imply causation, creative destruction, Edward Glaeser, financial independence, game design, German hyperinflation, hive mind, invisible hand, Jean Tirole, Kenneth Rogoff, Mark Zuckerberg, mass incarceration, minimum wage unemployment, Mohammed Bouazizi, open economy, Pareto efficiency, Paul Samuelson, price stability, rent control, The Wealth of Nations by Adam Smith, trade liberalization

, 25–26 Jones, Garett: Hive Mind, 6; talk at Stanford on “10% Less Democracy”, 1–3 judiciary: appointment of judges, 65, 67, 69–73, 83, 187; vs. central banks, 64, 65, 70–71, 74, 76, 83; committee decisions by, 65; decisions as local, 66–68; election of judges, 65, 66–68, 69, 72–73, 76, 83, 187, 188; vs. government regulators, 82–83, 88, 90–91; impeachment of U.S. federal judges, 91; as independent, 15, 64–65, 67–68, 69–76, 175, 179, 186, 187; relationship to economic freedom, 69–76; relations with voters, 66–68; respect for judicial precedent among, 68–69, 72, 73, 74; supreme court judges vs. administrative court judges, 73, 74; term length of judges, 43, 64, 65, 70, 73, 74, 75, 76, 177, 181 Kennedy, Ted: relationship with Orrin Hatch, 3 Keynes, John Maynard, 16, 145 Kleine, Mareike, 36, 37 Klein, Ezra: on Supreme Court, 64 Klomp, Jeroen: on central banks and financial crises, 57 Kydland, Finn: on real business cycle (RBC) theory, 55 labor market regulation, 34–35, 74, 75, 76, 100 Laffer curves, 19–22, 65, 81, 117 La Porta, Rafael: on judicial independence and economic freedom, 73–76 Latin American debt crisis, 133 Lawson, Robert: on economic freedom in EU, 155 Lee Kuan Yew, 175; on democracy, 172–73; From Third World to First, 172 legislative productivity: impact of longer terms on, 37–38; impact of looming elections on, 36–37 liberal institutions and peace, 16–17 Lincoln, Abraham: on fooling people all the time, 53 Lipset, Seymour Martin: on prosperity and democracy, 11 logrolling, 139–42, 143 Long, John: on real business cycle (RBC) theory, 55 looming elections: impact on exchange rate policy, 36; impact on labor market policy, 34–35, 36; impact on legislative productivity, 36–39; impact on trade policy, 32–34, 36; impact on U.S.

, 25–26 Olson, Mancur: on selective benefits, 141 Orange County, California: bankruptcy of, 77, 79–80 Pareto efficiency, 160 Paris Club conditions on loans, 125–26 Parkin, Michael: on central bank independence (CBI), 44–45 peace: and democracy, 15–17, 186; and liberal institutions, 16–17; relationship to trade, 16–17 Plosser, Charles: on real business cycle (RBC) theory, 55 Plunkitt, George Washington: Plunkitt of Tammany Hall, 105, 137–38, 141, 175; on reelection, 137–38 Poland: EU membership, 158; unanimity rule in, 160, 162 political culture and central banks, 47, 58–59 political donors, 31 political machines, 137, 142–43, 175–76, 179 Polity IV index: Autocracy index, 18–19; Democracy index, 18–19, 171 Polybius: on mixed form of government, 181, 183–84 Pop-Eleches, Cristian: on judicial independence and economic freedom, 73–76 pork projects, 29–30 Posso, Alberto: on inflation and central banks, 47–48 Prescott, Ed: on real business cycle (RBC) theory, 55 prices, 87–88, 89; price controls, 84, 100 Pritchett, Lant: on “Getting to Denmark”, 169 productivity, 35 property rights, 73, 74, 75, 76 proportional representation, 151 public choice theory, 28–29 Putnam, Robert: research on trust in one’s neighbors, 159 Quarterly Journal of Economics, 50 Quek, Kai: on peace and democracy, 15–16 racially integrated schools, 65 Rauch, Jonathan: on crisis of followership, 144; on democracy, 143; influence of, 142; on party insiders, 142–43, 179; on political machines, 137, 142–43, 179; Political Realism, 142–43 Read, Carveth, 187 real business cycle (RBC) theory, 54, 55–56 real per capita GDP, 30 reciprocal altruism, 139 reform proposals: bondholders with explicit, advisory role in governance, 11, 119, 126–27, 133, 134–36; continued restrictions on voting by felons, 108–9; costs of, 20, 23, 25, 93; education requirements for voters, 96–98, 105–6, 107–8, 114–17, 188; impact on socioeconomic development, 17; longer terms for politicians, 39–40, 178, 188; and microfoundations, 25; national tax board, 61, 92–94, 143; as nonutopian, 8, 20–21, 60–61; relationship to personal morality, 187–88; risks of, 25, 94, 179; six-year term for U.S. president, 188; staggered elections, 146–47, 179; and transitional gains trap, 112–14; upper house as Sapientum, 110–12, 127 regression discontinuity design (RDD), 78–79 religious liberty, 65 rent control, 100 Republican Party, 140–41 reputation with lenders, 128–32 Rickard, Stephanie, 34–35 right to competent government, 103, 104, 109 right to health care, 103–4 Riordan, William, 137 Rocher, François, 107 Rogers, Will: on Democratic Party, 159 Rogoff, Kenneth: conservative central banker theory, 53–55, 56, 60, 86 Roosevelt, Franklin, 125 Root, Hilton: on corporations in Old Regime, 129–30; “Tying the King’s Hands”, 129–30 Rossi, Martin: on term lengths of politicians in Argentina, 37–38 Rousseau, Jean-Jacques, 102 rule of law, 14, 16 Samuelson, Paul: on inflation and unemployment, 43 Sargent, Thomas: on monetary policies, 44, 46 Schelker, Mark: on short terms, 31 Schulhof, Natalie: article in Fourth Estate, 1–3 Sen, Amartya: on democracies and famines, 9–11, 12, 171; Development as Freedom, 9; on minimal requirements for democracy, 11, 171 Shanmugaratnam, Tharman, 175 Shepsle, Kenneth: on voters’ short memories, 29–30 Shleifer, Andrei: on judicial independence and economic freedom, 73–76 Sims, Christopher: “Paper Money” lecture, 122 Singapore: buffet syndrome in, 20; democracy in, 170–72, 173, 174, 175–76; vs.

One way out: Have the government delegate total power over monetary policy to someone who doesn’t care about creating a boom. And I mean someone who really doesn’t care about creating a boom. Someone who cares only about low and stable inflation. That might be a Wall Street– or London–, or Hong Kong–based banker, someone who has spent his career worrying that high surprise inflation might crush the value of his bond portfolio. Or it could be someone trained in real business cycle (RBC) theory, the Nobel-winning theory that modern boom-bust cycles are mostly caused by oil price changes, regulatory and tax changes, and other supply-side forces that have nothing to do with central banks and money. In its most extreme form, RBC theory means that monetary policy is irrelevant to the real economy. But even in its milder forms, RBC theory suggests that monetary policy is overrated, that fretting about whether cheap money boosts the economy is like fretting over the decor in a hospital operating room or the color of the president’s tie when he’s speaking to Congress.


pages: 293 words: 91,412

World Economy Since the Wars: A Personal View by John Kenneth Galbraith

business cycle, central bank independence, full employment, income inequality, James Hargreaves, James Watt: steam engine, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, means of production, price discrimination, price stability, road to serfdom, Ronald Reagan, spinning jenny, The Wealth of Nations by Adam Smith, Thorstein Veblen, union organizing, War on Poverty

Perhaps men might not starve amidst Malthusian scarcity, but might it not still be their fate to starve amidst an abundance of goods that they could not buy? Was it not a fair conclusion that by whatever means they were predestined to poverty? Nothing in the history of social ideas is more interesting than the treatment of the so-called business cycle in the central tradition of economic thought. Its study was isolated in a separate compartment until very recent times. Prices, wages, rents and interest, all of which were profoundly affected by depressions, were studied very largely on the assumption that depressions did not occur. Normal conditions were assumed; normal meant stable prosperity. In the separate study of the business cycle, emphasis was placed on the peculiar and nonrecurring conditions which lay back of each depression—the retirement of the greenbacks prior to 1873, the readjustments following World War I, the breakdown of international trade and capital movements and the collapse of the stock market in 1929.

But this term eventually acquired a foreboding quality and a recession in 1953–1954 was widely characterized as a rolling readjustment. By the time of the Nixon administration, the innovative phrase "growth recession" was brought into use. To view the business cycle as a normal rhythm was to regard it as self-correcting. Hence, nothing needed to be done about it. Remedies are unnecessary if the patient is certain to recover, and they are also unwise. Writing in 1934, Joseph A. Schumpeter, then with Wesley C. Mitchell one of the world's two most eminent authorities on the business cycle, surveyed the experience of the preceding century and concluded, "In all cases ... recovery came of itself... But this is not all: our analysis leads us to believe that recovery is sound only if it does come of itself. For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustment, new maladjustments of its own."10 Had depressions always remained mild, the notion of a normal rhythm, which wisdom required be undisturbed, would have been reassuring.

To increase output by increasing the rate of capital formation or by expanding the total labor force or by a serious effort to increase the rate of technological innovation was not part of his concern.4 Most important of all, the loss of production as the result of depressions was not peculiarly a liberal concern. No one was deeply committed politically on this problem; conservatives had an equal interest with liberals in "smoothing out" the business cycle. During the decade of the twenties, the political leadership in discussion of possible means to mitigate the business cycle was assumed by Herbert Hoover. The classical program of American liberals, until the decade of the thirties, sought the redistribution of the existing income, greater economic security and the protection of the liberties and immunities of individuals and organizations in face of the highly unequal distribution of economic power.


pages: 411 words: 114,717

Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma

3D printing, affirmative action, Albert Einstein, American energy revolution, anti-communist, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, business climate, business cycle, business process, business process outsourcing, call centre, capital controls, Carmen Reinhart, central bank independence, centre right, cloud computing, collective bargaining, colonial rule, corporate governance, creative destruction, crony capitalism, deindustrialization, demographic dividend, Deng Xiaoping, eurozone crisis, Gini coefficient, global supply chain, housing crisis, income inequality, indoor plumbing, inflation targeting, informal economy, Kenneth Rogoff, knowledge economy, labor-force participation, land reform, M-Pesa, Mahatma Gandhi, Marc Andreessen, market bubble, mass immigration, megacity, Mexican peso crisis / tequila crisis, Nelson Mandela, new economy, oil shale / tar sands, oil shock, open economy, Peter Thiel, planetary scale, quantitative easing, reserve currency, Robert Gordon, Shenzhen was a fishing village, Silicon Valley, software is eating the world, sovereign wealth fund, The Great Moderation, Thomas L Friedman, trade liberalization, Watson beat the top human players on Jeopardy!, working-age population, zero-sum game

As speculation drives up oil prices, consumers now spend a record amount of their income on energy needs. The easy money flows from a sea change in the way the United States sees hard times. The old view was that recessions were a natural phase in the business cycle, unpleasant but unavoidable. A new view started to emerge in the Goldilocks economy of the 1990s, when after many straight years of solid growth, people started to say that the Federal Reserve had beaten back the business cycle. Under Alan Greenspan and his successor, Ben Bernanke, the Fed shifted focus from fighting inflation and smoothing the business cycle to engineering growth. Low U.S. interest rates and rising debt increasingly became the bedrock of American growth, and the increases in total U.S. debt started to dwarf the increases in total U.S. GDP: in the 1970s it took $1.00 of debt to generate $1.00 of U.S.

Apparently, for many investors, it is inspiring to imagine that their investments are well grounded in the remote past and the distant future, but in the real world it is not practical for investors or companies to tell clients to come back and check their returns in forty years. Forecasts are valuable, indeed unavoidable for planning purposes, but it doesn’t make much sense to talk about the future beyond five years, maybe ten at the most. The longest period that reveals clear patterns in the global economic cycle is also around a decade. The typical business cycle lasts about five years, from the bottom of one downturn to the bottom of the next, and the perspective of most practical people is limited to one or two business cycles. Beyond that, forecasts are often rendered obsolete by the appearance of new competitors (China in the early 1980s) or new technologies (the Internet in the early 1990s) or new leaders (the typical election cycle is also about five years). The super-long view is being popularized largely by economic historians and commentators and has become faddishly influential in business circles as well.

In a period of impending change, like this one, with the painful ending of a golden age of easy money and easy growth, it is typical for people to cling to dated ideas and rules for too long, particularly notions that minimize or explain away potential risks. The most dramatic recent example is the idea that the basic tools of economic stimulus—lowering interest rates and raising public spending—can end a business cycle, not only in the United States but also in the developing world. In the emerging markets, there has long been a disturbing tendency among leaders to take credit for boom times and blame bad times on the West: that phenomenon was widespread in late 2011, as many leaders attributed any slowdown in emerging markets to contagion from Europe, forgetting that lending from European banks was a key driver of the boom in the first place.


Universal Basic Income and the Reshaping of Democracy: Towards a Citizens’ Stipend in a New Political Order by Burkhard Wehner

basic income, business cycle, full employment, universal basic income

It would serve this purpose best if it was not financed by government debts, but rather by interest-free central bank loans to the welfare state.1 Moreover, such a stabilization allowance would be beyond suspicion of leading to unwanted side effects on the distribution of income and wealth, as is the case with most conventional measures of business cycle policy. An economic stimulus by means of a supplement to the citizens’ stipend would thus be far superior to conventional policy measures for this purpose. As with all business cycle stimuli, such stabilizations allowances would also require provisions to ensure that the stimulus does not induce unsustainable claims against the welfare state. For this purpose, these allowances could be declared as advance payments of citizens’ stipend. In the event of subsequent economic overheating, it would then be possible to offset formerly paid stabilization allowances from current citizens’ stipend payouts in small installments.

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... .... 3 3 .... .... 5 10 . . . . . . . . 11 11 13 13 ................... ................... ................... 14 15 18 3 A Long-Term Vision . . . . . . . . . . . . . . . . . . 3.1 Maximal Market Transparency . . . . . . . 3.2 Maximal Transparency in Redistribution 3.3 Basic Income and Social Security . . . . . 3.4 Basic Income, Minimum Wage and Full Employment Guarantee . . . . . . . . . . . . . 3.5 Optimization, Not Maximization . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Basic Income in Other Policy Areas . . . . . . . 4.1 Basic Income and Business Cycle Policy . 4.2 Basic Income and Demographic Policy . . 4.3 Basic Income for Nations in Need . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19 20 21 23 5 Common Objections to Basic Income 5.1 Tax Burden and Work Incentives 5.2 Further Objections . . . . . . . . . . .

A constitutional right to system transparency could thus be a Trojan Horse that would inadvertently open the way for basic income into a formerly rigid political and social order. 18 3 A Long-Term Vision References Wehner B (1992) Der Neue Sozialstaat: Vollbeschäftigung, Einkommensgerechtigkeit und Staatsentschuldung (The new social state: full employment, fair income distribution and the redemption of public debt). Westdeutscher Verlag, Opladen Wehner B (1997) Der Neue Sozialstaat: Entwurf einer neuen Wirtschafts- und Sozialordnung (The new social state. Outline of a new social and political order). Westdeutscher Verlag, Opladen Chapter 4 Basic Income in Other Policy Areas 4.1 Basic Income and Business Cycle Policy A citizens’ stipend system of the type proposed here would thus bring about a broad spectrum of positive changes without risking serious transitional problems. Such a system would be administratively easy to handle, it would be transparent, it would be fair, it would make the economy and working life more creative and innovative, and it would lead to full employment by reshaping the wage structure and economic risk sharing.


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The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, zero-sum game

Unfortunately, people tend to act (to some degree, at least) the way they are expected and conditioned to act; thus Homo economicus becomes a self-confirming prediction. Business Cycles, Interest Rates, and Central Banks We have just reviewed a minimalist history of human economies and the economic theories that have been invented to explain and manage them. But there is a lot of detail to be filled in if we are to understand what’s happening in the world economy today. And much of that detail has to do with the spectacular growth of debt — in obvious and subtle forms — that has occurred during the past few decades. The modern debt phenomenon in turn must be seen in light of recurring business cycles that characterize economic activity in modern industrial societies, and the central banks that have been set up to manage them. We’ve already noted that nations learned to support the fossil fuel-stoked growth of their real economies by increasing their money supply via fractional reserve banking.

A non-trivial example: In the US since World War II, military spending has supported a substantial segment of the national economy — the weapons industries and various private military contractors — while directly providing hundreds of thousands of jobs, at any given moment, for soldiers and support personnel. Critics describe the system as a military-industrial “welfare state for corporations.”15 The upsides and downsides of the business cycle are reflected in higher or lower levels of inflation. Inflation is often defined in terms of higher wages and prices, but (as Austrian School economists have persuasively argued) wage and price inflation is actually just the symptom of an increase in the money supply relative to the amounts of goods and services being traded, which in turn is typically the result of exuberant borrowing and spending. Inflation causes each unit of currency to lose value. The downside of the business cycle, in the worst instance, can produce the opposite of inflation, or deflation. Deflation manifests as declining wages and prices, due to a declining money supply relative to goods and services traded (which causes each unit of currency to increase in purchasing power), itself due to a contraction of borrowing and spending or to widespread defaults.

— Paul Krugman (economist) The conventional wisdom on the state of the economy — that the financial crisis that started in 2008 was caused by bad real estate loans and that eventually, when the kinks are worked out, the nation will be back to business as usual — is tragically wrong. Our real situation is far more unsettling, our problems have much deeper roots, and an adequate response will require far more from us than just waiting for the business cycle to come back around to the “growth” setting. In reality, our economic system is set for a dramatic, and for all practical purposes permanent, reset to a much lower level of function. Civilization is about to be downsized. Why have the vast majority of pundits missed this story? Partly because they rely on economic experts with a tunnel vision that ignores the physical limits of planet Earth — the context in which economies operate.


The Great Crash 1929 by John Kenneth Galbraith

Bernie Madoff, business cycle, Everybody Ought to Be Rich, full employment, housing crisis, invention of the wheel, joint-stock company, margin call, market fundamentalism, short selling, South Sea Bubble, the market place

[back] *** 1 Economic Indicators: Historical and Descriptive Supplement, Joint Committee on the Economic Report (Washington, 1953). [back] *** 2 New Levels in the Stock Market, p. 257. [back] *** 3 Walter Bagehot, Lombard Street, p. 130. The quotation from Macaulay. above, is cited by Bagehot, p. 128. [back] *** 4 "At present it is less likely that the existence of business cycles will be denied than that their regularity will be exaggerated." Wesley Clair Mitchell, Business Cycles and Unemployment (New York: McGraw-Hill, 1923), p. 6. [back] *** 5 Geoffrey H. Moore, Statistical Indications of Cyclical Revivals and Recessions, Occasional Paper 31, National Bureau of Economic Research, Inc. (New York. 1950). [back] *** 6 H. W. Arndt, The Economic Lessons of the Nineteen-Thirties (London: Oxford, 1944), p. 15. [back] *** 7 E.

The high tide of prosperity will continue." Mr. Mellon did not know. Neither did any of the other public figures who then, as since, made similar statements. These are not forecasts; it is not to be supposed that the men who make them are privileged to look farther into the future than the rest. Mr. Mellon was participating in a ritual which, in our society, is thought to be of great value for influencing the course of the business cycle. By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will in fact continue. Especially among businessmen the faith in the efficiency of such incantation is very great. VI Hoover was elected in a landslide. This, were the speculators privy to Mr. Hoover's mind, should have caused a heavy fall in the market. In his memoirs Mr. Hoover states that as early as 1925 he became concerned over the "growing tide of speculation." 15 During the months and years that followed this concern gradually changed to alarm, and then to something only slightly less than a premonition of total disaster.

(This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country's businesses and banks. This inventory—it should perhaps be called the bezzle—amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise.


pages: 283 words: 73,093

Social Democratic America by Lane Kenworthy

affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, business cycle, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, endogenous growth, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, Kenneth Arrow, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

Hall and Gingerich have several control variables in their regressions, including inflation, change in the country’s terms of trade (export prices divided by import prices) weighted by its degree of trade openness, and the share of the population younger than age 15 or older than age 64. However, none of these is related to economic growth in their analyses. A fourth is the average growth rate among the group of countries as a whole weighted by the degree of trade openness in each nation. In an analysis with yearly data, this is useful to control for business cycle effects, but it is unnecessary in an analysis that covers one or more complete business cycles. I estimated a series of regressions with various combinations of three other controls: education (average years of schooling completed), real interest rates, tax revenues (as a share of GDP). This did not yield a positive association between institutional coherence and economic growth. 30. See also Campbell and Pedersen 2007; Kristensen and Lilja 2011. 31.

But that has always been true, and yet American policy makers have managed to craft a host of programs that work quite well, from Social Security to Medicare to the EITC. As our evidence base grows, and particularly as we learn more about best practice in other nations, there is reason for optimism about the quality of future social policy. Can We Afford It? For the past half century, our government has taxed and spent a smaller portion of the country’s economic output than have most other affluent nations. In 2007, the peak year of the pre-crash business cycle, government expenditures totaled 37 percent of GDP in the United States. As figure 1.1 shows, in most other rich nations the share was well above 40 percent, and in some it was above 50 percent. The added cost of the new programs and expansions I recommend plus our existing commitments to Social Security and Medicare is likely to be in the neighborhood of 10 percent of GDP.22 If that sounds massive, keep in mind two things.

As a technical matter, revising our tax system to raise an additional 10 percent of GDP in government revenue is simple. Adding a national consumption tax could get us halfway there, and an assortment of relatively minor additions and adjustments would take us the rest of the way.23 FIGURE 1.1 Government expenditures as a share of GDP Includes government at all levels: national, regional, local. 2007 is the most recent business cycle peak year. Data sources: OECD, stats.oecd.org; Vito Tanzi, Governments versus Markets, Cambridge University Press, 2011, table 1. US 47 percent in 2060 is my projection. Since 1980, much of America’s left has thought about taxation in terms of its impact on the distribution of income, putting tax progressivity front and center. But we can’t get an additional 10 percent of GDP solely from those at the top, even though they are getting a steadily larger share of the pretax income.


pages: 159 words: 45,073

GDP: A Brief but Affectionate History by Diane Coyle

"Robert Solow", Asian financial crisis, Berlin Wall, big-box store, Bretton Woods, BRICs, business cycle, clean water, computer age, conceptual framework, crowdsourcing, Diane Coyle, double entry bookkeeping, en.wikipedia.org, endogenous growth, Erik Brynjolfsson, Fall of the Berlin Wall, falling living standards, financial intermediation, global supply chain, happiness index / gross national happiness, hedonic treadmill, income inequality, income per capita, informal economy, Johannes Kepler, John von Neumann, Kevin Kelly, Long Term Capital Management, mutually assured destruction, Nathan Meyer Rothschild: antibiotics, new economy, Occupy movement, purchasing power parity, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thorstein Veblen, University of East Anglia, working-age population

Thatcher would have won the same kind of election victory if her predecessors in power had not had to bring in the IMF? There is always pressure on the statisticians to produce timely data, so early estimates of the previous quarter’s GDP will almost always be revised subsequently as more of the component sources of data become available. These revisions can be significant, which makes life frustrating for policymakers trying to figure out what, if anything, they need to do to respond to the business cycle. Although the notion of “fine-tuning” the economy by adjusting tax and spending or interest rates has been pretty much discredited among economists, thanks to the terrible experience of this approach going wrong in the 1970s, there is still immense pressure on politicians and central bankers to try to boost the growth of GDP during a recession. The years of lackluster growth seen since the start of the financial crisis in 2008 are just such a period.

For a more recent comparison, the average annual real-terms growth rate for OECD countries in the first half of the 2000s—considered a boom period in recent economic history—was 2.5 percent on average. Table 2: Real Annual GDP Growth Rates (Percent) Country 1950–1973 1973–1998 United States 3.93 2.99 United Kingdom 2.93 2.00 France 5.05 2.10 Germany 5.68 1.76 Japan 4.61 4.96 Source: Angus Maddison, The World Economy: A Millennial Perspective (Paris: Organization for Economic Cooperation and Development, 2000). Even though the business cycle—the periodic downs and ups of the economy as a whole—returned, GDP growth continued above its earlier rates during the 1950s, 1960s, and early 1970s. In the United States, GDP growth averaged nearly 4 percent a year from 1950 to 1973, compared with less than 3 percent a year between the two world wars. The United Kingdom’s postwar 2.93 percent compares with just over 1 percent a year from 1913 to 1950.2 There is no simple explanation for the thirty-year success story.

So what was going wrong by the late 1960s, a decade that ended with students in the streets throwing stones and crude Molotov cocktails at the police, workers on strike, power cuts, and citizens hoarding food? As so often in life, the roots of failure lay in the nature of success. There was, in a way, too much growth. The tools of demand management proved too tempting and were used to boost the economy whenever there was a business cycle downturn. Both lower interest rates and extra government spending (or tax cuts) were generally used to try to limit downturns and keep the level of employment high. Politicians and other officials had in mind the model of the economy as a machine, just like the mechanical Phillips Machine that gave physical form to the circular flow of income in the national accounts (see chapter 1). Strong postwar growth seemed to validate their confidence; they overlooked the fact that by design GDP would increase when those policy levers were operated, at least in the short term.


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Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

At the end of the eighteenth century it had embarked upon the Industrial Revolution, and thus enjoyed comparative advantages in profiting from the revival of trade in Europe. Up until 1848, it was able to limit deflation to low, albeit persistent, rates. It took no less than forty years to bring the public debt back down to 100 percent of GDP. From the 1840s onwards, the business cycles of industrial capitalism set the rhythm of financial crises. Each turnaround in the business cycle after its peak degenerated into a financial crisis. These panics were triggered by the collapse of some important financial institution, precipitating the demand for gold conversion in all banks. Constrained by convertibility, the Bank of England sought to protect its own reserves, in turn worsening the panic. When it did decide to intervene, it was far too late to avoid a cascade of bank collapses.

Indeed, the most important trait of financial dynamics during these cycles is momentum, through which imbalances in asset stocks and indebtedness build up. These imbalances affect credit flows in both bearish and bullish phases of the financial cycle.20 Figure 7.3 portrays the financial cycles and short-term business cycles in the main Western countries in which finance is entirely liberalised. These series are logarithms presented in real terms, deflated by the consumer price index. Only credit as a share of GDP is expressed as a percentage. The financial cycle corresponds to the average of these three standardised and filtered series. Figure 7.3 Business cycles and financial cycles (1976 Q1–2014 Q3) Sources: IBS and OECD. Calculations by Thomas Brand for Aglietta and Brand, ‘La stagnation séculaire dans les cycles financiers de longue période’ (2015). Legend: These estimates build on the work of Drehmann, Borio and Tsatsaronis, ‘Characterizing the Financial Cycle: Don’t Lose Sight of the Medium Term’ (2012).

The issuer of the international currency does not have to concern itself with this problem as attentively as do the peripheral countries. The former offloads the burden of adjustment onto these countries, in particular if they are in deficit. This privileged situation puts the issuing country into the position of a business-cycle maker and generator of global shocks (for economic activity, raw materials prices, exchange rates, and so on). Conversely, the peripheral countries have to take on the burden of an asymmetrical adjustment. Their position as a business-cycle taker makes them vulnerable to exogenous shocks that they have to absorb. Here, too, they are incentivised to accumulate surplus foreign currency reserves as a precaution, and to implement restrictive neo-mercantilist policies focused on export-led growth.37 Finally, there is a profound asymmetry in terms of the autonomy of different countries’ economic policy.


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Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

And even though the current crisis began in the United States, it remains a fact that countries with sophisticated financial markets have fewer financial crises than others.' One reason the peaks and troughs of the business cycle are evened out in developed countries is that people there can take out loans when times are bad. Before They Knew the Answers We cannot do without the confidence and cooperation that financial markets embody. But we have also seen how easy it is to develop confidence in the wrong people or business concepts. Toward the end of 2008, the worst financial storms had abated, at least for now, but this is also when the long and deep trough of the business cycle begins to make itself felt in earnest. As banks reduce their indebtedness and leverage, and as institutions that previously threw capital in all directions are wound down, companies, households, and in some cases even entire nations will be unable to borrow enough to cover their running expenses.

As Western countries build ever-larger deficits, they scour markets for capital, meaning that businesses and developing countries will not be able to find any. The gigantic public works programs are being justified by reference to Keynes's teachings that the government can stimulate demand. In the absence of private demand, public spending is to fill the void and get the business cycle moving upward. But Keynes developed his ideas during the Great Depression and saw them as a way to get a completely stationary economy moving again. He was much more skeptical about whether public works could be used to control the business cycle. In 1942, he warned, "They are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date)."35 In fact, the delayed impact may reinforce the subsequent upturn, leading to overheating and a new crisis. Moreover, people may become worried if the government is overreacting, seeing it as a signal to stop consuming because they will have to pay for it in the future.

As an economist told the New York Times when Greenspan was appointed Fed chairman: He isn't a Keynesian. He isn't a monetarist. He isn't a supplysider. If he's anything, he's a pragmatist, and as such, he is somewhat unpredictable? But regardless of what theory Greenspan's actions built on, they caused him to be declared a genius in some circles, where he was viewed as a magician who had lifted growth and tamed the business cycle. Journalist Bob Woodward, of Watergate fame, chose the title Maestro for his book about Greenspan, who is there credited with orchestrating the 1990s boom in the United States. During the 2000 presidential election, the Republican primary candidate John McCain joked that he would reappoint the then 76-year-old Fed chairman-even if he were to die: "I'd prop him up and put a pair of dark glasses on him and keep him as long as we could."3 An Inflationary Boom of Some Sort After September 11, 2001, the world once more looked to Alan Greenspan, the Fed chairman who, like Archimedes, got his best ideas in his bath.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

Manias are dramatic but they have been infrequent; only two have occurred in US stocks in two hundred years. Manias generally have occurred during the expansion phase of the business cycle, in part because the euphoria associated with the mania leads to increases in spending. During the mania the increases in the prices of real estate or stocks or in one or several commodities contribute to increases in consumption and investment spending that in turn lead to quickening of economic growth. Seers in the economy forecast perpetual economic growth and some venturesome ones even proclaim an end to recessions and declare that traditional business cycles have become obsolete. The more rapid growth induces investors and lenders to become more optimistic, and asset prices increase more rapidly. Manias – especially macro manias – are associated with economic euphoria; business firms become increasingly upbeat and investment spending surges because credit is plentiful.

An epilogue summarizes some of the proposals for reform of the US financial system and asks whether the bubble and crisis of 2002–08 would have been significantly different if the legislation adopted in 2010 had been adopted in 2000. 2 The Anatomy of a Typical Crisis History vs economics Historians view each event as unique. In contrast economists search for the patterns in the data, and the systematic relationships between an event and its antecedents. History is particular; economics is general. The business cycle is a standard feature of market economies; increases in investment spending lead to increases in household income and in GDP growth. Macroeconomics focuses on the explanations for the cyclical variations in the growth of GDP relative to its long-run trend. An economic model of a general financial crisis is presented in this chapter, while the various phases of the speculative manias that lead to crises are illustrated in the following chapters.

Theories based on uncertainty of the market, on speculation in commodities, on ‘overtrading,’ on the excesses of bank credit, on the psychology of traders and merchants, did indeed reasonably fit the early ‘mercantile’ or commercial phase of modern capitalism. But as the nineteenth century wore on, captains of industry ... became the main outlets for funds seeking a profitable return through savings and investments.7 Hansen – who was a foremost expositor of the Keynesian model of the business cycle and especially of persistent high levels of unemployment – wanted to downplay the significance of alternative explanations for declines in economic activity other than a high level of saving. Hansen’s emphasis on the importance of the relation between savings and investment does not require the rejection of the view that changes in the supply of credit can have important impacts on the prices of securities and economic activity.


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Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

Bernanke, Ben, and Mark Gertler. 2000. ‘Monetary Policy and Asset Price Volatility’. NBER Working Paper Series, No. 7559. Bernanke, Ben, Mark Gertler, and Simon Gilchrist. 1999. ‘The Financial Accelerator in a Quantitative Business Cycle Framework’. Handbook of Macroeconomics 1: 1341–93. Berry, Sian. 2016. ‘Why a London Renters Union Stands In a Proud Tradition’. The Huffington Post. http://www.huffingtonpost.co.uk/sian-berry/london-housing_b_9090016.html. Bertay, Ata Can, Asli Demirgüç-Kunt, and Harry Huizinga. 2015. ‘Bank Ownership and Credit over the Business Cycle: Is Lending by State Banks Less Procyclical?’ Journal of Banking and Finance 50: 326–39. Bezemer, Dirk. 2009. ‘No One Saw This Coming: Understanding Financial Crisis Through Accounting Models’. Munich Personal RePEc Archive, No. 15892. http://mpra.ub.uni-muenchen.de/15892/.

While there is a strong theoretical case for allowing land to be used as a form of collateral from an economic development perspective (De Soto, 2000), there is also strong evidence that rapid rises in real estate credit increase financial fragility and are strong predictors of financial crises and long-lasting recessions. More generally, a number of economists now argue that capitalist economies are characterized by a land–credit ‘cycle’, which may be longer and deeper that the standard economics textbook ‘business cycle’ (Aikman et al., 2014; Borio, 2014). Figure 1.1 shows how house and land prices have developed over time in the UK over the last sixty years. We can see that since the 1960s land prices have become highly volatile, with three huge boom–bust cycles, corresponding to expansions in bank credit in the 1970s, late 1980s and 2000s. Discounting inflation, house prices have gone up five times since the end of the Second World War.

Thus the landowner monopolises the proceeds of growth. Eventually, a tipping point is reached, leading to the collapse of enterprises at the margin that can no longer afford to pay their staff and this may lead to a more widespread economic downturn with rising unemployment, banking crises and foreclosures. This natural tendency of economic rent to crowd out productive investment is, according to some, the true cause of the businesses cycles that plague advanced economies (Anderson, 2009; George, [1879] 1979, pp. 102–110).6 The solution, for George, was a comprehensive ‘single tax’, a land value tax (LVT), levied annually on the value of land held as private property. It would be high enough to end other taxes, especially upon labour and production, and would finance beneficial public investment in transport and provide improved social services, including a basic income for every citizen as a form of comprehensive welfare provision (see for example Van Parijs, 1992; Reed, 2016).


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Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Box 4.D - Irrational exuberance “Historians will marvel at the stability of our era” Gerard Baker The Times, January 2007 Prior to the most recent financial crisis, optimistic expectations within financial markets, the economics profession, and the general public were not hard to find. Belief in a ‘great moderation’ – that improvements in understanding the economy led to greater control of the business cycle through monetary policy – were endorsed by a wide range of economists including Ben Bernanke, Governor of the Federal Reserve (Bernanke, 2004). This behaviour is not surprising – psychologists have shown that success boosts confidence (Shiller, 1999). Thus extended periods of stability lead economic agents to revise what they believe to be ‘safe’ debt-equity ratios, spurred on by the proclamations of ‘experts’ (who believe themselves to have tamed the business cycle). One cause of over-optimism as to the future state of the economy is ‘disaster myopia’. Guttentag and Herring (1984) describe disaster myopia as the systemic underestimation by decision makers of the likely occurrence of low frequency events, such as asset price collapses.

Using the same 14 country 140 year dataset as Schularick and Taylor (2009), Jordà, Schularick and Taylor (2012) show “that throughout a century or more of modern economic history in advanced countries a close relationship has existed between the build-up of credit during an expansion and the severity of the subsequent recession.” As Taylor (2012) explains in a subsequent paper: “…that credit booms matter as a financial crisis risk factor is a rather narrow conclusion, and that a more general and worrying correlation is evident. During any business cycle, whether ending in a financial crisis recession or just a normal recession, there is a very strong relationship between the growth of credit (relative to GDP) on the upswing, and the depth of the subsequent collapse in GDP on the downswing.” Essentially, excess credit creation by the banking sector increases the severity of any subsequent downturn, whether it results in a financial crisis or just a normal ‘garden variety’ recession.

Needless to say, these are not trivial sums. 5.4 Environmental impacts The following section looks at how the monetary system impacts on the environment as a consequence of the government’s response to the boom bust cycle, the funding of businesses, and the effect of the monetary system on growth.4 Government responses to the boom bust cycle As outlined in Chapter 4, the current monetary system creates an inbuilt tendency for the economy to experience temporary booms followed by recessions. This may also be followed by financial crisis when the burden of debt becomes too large to service. While the business cycle itself has a relatively neutral effect on the environment (excluding the mal-investment effect on resource use) the same cannot be said of the government’s response to these cycles, which tends to involve removing environmental regulations and reducing spending, as outlined below. Environmental regulation in economic downturns In a recession it is common to hear the argument that the costs of businesses are too high due to regulations which are represented as onerous, and that the relaxation of these regulations would allow businesses to hire, resulting in reduced unemployment and increased output.


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The American Dream Is Not Dead: (But Populism Could Kill It) by Michael R. Strain

Bernie Sanders, business cycle, centre right, creative destruction, deindustrialization, Donald Trump, feminist movement, full employment, gig economy, Gini coefficient, income inequality, job automation, labor-force participation, market clearing, market fundamentalism, new economy, Robert Gordon, Ronald Reagan, social intelligence, Steven Pinker, The Rise and Fall of American Growth, upwardly mobile, working poor

Certainly, we want to compare the wages of today’s workers to wages at some point in the past. But when? The base-year selection is always somewhat arbitrary, of course, but we still need to pick one. I like to use July 1990, for a few reasons. Wage growth typically responds to the business cycle. To make comparisons of wage growth between two periods, then, it is important to try to find periods that are at a similar point in the business cycle. For example, comparing wage growth during a recession to wage growth during an expansion might bias the calculation to show stronger growth than may exist in the underlying trend. July 1990 was a business-cycle peak, making it a good month to compare to today’s economy. (If anything, this date introduces a slight bias in favor of finding relatively weaker wage growth.) Figure 7 is the same as the one that started this chapter.

Figure 7 is the same as the one that started this chapter. It looks as if wage growth can be broken into three periods: robust growth following the end of World War II, followed by a period of stagnant—or even declining—growth from the mid-1970s through the mid-1990s, followed again by a period of solid growth. So another reason to make comparisons to the summer of 1990 is that this was the business-cycle peak prior to the “structural break” that seems to have occurred in the mid-1990s. FIGURE 7. AVERAGE REAL WAGE FOR PRODUCTION AND NONSUPERVISORY EMPLOYEES. July 1990 is also roughly 30 years ago, which reflects the current narrative. You often hear that wages have been stagnant “for several decades,” which many take to mean 30 years. Sometimes, you hear explicit references to 30 years—for example, in Senator Hawley’s speech mentioned in chapter 2.

(As mentioned earlier, I would advise the latter, because economic theory argues that workers are paid the marginal product of the output they produce, not of the goods and services they consume.) Stansbury and Summers have a straightforward empirical design. They calculate the three-year moving average of the change in real compensation and the three-year moving average of the change in labor productivity. They then correlate these smooth, short-run measures of compensation growth and productivity growth, holding constant effects from the business cycle. Their main results analyze the period from 1975 through 2015. The economists find that a 1-percentage-point increase in productivity growth predicts a 0.73-percentage point increase in median compensation growth, a 0.53-percentage-point increase in compensation growth for nonsupervisory employees, and a 0.74-percentage-point increase in average compensation growth. In all three cases, their estimate is statistically significantly different from zero—that is, in a statistical sense, they can reject the hypothesis that there is no relationship between pay and productivity.


The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K, zero-sum game

When America mobilized for the war, the system helped planners set goals for military production and gauge how much rationing would be needed on the home front to support the war effort. The NBER is also the authority on the ups and downs of the business cycle; its analysts to this day determine the official beginning and ending dates of recessions. Arthur Burns was an avuncular, pipe-smoking scholar. He had a profound impact on business-cycle research—his 1946 book, written with Wesley Clair Mitchell, was the seminal analysis of U.S. business cycles from 1854 to 1938. His devotion to empirical evidence and deductive logic put him at odds with the economics mainstream. Burns loved to provoke disagreements among his graduate students. One day, in a class about inflation's corrosive effect on national wealth, he went around the room asking, "What causes inflation?"

By Thanksgiving I was telling the president, "There's a possibility that we may have very severe problems going into next spring." On Christmas Eve, the policy group wrote a memorandum warning him to expect more unemployment and the deepest recession since World War II. It was not a nice present. Worse, we had to tell him we didn't know how bad the recession would be. Recessions are like hurricanes—they range from ordinary to catastrophic. The ordinary ones are part of the business cycle: they happen when business inventories exceed demand, and companies cut production sharply until the excess inventory gets sold. The Category 5 kind happens when demand itself collapses—when consumers stop spending and businesses stop investing. As we talked through the possibilities, President Ford worried that America would find itself trapped in a vicious circle of falling demand, layoffs, and gloom.

A few days later, he publicly endorsed the rate increase as essential for the long-term stability of the system. "In the medium and long term it will be a very good thing for the economy," he added. W hen George Bush won that fall, I hoped the Fed and his administra- tion would get along. Everybody knew that whoever came in after Reagan would face big economic challenges: not just an eventual downturn in the business cycle, but whopping deficits and the rapidly mounting national debt. I thought Bush had upped the ante substantially when he'd declared in his acceptance speech at the Republican convention: "Read my lips: no new taxes." It was a memorable line, but at some point he was going to have to tackle the deficit—and he'd tied one hand behind his back. People were surprised by the thoroughness with which the new administration replaced Reagan appointees.


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The Investment Checklist: The Art of In-Depth Research by Michael Shearn

Asian financial crisis, barriers to entry, business cycle, call centre, Clayton Christensen, collective bargaining, commoditize, compound rate of return, Credit Default Swap, estate planning, intangible asset, Jeff Bezos, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, supply-chain management, technology bubble, time value of money, transaction costs, urban planning, women in the workforce, young professional

Be certain to distinguish between this kind of long-term growth and shorter-term cyclical changes. These short-term changes are also called business cycle changes: these are the ups and downs that are associated with growth and contraction in the wider economy. The earnings of a cyclical business, such as a steel manufacturer, are especially sensitive to business cycles, and change with swings in the economy. (Non-cyclical businesses don’t tend to go up and down with the economy.) If a business benefits from a secular growth trend, its growth is longer lasting than a single business cycle. Secular growth continues through a business cycle. In fact, earnings-per-share of businesses riding secular growth trends tend to peak at each succeeding major business cycle. Also, be careful to distinguish rising commodity prices from secular growth trends.

To further protect itself, Brookfield will only borrow the amount that it would typically be able to pay back in one business cycle. Brookfield also staggers the maturity of its debt repayments so that they don’t all come due at the same time, thus decreasing refinancing risk. Brookfield will typically finance assets that generate predictable long-term cash flows with long-term fixed-rate debt, instead of variable-rate debt, in order to provide stability in cash flows and protect returns in the event of changes in interest rates. It also maintains access to a broad range of financing markets, such as equity and debt markets, so that it can facilitate access to capital throughout the business cycle. This way, it is not dependent on any particular segment of the capital markets to finance its operations.7 Determining How Much a Business Can Borrow You need to determine how much a business can borrow.

These items are products or services that a consumer can defer purchasing for a long time (and may not even purchase at all), such as jewelry, a new car, a new house, or travel. Do not make the assumption that a discretionary business or industry will always lose sales in tough times, however. For example, many luxury retailers—such as Louis Vuitton Moët Hennessy or Compagnie Financière Richemont SA, which owns Cartier, Montblanc, Alfred Dunhill, and Van Cleef & Arpels—were thought to be sensitive to business cycles, and their stock prices fell when the recession began in 2007. However, the stock prices of these two companies quickly rebounded as their core customers, who are ultra-wealthy, continued their spending habits, and sales did not drop as much as was anticipated. 14. If the business disappeared tomorrow, what impact would this have on the customer base? To understand how much customers depend on a business, ask what the customer would do if the business disappeared tomorrow.


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The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, plutocrats, Plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

Anticipating the objection that “the people” in question had voted for liberals, Spahr lectured his audience that “the last popular vote for Hitler was nearly 100% of the total vote cast.”14 Evidently, in those years when peace was new, the relics of the prewar economics lived on in the NYU faculty. The question is how far any of this made a difference to the young Greenspan. Toward the end of his undergraduate career, he took Spahr’s class on understanding business cycles. Ironically, Spahr’s views on this subject anticipated the lectures and articles that Greenspan would produce in his thirties and early forties. In Spahr’s opinion, Keynes and his disciples had business cycles backward: they favored budget deficits and money printing to battle recessions, but Spahr fervently believed that such activism would serve only to exacerbate swings in the economy. Yet if this was Spahr’s opinion, he was ineffective at communicating it. His fierce off-campus speeches contrasted sharply with his quiet comportment at the university, and he smothered his ideological fire with a wet-blanket teaching style that made him the last person to win young minds over to conservatism.

If central bankers aspired to smooth out the peaks and troughs in the business cycle, they would have to control asset bubbles. Greenspan drove home this point with a lesson from history. In the 1920s, the stock market had broken one record after another, yet the Fed had ducked its responsibility to choke off the bubble by raising interest rates. Instead, it had sided with commentators who rationalized the bubble, arguing that the abandonment of the rigid pre–World War I gold standard had inoculated the United States from boom-bust cycles, thereby neutralizing one of the main risks to investors and justifying a huge revaluation of the stock market.27 As Greenspan put it: The belief, widespread at the time, that the business cycle had finally been controlled by the institution of a managed currency, induced a sharp drop in risk premiums, presumably to irrational levels. . . .

Keynes had taught how to combat economic slowdowns by running a government budget deficit, and neo-Keynesians had grasped how slumps could be averted by the central bank as well: low interest rates, hitherto regarded principally as a means of helping the government to borrow, were now understood as a tool of economic management.2 “The supply of money, its availability to investor borrowers, and the interest cost of such borrowings can have important effects on [GNP],” Paul Samuelson instructed in the 1961 edition of his bestselling textbook, revising the dismissal of monetary policy in his 1948 edition.3 “The worst consequences of the business cycle . . . are probably a thing of the past,” Samuelson wrote confidently, and conservative economists agreed.4 At the end of 1959, Greenspan’s mentor Arthur Burns proclaimed, “The business cycle is unlikely to be as disturbing or troublesome to our children as it was to us and our fathers.”5 It was not just that economists understood how to prevent recessions. Thanks to new computer models, they believed they understood the relationships between growth, inflation, and employment so precisely that they could “fine-tune” the economy to deliver the ideal combination.


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The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bernie Madoff, Black Swan, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index fund, interest rate swap, invisible hand, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Academic research (Williams 1986), has examined the economic determinants of returns to commodity investment. As with any futures based investment, returns are determined by both the expected returns on the deliverable and the expected cost of carry returns, as well as other storage and deliverable options. For example, as expected, Fama and French (1988) and Schneeweis, Spurgin, and Georgiev (2000) identified a strong business cycle component in industrial metals based futures contracts, a finding that is consistent with the business cycle variation of spot and futures prices of industrial metals.3 Commodity based index returns can also benefit from multiple sources of returns, many of which tend not to be correlated. These can include spot,4 roll,5 beta, momentum, rebalancing, and Treasury Bill, returns. However, each index has its own unique portfolio attribution characteristics and can be impacted by additional factors like diversification, commodity component weighting, and roll schedule. 161 – 6.00% – 5.00% – 4.00% – 3.00% – 2.00% – 1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% EXHIBIT 7.21 Average Monthly Return All REITs Equity REITs Mortgage REITs Middle 32 Months FTSE REIT Returns Ranked by S&P 500 (2001–2008) S&P 500 Worst 32 Months Hybrid REITs Best 32 Months 162 THE NEW SCIENCE OF ASSET ALLOCATION Commodity Return and Risk Performance Results in Exhibit 7.22 show the risk and return performance of the S&P GSCI commodity index, traditional U.S. equity and bond indices, the hedge fund and CTA indices, and the real estate and private equity indices for the period 2001 to 2008.

The entire area of monitoring and evaluating fund risk is constantly evolving, and readers are directed to articles in academic (The Journal of Alternative Investments) and practitioner press to track changes and advances in the field. APPENDIX Risk and Return of Asset Classes and Risk Factors Through Business Cycles This appendix presents graphs of risks and returns of major asset classes through time. The goal is to familiarize readers with the behavior of these variables as the economy goes through various stages of the business cycle. Our other goal is to show that return and, especially, risk characteristics of asset classes do change through time and some of these changes will be quite dramatic during periods of economic stress. On the graphs that follow, periods of economic stress are highlighted with shading. 700 600 USD 500 400 300 200 100 D ec No -89 vO 90 ct Se 91 pA u 92 g9 Ju 3 l-9 Ju 4 n M -95 ay Ap 96 r-9 M 7 ar Fe 98 bJa 99 n D -00 ec N -00 ov O 01 ct -0 Se 2 p Au -03 g0 Ju 4 l-0 Ju 5 n M -06 ay Ap 07 r-0 M 8 ar -0 9 0 Date EXHIBIT A.1 S&P 500: Growth of $100 Source: Bloomberg Corporation 251 D ec No -89 vO 90 ct Se 91 pA u 92 g9 Ju 3 l-9 Ju 4 n M -95 ay Ap 96 r-9 M 7 ar Fe 98 bJa 99 n D -00 ec No -00 vO 01 ct Se 02 pA u 03 g0 Ju 4 lJu 0 5 n M -06 ay Ap 07 r-0 M 8 ar -0 9 USD D ec No -90 vO 91 ct Se 92 pA u 93 g9 Ju 4 l-9 Ju 5 n M -96 ay Ap 97 r-9 M 8 ar Fe 99 bJa 00 nD 01 ec N -01 ov O 02 ct Se 03 pA u 04 g0 Ju 5 l-0 Ju 6 n M -07 ay Ap 08 r-0 9 Standard Deviation 252 APPENDIX 0.25 0.20 0.15 0.10 0.05 0.00 Date EXHIBIT A.2 S&P 500: Volatility Source: Bloomberg Corporation. 1,200 1,000 800 600 400 200 0 Date EXHIBIT A.3 NASDAQ Composite: Growth of $100 Source: Bloomberg Corporation.

Notes CHAPTER 5 Strategic, Tactical, and Dynamic Asset Allocation Asset Allocation Optimization Models Strategic Asset Allocation Tactical Asset Allocation Dynamic Asset Allocation Notes CHAPTER 6 Core and Satellite Investment: Market/Manager Based Alternatives Determining the Appropriate Benchmarks and Groupings Sample Allocations Core Allocation Satellite Investment Algorithmic and Discretionary Aspects of Core/Satellite Exposure Replication Based Indices Peer Group Creation—Style Purity Notes 58 59 61 66 70 71 74 82 84 88 91 92 99 101 107 109 110 111 117 119 120 120 122 126 132 Contents CHAPTER 7 Sources of Risk and Return in Alternative Investments Asset Class Performance Hedge Funds Managed Futures (Commodity Trading Advisors) Private Equity Real Estate Commodities Notes CHAPTER 8 Return and Risk Differences among Similar Asset Class Benchmarks Making Sense Out of Traditional Stock and Bond Indices Private Equity Real Estate Alternative REIT Investments Indices Commodity Investment Hedge Funds Investable Manager Based Hedge Fund Indices CTA Investment Index versus Fund Investment: A Hedge Fund Example Notes CHAPTER 9 Risk Budgeting and Asset Allocation Process of Risk Management: Multi-Factor Approach Process of Risk Management: Volatility Target Risk Decomposition of Portfolio Risk Management Using Futures Risk Management Using Options Covered Call Long Collar Notes CHAPTER 10 Myths of Asset Allocation Investor Attitudes, Not Economic Information, Drive Asset Values Diversification Across Domestic or International Equity Securities Is Sufficient vii 134 135 139 143 148 153 160 166 167 168 170 173 179 179 185 185 189 189 194 195 195 200 202 203 206 206 208 210 212 213 214 viii CONTENTS Historical Security and Index Performance Provides a Simple Means to Forecast Future Excess Risk-Adjusted Returns Recent Manager Fund Return Performance Provides the Best Forecast of Future Return Superior Managers or Superior Investment Ideas Do Not Exist Performance Analytics Provide a Complete Means to Determine Better Performing Managers Traditional Assets Reflect “Actual Values” Better Than Alternative Investments Stock and Bond Investment Means Investors Have No Derivatives Exposure Stock and Bond Investment Removes Investor Concerns as to Leverage Given the Efficiency of the Stock and Bond Markets, Managers Provide No Useful Service Investors Can Rely on Academics and Investment Professionals to Provide Current Investment Models and Theories Alternative Assets Are Riskier Than Equity and Fixed Income Securities Alternative Assets Such as Hedge Funds Are Absolute Return Vehicles Alternative Investments Such as Hedge Funds Are Unique in Their Investment Strategies Hedge Funds Are Black Box Trading Systems Unintelligible to Investors Hedge Funds Are Traders, Not Investment Managers Alternative Investment Strategies Are So Unique That They Cannot Be Replicated It Makes Little Difference Which Traditional or Alternative Indices Are Used in an Asset Allocation Model Modern Portfolio Theory Is Too Simplistic to Deal with Private Equity, Real Estate, and Hedge Funds Notes CHAPTER 11 The Importance of Discretion in Asset Allocation Decisions The Why and Wherefore of Asset Allocation Models Value of Manager Discretion 215 215 216 216 217 217 218 218 218 219 220 221 222 222 223 223 223 225 226 226 230 Contents Manager Evaluation and Review: The Due Diligence Process Madoff: Due Diligence Gone Wrong or Never Conducted Notes CHAPTER 12 Asset Allocation: Where Is It Headed? An Uncertain Future What Is the Definition of Order? Costs and Benefits Today’s Issue Possible Governmental and Private Fund Responses to Current Market Concerns Note ix 232 233 239 240 241 243 246 246 247 249 Appendix: Risk and Return of Asset Classes and Risk Factors Through Business Cycles 251 Glossary: Asset Class Benchmarks 271 Bibliography 279 About the Authors 285 Index 287 Preface ithout reservation, everything we believe about asset allocation and the perceived science surrounding its application is not necessarily true. The corollary to this statement is that a complete understanding of asset allocation is impossible. First, all beliefs are based on perceived fact; unfortunately sometimes those perceptions stem from a misreading or misunderstanding of the relevant material, or on the reliance of oral communications from a trusted advisor or source.


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Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy by Erik Brynjolfsson

"Robert Solow", Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business cycle, business process, call centre, combinatorial explosion, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, easy for humans, difficult for computers, Erik Brynjolfsson, factory automation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, hiring and firing, income inequality, intangible asset, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, Kickstarter, knowledge worker, Loebner Prize, low skilled workers, minimum wage unemployment, patent troll, pattern recognition, Paul Samuelson, Ray Kurzweil, rising living standards, Robert Gordon, self-driving car, shareholder value, Skype, too big to fail, Turing test, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, wealth creators, winner-take-all economy, zero-sum game

Former Office of Management and Budget director Peter Orszag agrees, writing that “the fundamental impediment to getting jobless Americans back to work is weak growth.” In the cyclical explanation, an especially deep drop in demand like the Great Recession is bound to be followed by a long and frustratingly slow recovery. What America has been experiencing since 2007, in short, is another case of the business cycle in action, albeit a particularly painful one. A second explanation for current hard times sees stagnation, not cyclicality, in action. Stagnation in this context means a long-term decline in America’s ability to innovate and increase productivity. Economist Tyler Cowen articulates this view in his 2010 book, The Great Stagnation: We are failing to understand why we are failing. All of these problems have a single, little noticed root cause: We have been living off low-hanging fruit for at least three hundred years. … Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there.

As a result, millions of people are being left behind. Their incomes and jobs are being destroyed, leaving them worse off in absolute purchasing power than before the digital revolution. While the foundation of our economic system presumes a strong link between value creation and job creation, the Great Recession reveals the weakening or breakage of that link. This is not merely an artifact of the business cycle but rather a symptom of a deeper structural change in the nature of production. As technology accelerates on the second half of the chessboard, so will the economic mismatches, undermining our social contract and ultimately hurting both rich and poor, not just the first waves of unemployed. The economics of technology, productivity, and employment are increasingly fodder for debate and seemingly filled with paradoxes.

Borrowing helped mask the problem until the Great Recession came along. The gradual demand collapse that might have been spread over decades was compressed into a much shorter period, making it harder for workers to change their skills, entrepreneurs to invent new business models, and managers to make the necessary adjustments equally quickly. The result has been a dysfunctional series of crises. Certainly, much of the recent unemployment is, as past business cycles, simply due to weak demand in the overall economy, reflecting an extremely severe downturn. However, this does not negate the important structural component to the falling levels of employment, and it is plausible that the Great Recession itself may, in part, reflect a delayed response to these deeper structural issues. Looking Ahead As we look ahead, we see these three trends not only accelerating but also evolving.


The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson

"Robert Solow", barriers to entry, British Empire, business cycle, California gold rush, collective bargaining, correlation coefficient, David Ricardo: comparative advantage, full employment, income per capita, Kenneth Arrow, market clearing, Norman Macrae, Pareto efficiency, price discrimination, profit maximization, rent-seeking, Sam Peltzman, selection bias, Simon Kuznets, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, urban decay, working poor

Mancur Olson For Ellika, Mancur Severin, and Sander Preface 1. The Questions, and the Standards a Satisfactory Answer Must Meet 2. The Logic 3. The Implications 4. The Developed Democracies Since World War 11 5. Jurisdictional Integration and Foreign Trade 6. Inequality, Discrimination, and Development 7. Stagflation, Unemployment, and Business Cycles: An Evolutionary Approach to Macroeconomics Acknowledgments Notes Index It may seem strange, at a time when so many find fault with economics, that an economist should claim to extend existing economic theory in a way that not only explains the "stagflation" and declining growth rates that have given rise to the recent complaints, but also provides a partial explanation of a variety of problems usually reserved for other fieldsthe "ungovernability" of some modern societies, the British class structure and the Indian caste system, the exceptionally unequal distribution of power and income in many developing countries, and even the rise of Western Europe from relative backwardness in the early Middle Ages to dominance of the whole world by the late nineteenth century.

VI We must now develop a point that may at first seem unimportant, and that in any case is obvious to anyone who has endured a committee meeting where it took a long time to make (or fail to make) a decision. The point is that special-interest organizations and collusions tend to make decisions more slowly than the firms or individuals of which they are composed. We shall see later that this trait is crucial to understanding phenomena as important as the business cycle and the rate of adoption of new technologies, and that the reasons for this slowness of decision-making are also very much worthy of our attention. The two main reasons why special-interest groups make decisions more slowly than the individuals or firms of which they are constituted is that they must use either consensual bargaining or constitutional procedures, or both of these methods, to make decisions.

Not all the definitions of rational expectations are exactly the same, but for present purposes it is best interpreted as the notion that people making decisions take into account all available information that is worth taking into account; economically rational expectations in this sense has all along been the usual implicit assumption in microeconomic theorizing. Equilibrium theorists explain obvious variations in the rate of unemployment over the business cycle primarily in terms of voluntary choices concerning when appears to be the most advantageous time to take leisure or education or to forgo gainful employment in order to spend full time seeking a better job. Their arguments are too complicated to summarize without violating the general constraints that govern the exposition in this volume. The key to the equilibrium theory is nonetheless clear: it is the supposition that different groups in the economy have different information or expectations of the future, and that individual workers, despite rational expectations, temporarily misperceive real wages or real interest rates.


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Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

"Robert Solow", Airbus A320, Albert Einstein, Albert Michelson, algorithmic trading, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Benoit Mandelbrot, bitcoin, Black Swan, Bonfire of the Vanities, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, easy for humans, difficult for computers, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Hans Rosling, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, Moneyball by Michael Lewis explains big data, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, oil shock, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Pierre-Simon Laplace, popular electronics, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, World Values Survey, Yom Kippur War, zero-sum game

One of the authors was, as Deputy Governor of the Bank of England, asked to give evidence before the House of Commons Select Committee on Education and Employment on the subject of whether Britain should join the European Monetary Union. How, the MPs asked, could we know when the UK business cycle had converged with that on the Continent? The answer was that since business cycles are of the order of ten years in duration, and at least twenty or thirty observations would be needed to assess the issue, it would be two hundred years or more before we would know. Underlying the question was the assumption that the process driving business cycles was stationary, and that over time we could learn enough about that process to provide an answer. But it would be absurd to claim that economic cycles had been unchanging since the beginning of the Industrial Revolution.

., 295 , 407 , 412 business cycles, 347 business history (academic discipline), 286 business schools, 318 business strategy: approach in 1970s, 183 ; approach in 1980s, 181–2 ; aspirations confused with, 181–2 , 183–4 ; business plans, 223–4 , 228 ; collections of capabilities, 274–7 ; and the computer industry, 27–31 ; corporate takeovers, 256–7 ; Lampert at Sears, 287–9 , 292 ; Henry Mintzberg on, 296 , 410 ; motivational proselytisation, 182–3 , 184 ; quantification mistaken for understanding, 180–1 , 183 ; and reference narratives, 286–90 , 296–7 ; risk maps, 297 ; Rumelt’s MBA classes, 10 , 178–80 ; Shell’s scenario planning, 223 , 295 ; Sloan at General Motors, 286–7 ; strategy weekends, 180–3 , 194 , 296 , 407 ; three common errors, 183–4 ; vision or mission statements, 181–2 , 184 Buxton, Jedediah, 225 Calas, Jean, 199 California, 48–9 Cambridge Growth Project, 340 Canadian fishing industry, 368–9 , 370 , 423 , 424 cancer, screening for, 66–7 Candler, Graham, 352 , 353–6 , 399 Cardiff City Football Club, 265 Carlsen, Magnus, 175 , 273 Carnegie, Andrew, 427 Carnegie Mellon University, 135 Carré, Dr Matt, 267–8 Carroll, Lewis, Through the Looking-Glass , 93–4 , 218 , 344 , 346 ; ‘Jabberwocky’, 91–2 , 94 , 217 Carron works (near Falkirk), 253 Carter, Jimmy, 8 , 119 , 120 , 123 , 262–3 cartography, 391 Casio, 27 , 31 Castro, Fidel, 278–9 cave paintings, 216 central banks, 5 , 7 , 95 , 96 , 103–5 , 285–6 , 348–9 , 350 , 351 , 356–7 Central Pacific Railroad, 48 Centre for the Study of Existential Risk, 39 Chabris, Christopher, 140 Challenger disaster (1986), 373 , 374 Chamberlain, Neville, 24–5 Chandler, Alfred, Strategy and Structure , 286 Chariots of Fire (film, 1981), 273 Charles II, King, 383 Chelsea Football Club, 265 chess, 173 , 174 , 175 , 266 , 273 , 346 Chicago economists, 36 , 72–4 , 86 , 92 , 111–14 , 133–7 , 158 , 257–8 , 307 , 342–3 , 381–2 Chicago Mercantile Exchange, 423 chimpanzees, 161–2 , 178 , 274 China, 4–5 , 419–20 , 430 cholera, 283 Churchill, Winston: character of, 25–6 , 168 , 169 , 170 ; fondness for gambling, 81 , 168 ; as hedgehog not fox, 222 ; on Montgomery, 293 ; restores gold standard (1925), 25–6 , 269 ; The Second World War , 187 ; Second World War leadership, 24–5 , 26 , 119 , 167 , 168–9 , 170 , 184 , 187 , 266 , 269 Citibank, 255 Civil War, American, 188 , 266 , 290 Clapham, John, 253 Clark, Sally, 197–8 , 200 , 202 , 204 , 206 Clausewitz, Carl von, On War , 433 climate systems, 101–2 Club of Rome, 361 , 362 Coase, Ronald, 286 , 342 Cochran, Johnnie, 198 , 217 Cochrane, John, 93 coffee houses, 55–6 cognitive illusions, 141–2 Cohen, Jonathan, 206–7 Colbert, Jean-Baptiste, 411 Cold War, 293–4 , 306–7 Collier, Paul, 276–7 Columbia disaster (2003), 373 Columbia University, 117 , 118 , 120 Columbus, Christopher, 4 , 21 Colyvan, Mark, 225 Comet aircraft, 23–4 , 228 communication: communicative rationality, 172 , 267–77 , 279–82 , 412 , 414–16 ; and decision-making, 17 , 231 , 272–7 , 279–82 , 398–9 , 408 , 412 , 413–17 , 432 ; eusociality, 172–3 , 274 ; and good doctors, 185 , 398–9 ; human capacity for, 159 , 161 , 162 , 172–3 , 216 , 272–7 , 408 ; and ill-defined concepts, 98–9 ; and intelligibility, 98 ; language, 98 , 99–100 , 159 , 162 , 173 , 226 ; linguistic ambiguity, 98–100 ; and reasoning, 265–8 , 269–77 ; and the smartphone, 30 ; the ‘wisdom of crowds’, 47 , 413–14 Community Reinvestment Act (USA, 1977), 207 comparative advantage model, 249–50 , 251–2 , 253 computer technologies, 27–31 , 173–4 , 175–7 , 185–6 , 227 , 411 ; big data, 208 , 327 , 388–90 ; CAPTCHA text, 387 ; dotcom boom, 228 ; and economic models, 339–40 ; machine learning, 208 Condit, Phil, 228 Condorcet, Nicolas de, 199–200 consumer price index, 330 , 331 conviction narrative theory, 227–30 Corinthians (New Testament), 402 corporate takeovers, 256–7 corporations, large, 27–31 , 122 , 123 , 286–90 , 408–10 , 412 , 415 Cosmides, Leda, 165 Cretaceous–Paleogene extinction, 32 , 39 , 71–2 Crick, Francis, 156 cricket, 140–1 , 237 , 263–5 crime novels, classic, 218 crosswords, 218 crypto-currencies, 96 , 316 Csikszentmihalyi, Mihaly, 140 , 264 Cuba, 278–80 ; Cuban Missile Crisis, 279–81 , 299 , 412 Custer, George, 293 Cutty Sark (whisky producer), 325 Daily Express , 242–3 , 244 Damasio, Antonio, 171 Dardanelles expedition (1915), 25 Darwin, Charles, 156 , 157 Davenport, Thomas, 374 Dawkins, Richard, 156 de Havilland company, 23–4 Debreu, Gerard, 254 , 343–4 decision theory, xvi ; critiques of ‘American school’, 133–7 ; definition of rationality, 133–4 ; derived from deductive reasoning, 138 ; Ellsberg’s ‘ambiguity aversion’, 135 ; expected utility , 111–14 , 115–18 , 124–5 , 127 , 128 – 30 , 135 , 400 , 435–44 ; hegemony of optimisation, 40–2 , 110–14 ; as unable to solve mysteries, 34 , 44 , 47 ; and work of Savage, 442–3 decision-making under uncertainty: and adaptation, 102 , 401 ; Allais paradox, 133–7 , 437 , 440–3 ; axiomatic approach extended to, xv , 40–2 , 110–14 , 133–7 , 257–9 , 420–1 ; ‘bounded rationality concept, 149–53 ; as collaborative process, 17 , 155 , 162 , 176 , 411–15 , 431–2 ; and communication, 17 , 231 , 272–7 , 279–82 , 398–9 , 408 , 412 , 413–17 , 432 ; communicative rationality, 172 , 267–77 , 279–82 , 412 , 414–16 ; completeness axiom, 437–8 ; continuity axiom, 438–40 ; Cuban Missile Crisis, 279–81 , 299 , 412 ; ‘decision weights’ concept, 121 ; disasters attributed to chance, 266–7 ; doctors, 184–6 , 194 , 398–9 ; and emotions, 227–9 , 411 ; ‘evidence-based policy’, 404 , 405 ; excessive attention to prior probabilities, 184–5 , 210 ; expected utility , 111–14 , 115–18 , 124–5 , 127 , 128–30 , 135 , 400 , 435–44 ; first-rate decision-makers, 285 ; framing of problems, 261 , 362 , 398–400 ; good strategies for radical uncertainty, 423–5 ; and hindsight, 263 ; independence axiom, 440–4 ; judgement as unavoidable, 176 ; Klein’s ‘primed recognition decision-making’, 399 ; Gary Klein’s work on, 151–2 , 167 ; and luck, 263–6 ; practical decision-making, 22–6 , 46–7 , 48–9 , 81–2 , 151 , 171–2 , 176–7 , 255 , 332 , 383 , 395–6 , 398–9 ; and practical knowledge, 22–6 , 195 , 255 , 352 , 382–8 , 395–6 , 405 , 414–15 , 431 ; and prior opinions, 179–80 , 184–5 , 210 ; ‘prospect theory’, 121 ; public sector processes, 183 , 355 , 415 ; puzzle– mystery distinction, 20–4 , 32–4 , 48–9 , 64–8 , 100 , 155 , 173–7 , 218 , 249 , 398 , 400–1 ; qualities needed for success, 179–80 ; reasoning as not decision-making, 268–71 ; and ‘resulting’, 265–7 ; ‘risk as feelings’ perspective, 128–9 , 310 ; robustness and resilience, 123 , 294–8 , 332 , 335 , 374 , 423–5 ; and role of economists, 397–401 ; Rumelt’s ‘diagnosis’, 184–5 , 194–5 ; ‘satisficing’ (’good enough’ outcomes), 150 , 167 , 175 , 415 , 416 ; search for a workable solution, 151–2 , 167 ; by securities traders, 268–9 ; ‘shock’ and ‘shift’ labels, 42 , 346 , 347 , 348 , 406–7 ; simple heuristics, rules of thumb, 152 ; and statistical discrimination, 207–9 , 415 ; triumph of probabilistic reasoning, 20 , 40–2 , 72–84 , 110–14 ; von Neumann– Morgenstern axioms, 111 , 133 , 435–44 ; see also business strategy deductive reasoning, 137–8 , 147 , 235 , 388 , 389 , 398 Deep Blue, 175 DeepMind, 173–4 The Deer Hunter (film, 1978), 438 democracy, representative, 292 , 319 , 414 demographic issues, 253 , 358–61 , 362–3 ; EU migration models, 369–70 , 372 Denmark, 426 , 427 , 428 , 430 dentistry, 387–8 , 394 Derek, Bo, 97 dermatologists, 88–9 Digital Equipment Corporation (DEC), 27 , 31 dinosaurs, extinction of, 32 , 39 , 71–2 , 383 , 402 division of labour, 161 , 162 , 172–3 , 216 , 249 DNA, 156 , 198 , 201 , 204 ‘domino theory’, 281 Donoghue, Denis, 226 dotcom boom, 316 , 402 Doyle, Arthur Conan, 34 , 224–5 , 253 Drapers Company, 328 Drescher, Melvin, 248–9 Drucker, Peter, Concept of the Corporation (1946), 286 , 287 Duhem–Quine hypothesis, 259–60 Duke, Annie, 263 , 268 , 273 Dulles, John Foster, 293 Dutch tulip craze (1630s), 315 Dyson, Frank, 259 earthquakes, 237–8 , 239 Eco, Umberto, The Name of the Rose , 204 Econometrica , 134 econometrics, 134 , 340–1 , 346 , 356 economic models: of 1950s and 1960s, 339–40 ; Akerlof model, 250–1 , 252 , 253 , 254 ; ‘analogue economies’ of Lucas, 345 , 346 ; artificial/complex, xiv–xv , 21 , 92–3 , 94 ; ‘asymmetric information’ model, 250–1 , 254–5 ; capital asset pricing model (CAPM), 307–8 , 309 , 320 , 332 ; comparative advantage model, 249–50 , 251–2 , 253 ; cost-benefit analysis obsession, 404 ; diversification of risk, 304–5 , 307–9 , 317–18 , 334–7 ; econometric models, 340–1 , 346 , 356 ; economic rent model, 253–4 ; efficient market hypothesis, 252 , 254 , 308–9 , 318 , 320 , 332 , 336–7 ; efficient portfolio model, 307–8 , 309 , 318 , 320 , 332–4 , 366 ; failure over 2007–08 crisis, xv , 6–7 , 260 , 311–12 , 319 , 339 , 349–50 , 357 , 367–8 , 399 , 407 , 423–4 ; falsificationist argument, 259–60 ; forecasting models, 7 , 15–16 , 68 , 96 , 102–5 , 347–50 , 403–4 ; Goldman Sachs risk models, 6–7 , 9 , 68 , 202 , 246–7 ; ‘grand auction’ of Arrow and Debreu, 343–5 ; inadequacy of forecasting models, 347–50 , 353–4 , 403–4 ; invented numbers in, 312–13 , 320 , 363–4 , 365 , 371 , 373 , 404 , 405 , 423 ; Keynesian, 339–40 ; Lucas critique, 341 , 348 , 354 ; Malthus’ population growth model, 253 , 358–61 , 362–3 ; misuse/abuse of, 312–13 , 320 , 371–4 , 405 ; need for, 404–5 ; need for pluralism of, 276–7 ; pension models, 312–13 , 328–9 , 405 , 423 , 424 ; pre-crisis risk models, 6–7 , 9 , 68 , 202 , 246–7 , 260 , 311–12 , 319 , 320–1 , 339 ; purpose of, 346 ; quest for large-world model, 392 ; ‘rational expectations theory, 342–5 , 346–50 ; real business cycle theory, 348 , 352–4 ; role of incentives, 408–9 ; ‘shift’ label, 406–7 ; ‘shock’ label, 346–7 , 348 , 406–7 ; ‘training base’ (historical data series), 406 ; Value at risk models (VaR), 366–8 , 405 , 424 ; Viniar problem (problem of model failure), 6–7 , 58 , 68 , 109 , 150 , 176 , 202 , 241 , 242 , 246–7 , 331 , 366–8 ; ‘wind tunnel’ models, 309 , 339 , 392 ; winner’s curse model, 256–7 ; World Economic Outlook, 349 ; see also axiomatic rationality; maximising behaviour; optimising behaviour; small world models Economic Policy Symposium, Jackson Hole, 317–18 economics: adverse selection process, 250–1 , 327 ; aggregate output and GDP, 95 ; ambiguity of variables/concepts, 95–6 , 99–100 ; appeal of probability theory, 42–3 ; ‘bubbles’, 315–16 ; business cycles, 45–6 , 347 ; Chicago School, 36 , 72–4 , 86 , 92 , 111–14 , 133–7 , 158 , 257–8 , 307 , 342–3 , 381–2 ; data as essential, 388–90 ; division of labour, 161 , 162 , 172–3 , 216 , 249 ; and evolutionary mechanisms, 158–9 ; ‘expectations’ concept, 97–8 , 102–3 , 121–2 , 341–2 ; forecasts and future planning as necessary, 103 ; framing of problems, 261 , 362 , 398–400 ; ‘grand auction’ of Arrow and Debreu, 343–5 ; hegemony of optimisation, 40–2 , 110 – 14 ; Hicks–Samuelson axioms, 435–6 ; market fundamentalism, 220 ; market price equilibrium, 254 , 343–4 , 381–2 ; markets as necessarily incomplete, 344 , 345 , 349 ; Marshall’s definition of, 381 , 382 ; as ‘non-stationary’, 16 , 35–6 , 45–6 , 102 , 236 , 339–41 , 349 , 350 , 394–6 ; oil shock (1973), 223 ; Phillips curve, 340 ; and ‘physics envy’, 387 , 388 ; and power laws, 238–9 ; as practical knowledge, 381 , 382–3 , 385–8 , 398 , 399 , 405 ; public role of the social scientist, 397–401 ; reciprocity in a modern economy, 191–2 , 328–9 ; and reflexivity, 35–6 , 309 , 394 ; risk and volatility, 124–5 , 310 , 333 , 335–6 , 421–3 ; Romer’s ‘mathiness’, 93–4 , 95 ; shift or structural break, 236 ; Adam Smith’s ‘invisible hand’, 163 , 254 , 343 ; social context of, 17 ; sources of data, 389 , 390 ; surge in national income since 1800, 161 ; systems as non-linear, 102 ; teaching’s emphasis on quantitative methods, 389 ; validity of research findings, 245 ‘Economists Free Ride, Does Anyone Else?’

In macroeconomics the error terms were rebranded as ‘shocks’. 18 But if the ‘shock’ is simply the deviation between the prediction of the model and the reality of the world, we learn nothing by attaching the label ‘shock’ to these error terms. To go further we have to be able to gain insight into the origins of the shocks, and perhaps be able to formulate some probability distribution or narrative account of their occurrence. The nineteenth-century economist W. S. Jevons propounded a similar thesis. 19 His argument, not then entirely without empirical justification, was that business cycles were the result of fluctuations in nature. In particular, variations in sunspot activity influenced climatic conditions, which in turn affected the prices and volumes of agricultural products, which had consequential effects in other sectors of the economy. Jevons’ narrative identified the sources of the shocks, and described the ways in which they gave rise to economic cycles. And even though the determinants of sunspots were not understood, empirical information about their incidence was available.


Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, business cycle, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, knowledge economy, late capitalism, market fundamentalism, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Robert Shiller, Sand Hill Road, Silicon Valley, Simon Kuznets, South Sea Bubble, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, Washington Consensus

Carlota Perez made the vital point that countries and regions vary in their capacity and their desire to make such institutional changes, depending on social and political factors, the particular historical circumstances and other social and political conflicts and ideas. In this book, she makes an even more original and seminal contribution. She examines the interaction between that part of the economy commonly known as financial capital and the upsurge of new technologies from their first beginnings to the time when they predominate in the structure and behavior of the economy. In his major work, Business Cycles (1939), Joseph Schumpeter, whilst interpreting the major waves of economic growth and technological transformation as ‘successive industrial revolutions’, insisted that these clusters of radical innovations also depended on financial capital. In fact, more space is devoted to finance in his book than to technology but, rather strangely, his followers – often known as ‘neo-Schumpeterians’ – neglected this aspect of his work.

In the current information revolution, several authors have developed interpretations of the new economy based on the strong contrast between tangible and intangible goods, between ‘atoms and bits’.226 Some claim that this new economy is different enough to require a new economics227 for its study and management. This may very well be so and is wholly within the logic of the present model. For the previous paradigm, John Maynard Keynes developed a new economics, providing both a different understanding and a whole new set of policy tools. Although the debate still rages,228 these policies, where applied, pretty much achieved their purpose of tempering the business cycle and supporting smooth growth, full employment and consistent investment, for the duration of the deployment period of the fourth great surge. That set of policies and that vision of economics lost effectiveness when the economy of the mass-production revolution, for which it was designed, became exhausted at the end of the 1960s. Once productivity stopped growing and investment opportunities dwindled, the whole basis of the model broke down and stagflation, that unusual combination of inflation with unemployment, rendered its main policy tools impotent.

As Eric Hobsbawm has remarked, it is the power to recognize the turning points that will help economists, politicians and businessmen to prepare for the next war, not for the last.246 This is no small task. If we look back into recent history we can have a measure of the amount of audacity required to visualize the future, even a decade or two ahead. How easy do we think it may have been for people in the depression of the 1930s to conceive the possibility of effective policies for full employment and for the control of business cycles? How many would have believed in the early 1940s, when empire building was still on the agenda, that most developing countries would soon gain independence? Or, in the mid1920s, how realistic would proposals have seemed for strict regulation of financial capital and for the official recognition of labor unions? How many in the 1960s could have envisaged the collapse of Bretton Woods, stagflation, deregulation and the decline of the welfare state?


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Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Andrei Shleifer, asset allocation, banking crisis, Benoit Mandelbrot, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, urban decay, Y2K

Now, Bootle declared, we are entering the “zero era,” brought on N E W E RA E CO N O MIC TH INKING 113 by global capitalism, privatization, and the decline of labor unions, all of which make it impossible for prices to be decided by committee.31 Steven Weber, with his 1997 article “The End of the Business Cycle” in the public policy journal Foreign Affairs, argued that macroeconomic risks are lower now: “Changes in technology, ideology, employment and finance, along with the globalization of production and consumption, have reduced the volatility of economic activity in the industrialized world. For both empirical and theoretical reasons in advanced industrial economies the waves of the business cycle may be becoming more like ripples.” Weber presented a number of reasonable-sounding arguments. For instance, he noted that the economy has come to be dominated by the service sector in a way that it was not thirty years ago, and he pointed out that service employment has always been more stable than industrial production.32 Downsizing and restructuring—terms describing so-called managerial revolutions in the 1980s—were thought then to be important reasons for the growth of profits since 1982.

The price-earnings ratio is a measure of how expensive the market is relative to an objective measure of the ability of corporations to earn profits. I use the ten-year average of real earnings for the denominator, along lines proposed by Benjamin Graham and David Dodd in 1934. The ten-year average smooths out such events as the temporary burst of earnings during World War I, the temporary decline in earnings during World War II, or the frequent boosts and declines that we see due to the business cycle.4 Note again that there is an enormous spike after 8 TH E S TOC K MAR KET LEVEL IN HIST OR IC AL PER SPEC T IVE Price-earnings ratio Figure 1.2 Price-Earnings Ratio, 1881–2000 Price-earnings ratio, monthly, January 1881 to January 2000. Numerator: real (inflation-corrected) S&P Composite Stock Price Index, January. Denominator: moving average over preceding ten years of real S&P Composite earnings.

The point I made in 1981 was that stock prices appear to be too volatile to be considered in accord with efficient markets. If stock prices are supposed to be an optimal predictor of the dividend present value, then they should not jump around erratically when the true fundamental value is growing along a smooth trend. We learn by considering Figure 9.1 that the common interpretation given in the media for stock market fluctuations in terms of the outlook for the short-run business cycle is generally misguided. The prospect that a temporary recession is on the horizon should have virtually no impact on stock prices, if the efficient markets theory is correct. Fluctuations in stock prices, if they are to be interpretable in terms of the efficient markets theory, must instead be due to new information about the long-run outlook for real dividends. Yet in the entire history of the U.S. stock market we have never seen such fluctuations, since dividends have fairly closely followed a steady growth path.


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The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

See also Paul Krugman, http://krugman.blogs.nytimes.com/2013/08/31/the-arithmetic-of-fantasy-fiscal-policy. 14. J. Bradford de Long and Lawrence H. Summers, ‘Fiscal Policy in a Depressed Economy’, Brookings Papers on Economic Activity (Spring 2012), pp. 233–97. 15. The most prominent economists to believe that recessions are due entirely to real phenomena are those who believe in ‘real business cycles’. See http://en.wikipedia.org/wiki/Real_business_cycle_theory. 16. Alberto Alesina and Silvia Ardagna, ‘Large Changes in Fiscal Policy: Taxes versus Spending’, Tax Policy and the Economy, vol. 24, ed. Jeffrey R. Brown (Cambridge, MA: National Bureau of Economic Research). 17. http://krugman.blogs.nytimes.com/2013/03/19/cogan-taylor-and-the-confidence-fairy/. 18. See Jaime Guajardo, Daniel Leigh, and Andrea Pescatori, ‘Expansionary Austerity: New International Evidence’, International Monetary Fund Working Paper, WP/11/158, July 2011, http://www.imf.org/external/pubs/ft/wp/2011/wp11158.pdf, and ‘Will it Hurt: Macroeconomic Effects of Fiscal Consolidation’, ch. 3, World Economic Outlook, October 2012, http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/c3.pdf. 19.

Financial systems also generate credit booms and busts: this is the chief reason for the instability of market economies. The late and, until recently, disregarded Hyman Minsky, with whom this book began, described the broad features of such booms and busts.18 ‘A fundamental characteristic of our economy,’ wrote Minsky, ‘is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.’19 Minsky identified five stages in a bubble: ‘displacement’ – a trigger event, such as a new technology or falling interest rates; ‘boom’ – when asset prices start rising; ‘euphoria’ – when investors’ caution is thrown to the wind; ‘profit-taking’ – when intelligent investors start taking profits; and ‘panic’ – a period of collapsing asset prices and mass bankruptcy.20 Displacement is an event that raises optimism, such as an innovation, access to new economic resources, or maybe a decline in the cost of funds.

The bigger the divergence between the two rates of interest, the bigger the boom and the bigger the bust.34 In particular, Hayek blamed the Great Depression on the expansionary credit policies of the Federal Reserve during the 1920s.35 In the words of Mr Huerta de Soto, ‘Hayek views the Keynesian remedy for the Great Depression as nothing more than a temporary solution with adverse consequences. Indeed any artificial rise in aggregate demand will severely distort the productive structure and can only generate unstable employment.’36 In later years, Hayek devoted his attention to the idea of privately issued money, rather than the 100 per cent reserve-backed money of von Mises. In the debates of the 1930s, the Austrians lost the public argument on business-cycle theory to the Keynesians and, subsequently, the monetarists. They ceased to have much influence on ideas about macroeconomic policy for a long time. Both economics and politics explain this failure. The economic explanation was the scale of the slump. It was impossible to argue that no more was involved than the reversal of the malinvestment during the 1920s. Indeed, this theory is puzzling, particularly given that it comes from such passionate believers in laissez-faire.


Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs, Arthur A. Ekirch, Jr.

Alistair Cooke, American ideology, business cycle, clean water, collective bargaining, creative destruction, credit crunch, declining real wages, endowment effect, fiat currency, fixed income, full employment, hiring and firing, income per capita, Jones Act, Joseph Schumpeter, laissez-faire capitalism, manufacturing employment, means of production, minimum wage unemployment, plutocrats, Plutocrats, post-industrial society, price discrimination, profit motive, rent control, rent-seeking, Richard Thaler, road to serfdom, Ronald Reagan, Sam Peltzman, Simon Kuznets, strikebreaker, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, transcontinental railway, union organizing, Upton Sinclair, War on Poverty, Works Progress Administration

Under such unstable dynamic conditions, business planning could be little more than guesswork, and many workers lost their jobs unexpectedly from time to time. As the relative shift of labor out of agriculture and into the urban-industrial sectors continued apace, the volatility of the economy's performance affected more immediately a growing proportion of the population. Even in the mostly prosperous Progressive Era the problem of the business cycle ranked high as an economic and hence a political concern. Probably because in those days a financial panic usually accompanied the onset of a business depression, many people subscribed to monetary theories of the economic cycle. During the depression that followed the financial panic of 1907, Congress created a National Monetary Commission to investigate the monetary and banking systems and make recommendations for remedial legislation.

Commercial bankers took comfort from the presence of this "bankers' bank," a source of extra cash reserves in the event of a liquidity crisis. With only a vague notion of how the Fed would operate, the public expected that it would somehow smooth out the fluctuations in the nation's economic growth. The Fed's officers, uncertain of their own capabilities and authority, had scarcely settled into their new offices when the Great War began and the government thrust upon them even more pressing obligations. Attempts to tame the business cycle would have to wait. As troublesome as the problem of economic fluctuations was the problem of labor relations. After suffering crushing setbacks in the depressed 1890s, labor unions expanded their membership severalfold during the economic boom at the turn of the century. Total union membership surged from less than half a million in 1897 to about two million in 1904, then stabilized for several years before resuming a slow increase after 1909.

Immigration Commission, which conducted an enormous study and delivered its final report to Congress late in 1910, recommended that admission of the "new" immigrants be limited. No limitation was imposed until 1917, when Congress enacted a literacy requirement expected to bear disproportionately on the unpopular groups. Not until the 1920s were effective legal barriers raised. The onset of the war, however, squeezed the torrent of immigration to a trickle during 1915-1920. While problems of money, banking and the business cycle, labor relations, and immigration attracted widespread public concern, none of them could rival "the trust problem." The question of what to do about big business was without doubt the preeminent public policy issue of the Progressive Era. It was, of course, connected with all the others. One could not talk about banking without considering Morgan and Rockefeller's financial empires and their many links with the great industrial and railroad corporations.


pages: 409 words: 118,448

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy by Marc Levinson

affirmative action, airline deregulation, banking crisis, Big bang: deregulation of the City of London, Boycotts of Israel, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, car-free, Carmen Reinhart, central bank independence, centre right, clean water, deindustrialization, endogenous growth, falling living standards, financial deregulation, floating exchange rates, full employment, George Gilder, Gini coefficient, global supply chain, income inequality, income per capita, indoor plumbing, informal economy, intermodal, invisible hand, Kenneth Rogoff, knowledge economy, late capitalism, linear programming, manufacturing employment, new economy, Nixon shock, North Sea oil, oil shock, Paul Samuelson, pension reform, price stability, purchasing power parity, refrigerator car, Right to Buy, rising living standards, Robert Gordon, rolodex, Ronald Coase, Ronald Reagan, Simon Kuznets, statistical model, strikebreaker, structural adjustment programs, The Rise and Fall of American Growth, Thomas Malthus, total factor productivity, unorthodox policies, upwardly mobile, War on Poverty, Washington Consensus, Winter of Discontent, Wolfgang Streeck, women in the workforce, working-age population, yield curve, Yom Kippur War, zero-sum game

Born into a Jewish family that had fled the Austro-Hungarian Empire at the start of the First World War, Burns grew up in Bayonne, New Jersey, where his father earned a living painting houses. The precocious young man won a scholarship to Columbia University in New York, where he discovered economics. When he returned to Columbia for doctoral study, Burns became the protégé of Wesley Mitchell, a prominent professor who had pioneered the study of business cycles—the economy’s irregular ups and downs. In the late 1930s Burns himself became a Columbia professor and later succeeded Mitchell as head of the National Bureau of Economic Research, the foremost institution for the study of the US economy. In 1953, he signed on to head the Council of Economic Advisers under President Dwight Eisenhower. As Eisenhower’s vice president, Nixon saw up close Burns’s skill as a teacher and his ability to deliver succinct, practical advice.

When Nixon ran for president in 1968, he relied on Burns to oversee the teams that fleshed out his policy proposals. Upon his inauguration, Nixon brought Burns into the White House as counselor to the president with cabinet rank. The fact that his favorite economist was a Democrat bothered the Republican president not at all.1 The new counselor’s academic expertise was in US economic policy—inflation, unemployment, and efforts to steady growth by smoothing the business cycle. But Nixon had other economists for that. Burns was instead given charge of a ragbag of domestic issues, from antipoverty programs to tax reform to oil import quotas. His main role, though, was professorial. With his white hair neatly parted in the middle, his rimless glasses, and his ever-present pipe, he became a familiar figure on the evening news. In his high-pitched voice, he spoke slowly, in short, clipped phrases, patiently explaining economic principles and defending Nixon’s program from critics right and left.

In his high-pitched voice, he spoke slowly, in short, clipped phrases, patiently explaining economic principles and defending Nixon’s program from critics right and left. Burns dreamed of becoming secretary of the Treasury, but in October 1969 he was offered a job that would prove far more consequential. Nixon named Burns chairman of the Federal Reserve Board of Governors. Burns was the first professional economist ever to take the helm of the central bank. His expertise in business cycles was sorely needed. In the mid-1960s, Nixon’s predecessor, Lyndon Johnson, had offered America “guns and butter,” building up military forces in Vietnam without raising taxes or curtailing social programs. The Fed had loyally supported Johnson’s policies by making sure that short-term interest rates stayed low so that the government could borrow cheaply to fund the war. In the short term, this mix of policies had ensured jobs for almost everyone and rapidly rising wages.


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End This Depression Now! by Paul Krugman

airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

So they plunged in deeper, moving further and further away from any realistic approach to recessions and how they happen. Much of the academic side of macroeconomics is now dominated by “real business cycle” theory, which says that recessions are the rational, indeed efficient, response to adverse technological shocks, which are themselves left unexplained—and that the reduction in employment that takes place during a recession is a voluntary decision by workers to take time off until conditions improve. If this sounds absurd, that’s because it is. But it’s a theory that lends itself to fancy mathematical modeling, which made real business cycle papers a good route to promotion and tenure. And the real business cycle theorists eventually had enough clout that to this day it’s very difficult for young economists propounding a different view to get jobs at many major universities.

Sound economics, in their view, says that overall failures of demand can’t happen—and that means that they don’t. Yet recessions do happen. Why? In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he held, would just add to the confusion. I was a graduate student at the time this work was being done, and I remember how exciting it seemed—and how attractive its mathematical rigor, in particular, was to many young economists. Yet the “Lucas project,” as it was widely called, went quickly off the rails. What went wrong? The economists trying to provide macroeconomics with microfoundations soon got carried away, bringing to their project a sort of messianic zeal that would not take no for an answer.

., 57 liquidity traps, 135–36, 137, 138, 143, 144 in depression of 2008–, 32–34, 38, 51, 136, 155, 163 money supply and, 152, 155 unemployment and, 33, 51, 152 Lizza, Ryan, 125 Long Term Capital Management (LTCM) failure, 69 Lucas, Robert, 91–92, 102, 107 Lucas project, 102, 103 macroeconomics, 91–92, 227, 231 “dark age” of, 92 “freshwater,” 101–3, 110–11 “real business cycle” theory in, 103 “saltwater,” 101, 103–4 magneto trouble, Keynes’s analogy of, 22, 23, 35–36 Mankiw, N. Gregory, 227 manufacturing capacity, 16 marginal product, 78 markets: “efficient” hypothesis of, 97–99, 100, 101, 103–4 inflation and, 202 investor rationality and, 97, 101, 103–4 Keynes on, 97, 98 1987 crash in, 98 panic in, 4 speculative excess in, 97, 98 in 2008 financial crisis, 117 McCain, John, 113 McConnell, Mitch, 109 McCulley, Paul, 48 McDonald’s, 6, 7 Medicaid, 120, 120, 121 Medicare, 18, 172 Meltzer, Allan, 151–52 Mencken, H.


pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

"Robert Solow", Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, business cycle, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Hal Varian interviews from two sources: Holly Finn, “Lunch with Hal,” Google Think Quarterly, March 2011, http://www.thinkwithgoogle.co.uk/quarterly/data/hal-varian-treating-data-obesity.html; and McKinsey & Company, “Hal Varian on How the Web Challenges Managers,” McKinsey Quarterly, January 2009, http://www.mckinsey.com/insights/innovation/hal_varian_on_how_the_web_challenges_managers. 2. Macroeconomists refer to this fundamentals-based theory as real business cycle theory, because fluctuations are driven by “real” shocks—that is, shocks to the productive capacity of the economy. The classic citation is Edward C. Prescott, “Theory Ahead of Business Cycle Measurement,” Federal Reserve Bank of Minneapolis Quarterly Review 10, no. 4 (1986): 9–21. 3. Robert Barro uses this example in chapter 2 of his textbook Macroeconomics, 5th ed. (Cambridge, MA: MIT Press, 1997). 4. In addition to our own work, four studies have influenced our thinking on these issues a great deal: Gauti Eggertsson and Paul Krugman, “Debt, Deleveraging, and the Liquidity Trap,” Quarterly Journal of Economics 127, no. 3 (2012): 1469–513; Veronica Guerrieri and Guido Lorenzoni, “Credit Crises, Precautionary Savings, and the Liquidity Trap” (working paper, University of Chicago Booth School of Business, July 2011); Robert E.

For home owners with a mortgage, for example, we will demonstrate how home equity is much riskier than the mortgage held by the bank, something many home owners realize only when house prices collapse. But it’s not all bad news. If we are correct that excessive reliance on debt is in fact our culprit, it is a problem that potentially can be fixed. We don’t need to view severe recessions and mass unemployment as an inevitable part of the business cycle. We can determine our own economic fate. We hope that the end result of this book is that it will provide an intellectual framework, strongly supported by evidence, that can help us respond to future recessions—and even prevent them. We understand this is an ambitious goal. But we must pursue it. We strongly believe that recessions are not inevitable—they are not mysterious acts of nature that we must accept.

Carmen Reinhart and Kenneth Rogoff, “Is the 2007 US Sub-Prime Financial Crisis So Different?: An International Historical Comparison,” American Economic Review 98 (2008): 339–44. 18. Carmen Reinhart and Kenneth Rogoff, This Time Is Different (Princeton, NJ: Princeton University Press, 2009). 19. Oscar Jorda, Moritz Schularick, and Alan M. Taylor, “When Credit Bites Back: Leverage, Business Cycles, and Crisis” (working paper no. 17621, NBER, 2011). 20. The IMF study also confirms this. They show that elevated household debt leads to more severe recession, even in the absence of a banking crisis. IMF, “Chapter 3: Dealing with Household Debt.” 21. Jorda, Schularick, and Taylor, “When Credit Bites Back,” 5. 22. George W. Bush, “Speech to the Nation on the Economic Crisis,” September 24, 2008, http://www.nytimes.com/2008/09/24/business/economy/24text-bush.html?


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

Arthur Burns was the most prominent member of the Columbia economics faculty. Burns was coauthor of Measuring Business Cycles (1946), a respected text.14 On the first day of Alan Greenspan’s doctoral training, the professor asked his students, “What causes inflation?” Silence followed. This seems to have often been the case in Burns’s presence. The pipe-smoking Burns enlightened the class: “Excess government spending causes inflation.”15 Greenspan did not entirely agree with Arthur Burns’s economic beliefs, but he did the important thing: he took up the pipe—Burns’s trademark. Arthur Burns’s own political aptitude was of the first order. 13 Ibid., p. 27. 14Burns was coauthor of Measuring Business Cycles (New York: National Bureau of Economic Research, 1946) with Wesley C. Mitchell. Mitchell also wrote Business Cycles (1913), which was highly regarded. 15 Martin, Greenspan, p. 29.

Lever Brothers Chairman Charles Luckman explained: “New York is the inevitable answer to our major problem—selling.”20 By 1960, more than 25 percent of the nation’s 500 largest corporations had headquarters in New York City.21 Populism Defeats William McChesney Martin’s Battle against Inflation Martin fought a valiant battle against inflation, although he was stymied by Congress. The Employment Act of 1946 committed the Fed to seek healthy economic growth—in addition to its responsibility for stable money. When the economy turns down, it does not grow. It contracts. Insolvencies and recessions are instrumental to the business cycle. Martin stood his ground before the Senate: “We are dealing with waste and extravagance, incompetency and inefficiency, the only way we have in a free society is to take losses from time to time. This is the loss economy as well as the profit economy.”22 Washington, of course, did not want to hear this. “Pro-growth economists” lobbied in Washington. They spoke the words that would both appeal to the politicians’ expansive tendencies and embellish their patriotic image. 16 Robert A.M.

Stephen Roach was a young economist at the Federal Reserve.7 After oil prices quadrupled, Arthur Burns instructed his staff to calculate a CPI stripped of energy costs. Burns’s rationale was the blazing Yom Kippur War, over which the Fed had no control.8 Why the Federal Reserve’s influence should matter in how the rate of consumer price inflation is calculated could be better understood by reading memoirs of the Nixon administration than by studying Arthur Burns’s seminal textbook, Measuring Business Cycles. Roach recalls: “Alas, it didn’t turn out to be quite that simple.” Burns thought the disappearance of anchovies off the Peruvian coast caused food costs to rise. They too were removed from the price index.9 Next went used cars, children’s toys, jewelry, and housing—about half the costs that consumers absorbed in their daily struggle with rising prices.10 Today, three decades after the anchovy shortage, without much ado from the economics guild, the media announces the monthly ex-food, ex-energy CPI, produced by the Bureau of Labor Statistics.


pages: 339 words: 95,270

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, money market fund, mortgage debt, New Urbanism, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

See employment rate unions: in China, 112 in Germany, 142–43, 148–49, 157–58 and transportation costs, 24, 25–26 in United States, 177 United Kingdom: Bank Act of 1826, 52 banking industry in, 41 business cycles in, 43 colonial territories of, 6, 17 credit supply in, 41 exchange rate regime in, 196, 218–19 and global credit boom (1820s), 46–51, 64 and global credit boom (1830s), 52–55 and global financial crisis (1873), 57, 58 and gold standard, 186, 187, 188 savings and investment in, 69–70, 76 tariffs in, 16–17 U.S. corporation income in, 37. See also Bank of England United States, 174–220 bilateral trade imbalances in, 97–100 and Bretton Woods, 189–91 and Bretton Woods II, 195–201 business cycles in, 43 class warfare in, 212–13 colonial territories of, 18 corporate tax avoidance in, 30–39, 36f, 39f credit supply in, 201–5, 204f current account balance in, 87, 96, 97–100, 176–79, 180–84, 182f, 210, 213–18, 214–15f, 221–22 and dollar’s rise as global reserve asset, 189–95, 212f employment rate in, 174, 190, 194, 210–11, 214–16, 219, 227 entrepreneurship in, 13, 25 and European banking glut, 63–64 and exchange rate regimes, 20, 189–201 fiscal policy in, 180–85, 182f, 210 and global credit boom (1830s), 52–55 and global financial crisis (1873), 55, 57 and global financial crisis (2008), 201–13 and global value chains, 27, 29 and gold standard, 185–89 and Hamilton’s “Report on the Subject of Manufactures,” 11–17 inequality in, 177, 210, 226 inflation in, 194, 210 infrastructure in, 184, 202, 217, 226, 227 interest rates in, 176, 178, 196–97, 198, 199, 201, 206 manufacturing in, 14–15, 23, 178–79, 210–11, 212–13, 214, 227 missing surplus mystery in, 176–79 policy choices for, 226–28 productivity in, 210–11 reserve assets in, 185–89 safe asset shortage in, 201–5, 204f savings and investment in, 70, 77–78, 77f, 83, 84, 178, 208 subprime mortgage crisis in, 205–13, 209f subsidies in, 78, 227 tariffs in, 20, 222–23 taxes in, 177, 181, 212 trade dispute with China, 2–3, 222–23 unions in, 177 in World War I, 19–20.

After all, every country is unique and investors should be able to evaluate the effects of local political conditions, technological innovations, changes in demand or supply of an important locally produced commodity, and demographic shifts. Yet the history of the past several hundred years is replete with synchronized credit cycles. This pattern is clearly visible in the relation between Great Britain and the United States during the eighteenth and nineteenth centuries, when the two economies had tightly linked business cycles. Part of the connection can be explained by fundamental ties: the United States was a major source of cotton for British textile mills and a major market for British manufactured goods, so what drove underlying economic growth in one often drove underlying economic growth in the other. More significant, however, is that these cycles were even more highly correlated with financial conditions in Great Britain.

During the bubble, shares listed on the Neuer Markt outperformed the Nasdaq-100 Index by a factor of four. At its peak in March 2000, the companies listed on the Neuer Markt were worth nearly €234 billion—tiny by American standards but large relative to the size of the total German stock market. The bubble burst shortly thereafter thanks to scandals (including insider trading, stock-price manipulation, and falsified earnings), fundamental overvaluation, and the turn in the business cycle. By 2002, companies listed on the Neuer Markt had collectively lost 95 percent of their value. Deutsche Börse announced that it would shut down the exchange that September.19 A borrowing binge had magnified the nonsense in the stock markets. Debt owed by German nonfinancial corporations rose by 25 percent between the start of 1997 and the end of 2001. The current account deficit of these companies ballooned from 2 percent of the German economy in 1998 to 7 percent by 2000.


The-General-Theory-of-Employment-Interest-and-Money by John Maynard Keynes

bank run, business cycle, collective bargaining, declining real wages, delayed gratification, full employment, invisible hand, laissez-faire capitalism, marginal employment, means of production, moral hazard, Paul Samuelson, price stability, profit motive, quantitative easing, secular stagnation, The Wealth of Nations by Adam Smith, working-age population

Introduction by Paul Krugman    xxxiii nomic theorists before Keynes, Haberler believed that the crucial thing was to explain the economy’s dynamics, to explain why booms are followed by busts, rather than to explain how mass unemployment is possible in the first place. And Haberler’s book, like much business cycle writing at the time, seems more preoccupied with the excesses of the boom than with the mechanics of the bust. Although Keynes speculated about the causes of the business cycle in Chap. 22 of The General Theory, those speculations were peripheral to his argument. Instead, Keynes saw it as his job to explain why the economy sometimes operates far below full employment. That is, The General Theory for the most part offers a static model, not a dynamic model—a picture of an economy stuck in depression, not a story about how it got there. So Keynes actually chose to answer a more limited question than most people writing about business cycles at the time. Indeed, most of Book II of The General Theory is a manifesto on behalf of Keynes’s strategic decision to limit the question.

Indeed, most of Book II of The General Theory is a manifesto on behalf of Keynes’s strategic decision to limit the question. Where pre-Keynesian business cycle theory told complex, confusing stories about disequilibrium, Chap. 5 makes the case for thinking of an underemployed economy as being in a sort of equilibrium in which short-term expectations about sales are, in fact, fulfilled. Chapters 6 and 7 argue for replacing all the talk of forced savings, excess savings, and so on that was prevalent in pre-Keynesian business cycle theory—talk that stressed, in a confused way, the idea of disequilibrium in the economy—with the simple accounting identity that savings equal investment. And Keynes’s limitation of the question was powerfully liberating. Rather than getting bogged down in an attempt to explain the dynamics of the business cycle—a subject that remains contentious to this day— Keynes focused on a question that could be answered.

Another measure of Keynes’s achievement may be hard to appreciate unless you’ve taught introductory macroeconomics: how do you explain to students how the central bank can reduce the interest rate by increasing the money supply, even though the interest rate is the price at which the supply of loans is equal to the demand? It is not easy to explain even when you know the answer; think how much harder it was for Keynes to arrive at the right answer in the first place. But the classical model wasn’t the only thing Keynes had to escape from. He also had to break free of the business cycle theory of the day. There was not, of course, anything like a fully-worked out model of recessions and recoveries. But it is instructive to compare The General Theory with Gottfried Haberler’s Prosperity and Depression, written at roughly the same time, which was a League of Nations-sponsored attempt to systematize and synthesize what the economists of the time had to say about the subject.3 What is striking about Haberler’s book, from a modern perspective—aside from the absence of any models—is that he was trying to answer the wrong question.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

There is no question that some speculative excess spills over into the equity and real estate markets in 77 Flat-Earth Economics 6 1870–1890 Real GDP Growth (%) 5 1940–1970 4 1890–1913 1913–1929 3 f(x) 5.58E2*^3 1.08E0*^2 6.12E0* 5.88E0 R^2 8.77E1 corr(^3,y) 1.31E1, corr(^2,y) 9.79E3, corr(^1,y) 2.09E1 1970–2008 2 1929–1940 1 0 0 Figure 4.1 1 2 3 4 5 6 7 Money Supply Growth (%) 8 9 Money Supply & Real Economic Growth Sources: Historical Statistics of the United States; Federal Reserve System Data. periods of moderate money growth. Consumer prices may rise somewhat more than moderately, but the reason may be shortages caused by the business cycle, or in the case of 1940-1970, the rebuilding of Europe and the fiscal policy of the Johnson administration. Granted, this attribution is overly simple, and one might legitimately assert that the meltdown of the early 1970s would have been averted with better policies, both fiscal and monetary, than those in force during the 1960s. But it may also be said that Nixon’s abrogation of gold settlement of international accounts in 1971 may have initiated a particularly deleterious chain of events instead of what might have been a more normally shaped recession.

One might accrue 4 to 5 percent interest on prime short-term paper, but between inflation and taxation there would be no real earnings and perhaps even erosion of value. Is it any wonder that the savings rate is chronically low, debt has risen to record levels compared to income, and wealth has been compelled to reside in risky assets? It may sound flippant, but the bedrock of today’s monetary policy is the rapid expansion of monetary aggregates at all points in the business cycle. The broadest measure of money supply (M3) was over $14 trillion in the United States as of December 2008, at which point its year-over-year growth rate was almost 11 percent.5 The power of compounding is remarkable. No one notices that prices in the United States increased 400 percent from 1940 to 1980. Disinflation reigned from the chairmanship of Paul Volcker on, but the price level of 2008 is over two and one-half times that which held when Reagan took office, and this is calculated with a CPI-U that is increasingly biased.

It is a bit like celebrating the genius of those who strung power lines instead of acknowledging Thomas Edison for inventing the light bulb, Anyos Jedlik the dynamo, or Michael Faraday the alternator. Although the transmission mechanism was also described by Fisher in the 1930s, the first economists to trumpet this new thesis in recent times were Ehsan Choudhri and Levis Kochin in their paper: The Exchange Rate and the International Transmission of Flat-Earth Economics 95 Business Cycle Disturbances.20 In this article, regressions show what Bernanke states in his speech and has echoed in his academic work, that nations remaining on the gold standard were worse off, and those that recovered sooner had abandoned gold earlier. Regressions by scholars such as Choudhri, Kochin, and the parade of others who have reprocessed the data first observed by Fisher undeniably establish the case.


Not Working by Blanchflower, David G.

active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, Boris Johnson, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, estate planning, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, illegal immigration, income inequality, indoor plumbing, inflation targeting, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta analysis, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, Own Your Own Home, p-value, Panamax, pension reform, plutocrats, Plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

That is what I turn to next. CHAPTER 4 The Semi-Slump and the Housing Market Why has wage growth been so weak? The simple answer is labor demand has been too low. At the time of writing it is eleven years since the United States entered recession in December 2007. It took until December 2008, a year after the recession started, for the National Bureau of Economic Research Business Cycle Dating Committee, which maintains a chronology of the U.S. business cycle, to work that out.1 In September 2010 they concluded that the recession had ended in June 2009. In most other advanced countries, including the UK, France, Japan, and Italy, it started a few months later, around the second quarter of 2008. Almost all of the major advanced countries had two successive quarters of negative growth in 2008, which meets the usual definition of recession.

Luxembourg’s rate reached a peak in 2008. Underemployment rates remain elevated in many countries. There are obvious biases apparent from table 5.1 in excluding voluntary part-timers and full-timers from any calculation of underemployment in a country. The U7 is a downward-biased estimator of the extent of labor market slack in the period after the Great Recession. The extent of the bias will move over the business cycle and remains uncertain; the United States does not have such data, but it does seem there are consistent time-series patterns across countries. The Eurostat measure is a halfway house and less biased as it uses data from all part-timers but still excludes full-timers. As the recession hit all three groups of workers, involuntary and voluntary part-timers were more likely to say they would like more hours.

UK more hours and fewer hours in millions of hours. Source: Bell and Blanchflower 2018b. Table 5.3 decomposes the net variation in aggregate desired hours between countries into components from voluntary and involuntary part-timers, and full-timers. It is clear that U7 is a biased estimator of the extent of labor market slack in the period after the Great Recession. The extent of the bias will move over the business cycle and remains uncertain—the United States does not have such data, but it does seem there are consistent time-series patterns across countries. As the recession hit all three groups of workers, involuntary and voluntary part-timers were more likely to say they would like more hours. In the UK, Germany, France, and Ireland, for example, in 2016, involuntary part-time employment accounted for only around a third of excess hours.


pages: 270 words: 75,473

Time Management for System Administrators by Thomas A.Limoncelli

8-hour work day, Albert Einstein, business cycle, Debian, job satisfaction, Kickstarter, Mahatma Gandhi, Steve Jobs

Your company has a similar business cycle. It might be as fast as once a month or as long as a year. If you work at NASA, it might be as long as a multiyear space mission. If you work in politics, it might be as regular as the legislative cycle or the campaign cycle. Take some time to figure out your company's cycle. You might want to ask your boss what he thinks the business cycle is. Once that is done, consider the following questions: What is the business cycle for this company? How can I better schedule my projects? When is the optimal time to schedule my time off? Can the system administration group better schedule its projects? Can we turn the system administration processes into cycles that are linked to the light and busy parts of the business cycle? If the business pattern is random, can we influence the business to make it more regular?

A skeleton crew was always around to deal with emergencies, but, otherwise, this is when the system administrators scheduled their vacations. Once the software "went gold" and was in manufacturing, stability was only important in the parts of the system that manufacturing relied on. Everyone else was celebrating. Then the cycle began again. By planning the system administration work around the company's business cycle, everything went very smoothly. Another common business cycle is the December holiday rush. For example, it is often true that retailers make half their sales during the holiday shopping season, often losing money the rest of the year. During the holiday rush, the network that supports the business must be completely stable. An hour of downtime can cost millions. Therefore, there is little IT work scheduled for that time.


pages: 238 words: 73,121

Does Capitalism Have a Future? by Immanuel Wallerstein, Randall Collins, Michael Mann, Georgi Derluguian, Craig Calhoun, Stephen Hoye, Audible Studios

affirmative action, blood diamonds, Bretton Woods, BRICs, British Empire, business cycle, butterfly effect, creative destruction, deindustrialization, demographic transition, Deng Xiaoping, discovery of the americas, distributed generation, eurozone crisis, fiat currency, full employment, Gini coefficient, global village, hydraulic fracturing, income inequality, Isaac Newton, job automation, joint-stock company, Joseph Schumpeter, land tenure, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, loose coupling, low skilled workers, market bubble, market fundamentalism, mass immigration, means of production, mega-rich, Mikhail Gorbachev, mutually assured destruction, offshore financial centre, oil shale / tar sands, Ponzi scheme, postindustrial economy, reserve currency, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, too big to fail, transaction costs, Washington Consensus, WikiLeaks

My argument is not very original. Marx also had a technological displacement mechanism, based on factory machinery, although in his argument it is combined with a number of other theoretical mechanisms, including business cycles, falling rates of profit, and—in current Neo-Marxian theories—financialization and financial crisis. What I want to emphasize, however, is that the process of technological displacement of labor, driven to a sufficient extreme, will generate the long-term and quite possibly terminal crisis of capitalism, all by itself and without the other processes in Marxian and Neo-Marxian theory. Business cycles may be hazy and imprecise in their timing and variable in the height and depth of their swings, as are Kondratieff waves and world-system hegemonies on the global level. Financial crises may be contingent and avoidable through the right policy.

And indeed popular participation in financial markets has grown a good deal during the late 20th century and the early 21st, through employee pension funds, millions of small stock market investors, and speculating through mortgaged home ownership in the Ponzi scheme of the inflationary housing market. How far can this go? Can it save capitalism? It would surely be a rocky road, given the inherent volatility of financial markets, their tendency to booms and busts. This has been a long-term historical pattern, ever since the Dutch tulip investment mania in 1637 and the South Sea bubble in 1720. Speculative collapses have been so common that Schumpeter [1939] regarded business cycles as intrinsic to capitalism, and their presence a historical marker of the existence of self-driven capitalist dynamics. One could turn the historical argument around; speculative busts have always bottomed out and eventually financial markets have gone up again. Financial crises are in the nature of the capitalist beast, and the historical record suggests that we will always recover from any financial crisis.

Milner, Murray Jr. Freaks, Geeks and Cool Kids: American Teenagers, Schools and the Culture of Consumption. New York: Routledge, 2004. Schneider, Eric C. Vampires, Dragons and Egyptian Kings. Youth Gangs in Postwar New York. Princeton: Princeton University Press, 1999. Schumpeter, Joseph A. The Theory of Economic Development. New York: Oxford University Press, 1911. Schumpeter, Joseph A. Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill, 1939. Skocpol, Theda. States and Social Revolutions. New York: Cambridge University Press, 1979 Tilly, Charles. Popular Contention in Great Britain, 1758–1834. Cambridge MA: Harvard University Press, 1995. Wallerstein, Immanuel. 1974–2011. The Modern World-System. Vols. 1–4. Berkeley: University of California Press.


Financial Statement Analysis: A Practitioner's Guide by Martin S. Fridson, Fernando Alvarez

business cycle, corporate governance, credit crunch, discounted cash flows, diversification, Donald Trump, double entry bookkeeping, Elon Musk, fixed income, information trail, intangible asset, interest rate derivative, interest rate swap, negative equity, new economy, offshore financial centre, postindustrial economy, profit maximization, profit motive, Richard Thaler, shareholder value, speech recognition, statistical model, time value of money, transaction costs, Y2K, zero-coupon bond

Sales fell by 1.5 percent in that recession year. To avert a decline in profits, the company instituted cost-saving measures that actually resulted in a year-over-year gain in net income. In that context, Kimberly-Clark reduced inventories by $523 million and relied more heavily on vendor financing, allowing accounts payable to increase by $278 million. By virtue of being long past the high-growth phase of its business cycle, Kimberly-Clark did not have to spend heavily on adding to its productive capacity. Capital expenditures, the main component of investing activities, therefore absorbed only about one-third of cash from operating activities during 2005 through 2009. That left the company with cash generation of $1.5 billion to $1.7 billion a year (and $2.2 billion in 2009) before financing activities. After paying annual dividends that rose from $838.4 million to $986.0 million during the period, Kimberly-Clark applied the cash generated from its business largely to buying back shares.

Security analysts found no clear-cut evidence within the reported numbers that stated profits were inaccurate. Still, users of financial statements can draw some lessons for future reference. To begin with, an exceptionally long record of beating guidance or posting year-over-year gains in quarterly earnings is a reason to suspect earnings management. Businesses tend to grow unevenly over time, reflecting such factors as the business cycle, waxing and waning of competitive pressures, and fluctuations in input costs. A second lesson of the Krispy Kreme case is that related-party transactions and deceptive financial reporting often go hand in hand. Finally, when management offers an excuse for deteriorating earnings that does not stand up to scrutiny, as Krispy Kreme did by citing the low-carb craze, it may be using financial reporting tricks to try to conceal the true causes.

Even if the company does not publish a specific number, its investor-relations officer will ordinarily respond to questions about the range or at least the direction (up, down, or flat) for the coming year. Dividends The $37 million figure shown assumes that Colossal will continue its stated policy of paying out in dividends approximately one-third of its sustainable earnings (excluding extraordinary gains and losses). Typically, this sort of guideline is interpreted as an average payout over time, so that the dividend rate does not fluctuate over a normal business cycle to the same extent that earnings do. A company may even avoid cutting its dividend through a year or more of losses, borrowing to maintain the payout if necessary. This practice often invites criticism and may stir debate within the board of directors, where the authority to declare dividends resides. Until the board officially announces its decision, an analyst attempting to project future dividends can make only an educated guess.


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The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

"Robert Solow", airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, business cycle, buy and hold, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, global pandemic, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, Laplace demon, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

Hatzius also has a refreshingly humble attitude about his ability to forecast the direction of the U.S. economy. “Nobody has a clue,” he told me when I met him at Goldman’s glassy office on West Street in New York. “It’s hugely difficult to forecast the business cycle. Understanding an organism as complex as the economy is very hard.” As Hatzius sees it, economic forecasters face three fundamental challenges. First, it is very hard to determine cause and effect from economic statistics alone. Second, the economy is always changing, so explanations of economic behavior that hold in one business cycle may not apply to future ones. And third, as bad as their forecasts have been, the data that economists have to work with isn’t much good either. Correlations Without Causation The government produces data on literally 45,000 economic indicators each year.24 Private data providers track as many as four million statistics.25 The temptation that some economists succumb to is to put all this data into a blender and claim that the resulting gruel is haute cuisine.

Torsten Rieke, “Ganz oben in der Wall Street,” Handelsblatt, October 19, 2005. http://www.handelsblatt.com/unternehmen/management/koepfe/ganz-oben-in-der-wall-street/2565624.html. 24. “Federal Reserve Economic Data,” Economic Research, Federal Reserve Bank of St. Louis. http://research.stlouisfed.org/fred2/. 25. Lakshman Achuthan and Anirvan Benerji, Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy New York: Random House, 2004). Kindle edition, locations 1476–1477. 26. “U.S. Business Cycle Expansions and Contractions,” National Bureau of Economic Research. http://www.nber.org/cycles.html. 27. Specifically, the stock market as measured by the S&P 500. 28. The original National Football League included the Pittsburgh Steelers, Baltimore Colts (now the Indianapolis Colts), and the Cleveland Browns (the original version of which became the Baltimore Ravens).

Consumer confidence is another notoriously tricky variable. Sometimes consumers are among the first to pick up warning signs in the economy. But they can also be among the last to detect recoveries, with the public often perceiving the economy to be in recession long after a recession is technically over. Thus, economists debate whether consumer confidence is a leading or lagging indicator,36 and the answer may be contingent on the point in the business cycle the economy finds itself at. Moreover, since consumer confidence affects consumer behavior, there may be all kinds of feedback loops between expectations about the economy and the reality of it. An Economic Uncertainty Principle Perhaps an even more problematic set of feedback loops are those between economic forecasts and economic policy. If, for instance, the economy is forecasted to go into recession, the government and the Federal Reserve will presumably take steps to ameliorate the risk or at least soften the blow.


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Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

addicted to oil, air freight, banking crisis, big-box store, BRICs, business cycle, carbon footprint, collateralized debt obligation, collective bargaining, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, energy security, food miles, hydrogen economy, illegal immigration, immigration reform, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Watt: steam engine, Just-in-time delivery, market clearing, megacity, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit maximization, reserve currency, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, trade liberalization, zero-sum game

Over the course of successive business cycles, the price of oil will move higher and higher—though not in a linear sense, since there will continue to be cyclical bumps along the way. And oil prices themselves will cause many of those bumps, as they caused the 2008 recession. But over successive business cycles, the price of oil will continue to rise, surpassing even the $147-per-barrel price seen briefly in 2008. The peak in one cycle’s oil prices will become the trough over the next cycle. Yesterday $20 was a recession trough; today it’s $40 to $45 per barrel—and in tomorrow’s recession, it will be $80 to $100 per barrel. Each new cycle will bring not only higher peak prices but higher troughs as well. In part, the rise in oil prices over the course of successive business cycles reflects the steady rise in marginal costs over time to produce oil as we increasingly scrape the bottom of the barrel.

And keep in mind that people were driving fully 30 percent more in 2000 than they were at the time of the OPEC shocks. We have been driving more and paying less to do it. Soon we will be driving less and paying more. Dependence on your car is starting to look like a bad idea. As much as it stung to fill up your tank when gasoline prices spiked in 2008, you can expect it to hurt even more in the near future. In the next business cycle, pump prices will rise to as high as $7 per gallon as oil becomes even scarcer on world markets. That’s 70 percent higher than the peaks we saw in 2008, which sent the world economy crashing into recession. What will the driving landscape look like at $7-per-gallon pump prices? Europe is as good a place as any to start getting an idea of what American highways will soon become. Thanks to the kind of crippling fuel taxes that would inspire most US motorists to take up arms against their government, European motorists have been paying those pump prices for years.

In fact, for the better part of this decade, it’s been growing at a near-record pace, led by explosive GDP gains in the economies of China, Russia and Brazil. And since every unit of global GDP requires energy, strong economic growth translates into strong energy demand. The bigger the global GDP, the more oil we consume, as long as we power our economies on oil. But the world economy doesn’t grow all the time. Economies have always been subject to the ebb and flow of the business cycle, and that won’t change just because oil is becoming increasingly scarce over time. If your GDP shrinks, so does your appetite for energy. Look what happened in Russia in the wake of the collapse of the Soviet Union: energy demand plummeted by roughly a third as the economy simply stopped working. The United States is in no danger of vanishing overnight the way the USSR did, but in recessions people buy less and companies manufacture less.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

"Robert Solow", accounting loophole / creative accounting, Bretton Woods, business climate, business cycle, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Eight-year rolling correlations of pairs of euro area countries were first computed and the unweighted average of these correlations calculated subsequently. Figure 14 Average of eight-year rolling correlations of output gap across euro area countries1,2 (in unweighted terms) What is remarkable is the high degree of synchronisation in the business cycle. Figure 14 shows that the degree of synchronisation of business cycles across the euro area countries has increased since the early 1990s and is currently at a historically high level. From the business cycle perspective, the ECB’s single monetary policy poses no major problems. There are only limited differences in growth rates across euro area member countries, a finding that is borne out by a comparison with growth in different regions of the USA. As can be seen from figure 15, the dispersion of growth rates in the euro area (measured by the unweighted standard deviation) is not significantly different from that across regions of the United States.

Lucas, ‘Two illustrations of the quantity theory of money’, American Economic Review, 70 (1980). Lucas even goes so far as to say: ‘I should think we would view any monetary model that did not have this neutrality property with the deepest suspicions, the way we would view a physical model that predicted different times for the earth to complete its orbit depending on whether the distance is measured in miles or kilometres’ (R. E. Lucas, Models of Business Cycles, Oxford, 1987). 106 • The ECB and the foundations of monetary policy y-axis: inflation rate x-axis: money (M2) growth 100 100 50 50 0 0 50 0 100 Source: G. McCandless and W. Weber, ‘Some monetary facts’, Federal Reserve Bank of Minneapolis Quarterly Review, 19:3 (1995). Figure 6 Money growth and inflation (per cent; long-term growth rates; 110 countries) with due seriousness. How could the intention of ‘assigning a prominent role to money’ be put into practice?

Index accountability, of ECB 30–1, 33, 37, 60, 97, 99, 105, 113, 156–69 Adenauer, Konrad 38, 58 Andriessen, Frans 10 Asian crisis (1997) 138 asset price trends, and wealth effect 109 Austria 14, 15, 16, 26 citizens’ attitudes to euro 21 conversion rates 20 Balassa-Samuelson effect 210–11, 216 Banca d’Italia 147 Bank Deutscher Länder 23, 38 see also Deutsche Bundesbank Bank of England 76, 90 independence 58 and minimum reserves issue 120 Bank of Japan 76 Bank Lending Survey (ECB) 108, 152 banking central as an art 185 collaboration with ECB and national central banks 136 mortgage policies 218 Banque de France 156 Belgium 14, 15, 16, 26 conversion rates 20 as a critical case 16, 19, 25–6 Berès, Pervenche 37, 38 Beveridge, W. H. B. 41 Blinder, Alan 34–5, 40–1 Boyer, Miguel 10 Bretton Woods system 5 Brown, Gordon, as Chancellor of the Exchequer 58 budget deficits 193 (1990–8) 15 fig. 2 convergence criterion 17–18 limits on overall EU 196 reference values 196–8 budget policies automatic stabilisers 195, 198, 204 of euro area member states 55, 195 sustainable 196 Bulgaria 76 business cycles, synchronisation in euro area 209 fig. 14 Canada, exchange rate intervention 175 capital, free movement of 7, 8, 11 245 246 • Index central planning, vs. market economy 61–2, 75, 222 centralisation 30, 38, 234 Committee of Central Bank Governors 9–10 common market principles 7–8, 32 communication, and cross-checking 111–14 communication policy, of ECB 60, 72–4, 86–7, 116, 146, 156–69, 227 consensus principle 153–6, 160–3 Convention on the Future of Europe 224, 231 convergence and fixed exchange rates 6 in monetary policy instruments of national central banks 119–20, 134 process 13–20, 33 convergence criteria 11–12, 13–17, 48, 220 further issues 17–20 strict application of 19–20 convergence reports, by ECB General Council 75–6, 221–3 conversion rates, between euro and national currencies 20 table 1, 26 credit ceilings 119 collateral for 119, 123–4 credit institutions eligibility within euro area 123–4 minimum reserves 119, 128 and national central banks 119 standing facilities for 126–7, 130 cross-checking, and communication 111–14, 116, 155 cultural differences 228, 234 currencies anchor 75, 180–1, 183 common 3–4, 191 criteria for optimum currency area 48–9, 219 devaluations 6–7, 8, 215, 217 investment 178 invoicing 181 ‘lost’ 54–5 multi-currency system 183–4 reserve 178, 183 stateless 228 transaction 181, 183 and trust 33 see also euro; international currencies; national currencies current account balances financing 214–15 fig. 18 and unit labour costs 215–16 fig. 19 Cyprus 67, 220 Czech Republic 220 data collection for ECB 54 from government’s budget plans 205 time series problem 85–6, 94 uncertainty in ECB 82–4 defence policy, common 232, 240, 242 deficit spending policy 192–3 deflation, risk of 103, 115, 117 Delors Group 10 Report (1989) 11 Delors, Jacques 10, 23 democracy accountability and independence of ECB 30–1 and control of public finances 236 and independence of central banks 58–9, 164 democratic legitimacy 196 denarius 3, 32 Denmark 25, 75, 240 deposit facility 126–7, 134 Deutsche Bundesbank Act (1957) 58, 118–19 Index • 247 Central Bank Council 147 opinion on Stage III of EMU 18–19 statement (1990) 11 statement (1992) 12–13 ‘democratic deficit’ question 58 discount policy 121–2, 133 and EMS 6–7 established (1957) 23, 58 independence 37, 38, 56–8, 235 and minimum reserve issue 120–1 as model for European Central Bank 10, 25, 37, 42–3, 59, 85, 156 monetary policy after reunification 7–9, 78, 94–5 monetary targeting 93 Monthly Report 73 revaluation of gold reserves proposed 29 status of 22–3, 230 Deutschmark (D-Mark) 3, 4 as anchor currency 14, 75 ‘bloc’ 49 and EMS 6–7 floating (1973) 5 introduction (1948) 22–3 market outside Germany 121 performance (1950–98) 142 and resistance to euro 21–5 status of 57, 178 development indicators 109 Dichgans, Hans 229 Directorates General for Economics and Research 71–4, 85, 133, 184–5, 188–9 dollar (US) 1, 176, 178, 181, 183 euro exchange rate against (1999–2006) 172 fig. 12, 175, 178 ‘dollarisation’ 181 Duisenberg, Willem F. 26–7, 35, 41, 70, 72, 73, 99 Dutch central bank 156 ECB see European Central Bank ‘ECB and its Watchers’ conference (1999) 187–8 Ecofin (Council of EU Finance Ministers) 67, 137 economic growth development indicators 109 and inflation 63–4 fig. 5 sustainable 63–6 economic and monetary union proposal 4–5 see also European Economic and Monetary Union economic pillar, and monetary pillar 99–100, 105–11, 112, 116 economic policy coordination 38–9 economic research 184–90 economic theory, and monetary policy practice 184–90 ‘economistic’ position 6, 11–12 ECU see European Currency Unit efficiency 120, 226 elections, restrict time horizon for fiscal policy 193 EMI see European Monetary Institute employment employers and labour 204 levels 63–6 see also unemployment EMS see European Monetary System EMU see European Economic and Monetary Union energy prices 101, 208 epidemics 143 Erhard, Ludwig 58 ERM see exchange rate mechanism ESCB see European System of Central Banks Estonia 75 euro in 2008 1–2, 171 as an anchor currency 75, 180–1, 239 248 • Index euro – cont. as an international currency 176–84 table 5, 242 as an investment currency 178 as an invoicing currency 181 banknotes and coins 1, 24, 54, 136, 178, 181, 229 cash in circulation 181 as a catalyst for integration 47, 84, 232 citizens’ attitudes to 21–5 compared with US dollar 1, 176–83 conversion rates with national currencies 20 table I countdown to the 25–43 countries with exchange rates linked to the 182 table 7 a currency without a state 228–30 effects of decline in exchange rate on world economy 175 exchange rate 54, 169–76 exchange rate against US dollar (1999–2006) 172 fig. 12, 175, 178 German open letter on ‘coming too early’ 19–20 Germany’s adjustment to the 23–5 global reserves 1 historical background 3–51 non-participating countries 75 pacemaker role 229 real effective exchange rate (1999–2006) 173 fig. 13 as a reserve currency 178, 180 role as currency of denomination for credit 1 share in official foreign exchange reserves 178–80 table 6 share in world GDP 43 stability 1–2, 33, 141–6, 184, 234 stable in ECB monetary policy 131–90 as statutory unit of account (1999) 20 success of 2, 237, 240 symbol 135, 229 as a transaction currency 181 euro area 43–51, 171, 177, 184 ‘catching-up’ process 17, 216–18, 220 causes of divergence in economic conditions 207–12 compared with USA 43, 46–7, 83, 190, 209–10, 212 credit institution eligibility 123–4 criteria for an optimum 48–9, 219 data gap 83–4 economic growth at beginning of monetary union 138–41 economy 43–7 enlargement of the 219–27 equal treatment of all financial institutions 122–4 exogenous price shocks 143 growth rate differentials 209–10 fig. 15 HICP for 97–8 import prices 173, 174 inflation differentials 212, 216 key characteristics 44–5 table 2 living standards differences 17, 209–10 as a political vs. economic decision 47–51 price stability 150–1 price-setting in 189–90 synchronisation of business cycles 209 fig. 14 wage growth differentials 217 ‘Euro-DM market’ 121 Eurogroup (finance ministers of EMU member countries) 67, 176, 203 ‘euroisation’ 180 Europe the future 233, 237–44 monetary union 3–9 political unification 4, 242 Index • 249 social model 231, 238, 241 see also European integration European Central Bank (ECB) accountability 30–1, 33, 37, 60, 97, 99, 105, 113, 156–69, 168–9 appointments 26 catalogue for the posting of collateral 123 communication policy 60, 72–4, 86–7, 116, 146, 156–69, 188, 227 Convergence Report (2004) 221, 223 cooperation with national central banks 110, 131–3 credibility 86–7, 137–41, 144–6, 202 criticism 187–8 decision-making bodies 66–76 dispute over first President 26–7 draft statute for 10, 12 establishment (1998) 26, 76 evaluation of stability-oriented monetary strategy (2003) 114–18 Executive Board 25–8, 66, 70–4, 132, 226 membership 25, 26–8, 42, 70–1 terms of office 26–8, 56 and foundations of monetary policy 52–130 General Council 66, 74–6 Governing Council 66, 67–9, 111, 119 Briefing Note and Annexes 152 consensus principle in 153–6, 159 meetings 69, 97, 133, 136, 151, 152–3, 155–6 monetary policy-making in 146–56 number of members 155, 223–7 Orange Book 151–2 orientations in 131–5 reports 152 responsibility for monetary policy 135–41, 149–56 strategy review (2002) 114–18 timely information production 158 implementation of monetary policy 128–30 independence (Article 108) 30–1, 55–60, 87, 170, 192, 201 independence and inflation outcomes 37–8 independence and national legislation 13 independence and price stability 33, 234 instruments of monetary policy 118–30 modelled on Bundesbank 10, 25, 42–3, 59, 85, 156 monetary policy in EMU framework 191–236 monetary policy and exchange rates 169–76 monetary policy options 86–96 monetary policy for a stable euro 131–90 Monthly Bulletin 60, 72–4, 99, 104–5, 109, 117, 133, 153, 160, 167–8 neutrality 120, 183, 206 pillars of monetary policy strategy 54–66, 99–100, 105–11, 116–18, 139–40, 155 political pressure on 137, 162, 174, 202–3 preparations for the single monetary policy 76–85 President 26, 68, 226 President’s introductory statement 117, 158, 159, 167 press conferences 157–8, 167, 168 price stability mandate 33, 60–6, 87, 205, 234 publications 60, 72–4, 116, 156, 160 robustness 97 250 • Index European Central Bank (ECB) – cont. rotation and voting rights of national central bank governors 224–6 table 8 as scapegoat 37 seat in Frankfurt am Main 25, 29 and the single monetary policy 223–7 stability-oriented monetary policy strategy 96–118 fig. 7, 205 success of monetary policy 141–6 supranational status 122–4, 200–1 transfer of monetary policy responsibility to 11 transparency 31, 33, 42–3, 60, 84, 87, 97, 99, 113, 163–9 trust in 84, 86–7 vulnerabilities 241 Watchers Groups 187–8 see also Statute of the European System of Central Banks European Coal and Steel Community (1952) 4 European Commission 223, 224 ECB annual report to 60 proposal of member states to participate in monetary union 25–6 European Council 76 Brussels meeting (1998) 25–8 ECB annual report to 60 enabled to amend Statute of ECB 223, 224 stages in implementation of EMU 11 UK presidency 25 unanimity on price stability 170–1 European Currency Unit (ECU) 6 European Defence Community project 240 European Economic Community (EEC) (1958) 4, 233 European Economic and Monetary Union (EMU) constitution consultations 193–5 ECB and monetary policy in 191–236, 207 fiscal and monetary policy in 192–200 fiscal policy rules in 192–6 German resistance to 21–5 options for countries not joining 239–40 policy coordination in 200–7 political prerequisities for the success of 234–6 and political union 232, 242–4 possibility of a country’s exit from 239 preparedness for accession 219, 237 selection of participating countries 12–20, 25–6 Stage I 11 Stage II 11 Stage III 9–13 strengthening scenario 241–2 threats to 238, 243–4 vulnerability to asymmetric shocks 208 European integration 20, 32, 239–44 euro as a catalyst for 47, 232 and flexible exchange rates 8 functional 232 scenarios for possible 241–4 European Liberal, Democrat and Reform Party 39–40 European Monetary Institute (EMI) 72, 75, 76 established (1994) 11 European Monetary System (EMS) characteristics of 6–7, 8 established (1979) 5–6, 9 membership requirement for EMU participation 13 European Parliament 76, 223, 224 debate on symbolism of euro coin 229 Index • 251 debates on ECB 34–43 ECB annual report to 60 questionnaire and hearings for candidates for Executive Board of ECB 29–34 European People’s Party, Christian Democratic Group 36 European System of Central Banks (ESCB) 52–4, 97 see also Eurosystem European Union (EU) countries with euro 1, 20, 220 current status 219, 233 economic growth 220 enlargement 17, 75–6, 219–27 founder members 17 and monetary union 219–22 relationship with EMU 239–40 Eurostat 83, 101 Eurosystem 53–4, 67, 76, 135 basic tasks 53–4, 119, 205 euro-area and multi-country models for macroeconomic projections 110 expert reports 152 ‘information kit’ 168 and national central banks 150 operational framework 122–4, 129 price stability objective 63, 104–5 transmission mechanism 189 Eurosystem Inflation Persistence Network 189–90 exchange rate mechanism (ERM II) 75, 181, 222 exchange rate regime, significance of 169–71 exchange rates countries linked to the euro 182 table 7 crises 6–9 criterion for admission to EMU 13, 16, 222 ECB strategy ruled out 90–3 of the euro 54, 169–76 European views on issues 5–6 fixed 9, 169; see also Bretton Woods system; EMS floating (flexible) 8, 9, 169, 171–4 and monetary policy 169–76 ‘parity grid’ 6 pegging 181 and price stability 90–3 real 213–14 risk in public debt 194 stability 6, 7, 8, 30 exogenous shocks 48, 78, 104, 109, 113, 116, 138, 140, 243 asymmetrical 208, 214 ECB reaction to 204–5 euro protects against 237 and labour market flexibility 48–9 prices in euro area 143 expectations role of 57, 65, 166, 206–7 see also inflation expectations exports 208, 213–14 Fabio, Udo di 240 Feldstein, Martin 50 financial markets 18, 33, 166, 194 domestic openness 177 integration 214 international 84, 177 and monetary policy 167 financial sector economic analysis of data 109 and the monetary policy transmission mechanism 82 financial system, US compared with euro area 47 Financial Times 199 financing, of current account balances 214–15 fig. 18 Finland 14, 15, 16, 26 citizens’ attitudes to euro 21 conversion rates 20 First World War, Germany after 62 252 • Index fiscal policy institutional mechanisms to monitor 18 and monetary policy in EMU 192–200 and monetary policy relationship 30, 38–9, 109, 138, 191–2, 200–7, 237 national 200, 202, 203–4, 217 rules in EMU 192–6 stability 14, 18–20, 222 flexibility of markets 19, 35, 48–9, 208, 214, 218, 220, 231, 235, 241 food prices 101, 143 foreign exchange markets intervention 174–6, 181 and monetary policy 169–76 foreign policy, common 230, 232, 242 France 14, 15, 16, 26 conversion rates 20 infringement of Stability and Growth Pact 199 monetarism 6 presidential campaign (2007) 202 reservations on ECB 59 resistance to first President of ECB 26 single currency 4, 244 see also Banque de France Frankfurt am Main 25, 29 Frankfurt University, Center for Financial Studies 187 free market principle 120 Friedman, Milton 40, 88, 105 Funk, Honor 36 German Federal Ministry of Economics, Council of Experts report (1989) 10 Germany 14, 15, 16, 26 adjustment to the euro 23–5 benefits of economic integration 233, 244 citizens’ attitudes to euro 21–5, 36 consensus democracy 153–4 conversion rates 20 current account balance 214 customs borders (1790) 3 customs union (1834) 3 economic and political union 229 economistic position 6 government relations with Bundesbank 29 historical right to mint coinage 3 hyperinflation (1922–3) 22, 62 inflation rate 33 infringement of Stability and Growth Pact 199 interest rates 35 media debate over German candidacy for Executive Board of ECB 29 Nazism 22–3 real interest rate argument 212–13 Reich (1871) introduces Mark 3, 4, 229 restrained wage growth 217 reunification 7, 23, 78 and the Second World War 22–3, 38 stagflation 57 see also Deutsche Bundesbank global corporations 36 globalisation 78, 84, 144 gold standard 88 in Germany (1871–1914) 4, 22 government debt (1990–8) 15–16 fig. 3, 17–18 ceiling for 193–8 implicit and explicit 197 governments accountability to national parliaments for public finances 236 deficits (1990–8) 15 fig. 2 fiscal policy sovereignty 193–4 and ‘lost’ currencies 55 Great Britain see United Kingdom (UK) Index • 253 Greece 67, 75, 210 current account balance 214 infringement of Stability and Growth Pact 199 Guterres, Antonio 232 Hague summit (1969) 4–5 Hämäläinen, Sirkka 27–8, 70 Hanover summit (1988) 10 Harmonised Index of Consumer Prices (HICP) 83, 101, 138, and price stability 97, 98, 115, 141–2 table 4, 207 Hayek, Friedrich 234 Hendrick, Mark 34, 35 housing prices 101, 217–18 Hungary 220 income distribution 204 indexation 62, 101 measurement bias in 103 inflation 2 per cent rate over medium term 2, 103, 115, 116 (1970s) 37–8 convergence (1990–8) 14 fig. 1 convergence criterion 13–14, 41, 221 ‘core’ 101 differentials in euro area 212 fig. 17, 216 forecast and targeting 91–3 and growth of money supply 92–3, 105–6 fig. 6 perception vs. statistics 24 problems of measurement 41 and real economic growth 64 fig. 5 redistribution effect 62, 238 and unemployment 39–40 zero 102–3, 117 inflation expectations 1–2, 35, 40, 57, 84, 114, 207, 213 high 143–6 long-term in euro area 144 fig. 11 low-level 100–3 well-anchored 66, 87, 117, 140–1, 145–6 inflation targeting 30, 85, 90–3, 103 insolvency, of sovereign states 194, 196 interest rates at beginning of monetary union 138–41 criterion for admission to EMU 13, 17 deposit facility 126–7, 134, 139 long-term nominal 1–2, 144–5 main refinancing operation 124–6, 129–30, 134, 138–40 marginal lending facility 126–7, 130, 134, 139 and money market rates (1999–2006) 141 fig. 10 and money market rates at beginning of monetary union 139 fig. 9 real argument 212–13 standing facilities 126–7, 134–5 and zero inflation 102–3 interests commonality of 191 national 202–3 Intergovernmental Conference (2000) 171 international agreement, for ECB Statute 52–4 international currencies 176–7 euro as 176–84 table 5, 242 factors in 177 functions of 178–83 International Monetary Fund, World Economic Outlook 33 investment 35 risk-sharing 214 Ireland 14, 15, 16, 26, 213 conversion rates 20 as a model case 16, 210 254 • Index Issing, Otmar 28, 244 Directorates General for Economics and Research 71–4, 85, 133 early experiences in Brussels 28–43 on first Executive Board of ECB 27, 28 opening statement in hearing 32–4 responses to MEPs’ questions 34–43 responsibilities on Governing Council of ECB 152–3 Italy 14, 15, 16, 26 citizens’ attitudes to euro 21 conversion rates 20 as a critical case 16, 19, 25–6 devaluation of lira 8 fiscal policy 222 infringement of Stability and Growth Pact 199 interest rates 35 see also Banca d’Italia Japan euro currency area compared with 43, 138 exchange rate intervention 175 yen 183 see also Bank of Japan ‘k-per cent rule’ 40, 88 Katiforis, Giorgos 40–1 Kenen, Peter 48 Keynesianism 192–3 King, Mervyn 85 Kohl, Helmut 11, 25, 229 Kohn, Don 85 Kosovo 180 La Malfa, Giorgio 39–40 labour markets 192 female participation in euro area compared with USA 47 flexibility 19, 35, 48–9, 220, 231, 241 rigidity 39–40, 47, 238, 243 Lafontaine, Oskar 137 Lamfalussy, Alexandre 10, 11, 27 languages, official of EU 60, 155, 234 legislation ECB 13, 52–66 national compatibility with EU Treaty 223 Lenin, V.


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Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low skilled workers, market clearing, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

Otherwise, their currencies will tend to rise against the dollar. The same arguments apply, in reverse, if the Fed chooses to raise interest rates. The Fed ends up setting monetary conditions in a dollar bloc that spreads far and wide around the world. This might not matter if most emerging economies’ business cycles were tied to the US business cycle because, in those circumstances, Fed policy that was good for the US goose would also be good for the emerging-market gander. But emerging-market business cycles are not perfectly linked with the US. In the late 1990s, at the time of the Asian crisis, the US economy was booming. In the early years of the twenty-first century, when the US economy was struggling to cope with the consequences of the collapse in its late 1990s technology bubble, emerging markets were booming.

Yet exchange rates, interest rates, commodity prices, manufactured-goods prices and all sorts of other prices are now increasingly under the emerging economies’ spell. For a while, it was possible for central banks to kid themselves that their sovereignty was still intact. From the late 1980s through to the early years of the new millennium, the developed world supposedly benefited from the ‘Great Moderation’, a process whereby inflation and interest rates gradually fell, where business cycles became less volatile and where global economic growth strengthened in relation to the 1970s and early 1980s.9 Yet this moderation was followed by possibly the worst, and certainly the most synchronized, global economic downswing since the 1930s. If inflation was so low, why did things go so badly wrong? FROM STABILITY TO INSTABILITY: WHY PRICE STABILITY DOESN’T ALWAYS LIVE UP TO ITS PROMISE Part of the explanation relates to an increased globalization of the inflation process.

In the modern era, the first country to adopt an explicit inflation target was New Zealand in 1989–90. 7. From ‘The Federal Reserve System: Purposes and Functions’. 8. The letter, dated 22 April 2009, can be found at http://www.bankofengland.co.uk/ monetarypolicy/pdf/chancellorletter090422.pdf. 9. The first reference to the ‘Great Moderation’ was in James H. Stock and Mark W. Watson’s Has the Business Cycle Changed and Why?, Research Working Paper No. W9127, National Bureau of Economic Research, Cambridge, MA, 2002. The term was popularized by Ben Bernanke in a speech in February 2004 when he was a Governor at the Federal Reserve. His speech is available at http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220/default.htm. 10. Purchasing power parity assumes the cost of a non-tradable service is the same in all parts of the world.


pages: 287 words: 82,576

The Complacent Class: The Self-Defeating Quest for the American Dream by Tyler Cowen

affirmative action, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, assortative mating, Bernie Sanders, Black Swan, business climate, business cycle, circulation of elites, clean water, David Graeber, declining real wages, deindustrialization, desegregation, Donald Trump, drone strike, East Village, Elon Musk, Ferguson, Missouri, Francis Fukuyama: the end of history, gig economy, Google Glasses, Hyman Minsky, Hyperloop, income inequality, intangible asset, Internet of things, inventory management, knowledge worker, labor-force participation, low skilled workers, Marc Andreessen, Mark Zuckerberg, medical residency, meta analysis, meta-analysis, obamacare, offshore financial centre, Paul Samuelson, Peter Thiel, purchasing power parity, Richard Florida, security theater, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, South China Sea, Steven Pinker, Stuxnet, The Great Moderation, The Rise and Fall of American Growth, total factor productivity, Tyler Cowen: Great Stagnation, upwardly mobile, Vilfredo Pareto, working-age population, World Values Survey

But eventually these positive expectations started to outrace the reality, and so those capital flows culminated in a financial explosion and crisis starting in 2011, followed by intermittent flare-ups and generally low economic growth and, in many countries, massive unemployment. These days, few macroeconomists are predicting that we have beat the business cycle forever. The current and wiser view is that business cycles and also deep recessions eventually return in a cyclical manner. Long periods of stability sooner or later give rise to excess risk-taking and some kind of overextension, leading to a later correction (and typically a bumpy rather than a smooth one). In fact, the stronger and more durable the initial period of calm, the more of a doozy the eventual downturn might be. The thing is, we’ve learned that about the business cycle, but only now is it starting to sink in that such patterns have a lot of power to explain cycles in other realms as well. Americans have dug into their comfortable cocoons with greater skill and acumen than they protected their shadow banking system or than how they tried to redo the Middle East.

In their lifetimes, they’d observed roughly a doubling of living standards every generation. Imagine they are assuming that there will be no nuclear war, that communism will fall, and that the world moves significantly closer to near-free trade. Now, we ask, what do you expect to happen to the male median wage over the course of the next forty-five or so years? Outside of the ups and downs of the business cycle, both economists would view ongoing growth in living standards as the normal state of affairs for a market economy. Even the most recent trends are discouraging. If we take out the gains of the top earners, take-home pay for typical American workers has been falling since the Great Recession ended in 2009, an unusual path for an economic recovery. According to one good estimate, median wages for the American economy as a whole fell 4 percent from 2009 to 2014.

What is even scarier is that the new troubles, in many cases, seem to be derived, albeit indirectly, from the old patterns of growth and stability. More and more hints are coming that perhaps cyclical theories, with nasty kicks on and after their turning points, are the ones that apply. The return of the cyclical perspective is perhaps clearest in macroeconomics. Throughout most of the 1990s and considerably beyond, until about 2008, most economists believed in something called “the Great Moderation.” It was believed that the business cycle was, if not quite dead, defanged, due to better monetary policy and financial regulation. It was believed that the advanced economies could enjoy both growth and a kind of stability more or less forever, at least if our central banks would follow some textbook-level advice. And indeed, for many years the United States, among other countries, demonstrated fairly smooth economic performance with low unemployment.


pages: 518 words: 147,036

The Fissured Workplace by David Weil

accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, banking crisis, barriers to entry, business cycle, business process, buy and hold, call centre, Carmen Reinhart, Cass Sunstein, Clayton Christensen, clean water, collective bargaining, commoditize, corporate governance, corporate raider, Corrections Corporation of America, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, declining real wages, employer provided health coverage, Frank Levy and Richard Murnane: The New Division of Labor, George Akerlof, global supply chain, global value chain, hiring and firing, income inequality, information asymmetry, intermodal, inventory management, Jane Jacobs, Kenneth Rogoff, law of one price, loss aversion, low skilled workers, minimum wage unemployment, moral hazard, Network effects, new economy, occupational segregation, Paul Samuelson, performance metric, pre–internet, price discrimination, principal–agent problem, Rana Plaza, Richard Florida, Richard Thaler, Ronald Coase, shareholder value, Silicon Valley, statistical model, Steve Jobs, supply-chain management, The Death and Life of Great American Cities, The Nature of the Firm, transaction costs, ultimatum game, union organizing, women in the workforce, yield management

With more of the workers responsible for creating economic value operating outside the walls of the lead companies—whether through subcontracting, outsourcing, franchising, or other organizational forms—more of the gains flowed to executives in lead companies and their investors.45 And as the economy slowly recovers from the effects of the Great Recession, the trends toward increasing inequality persist. The latest estimates indicate overall real income growth of 1.7% between 2009 and 2011. But that anemic growth masks two very different trends: real income grew by 11.2% for families at the top 1% level but declined by 0.4% for the other 99% of families.46 Employment and Wages over the Business Cycle The dot-com recession of the early years of the twenty-first century and the Great Recession of 2007–2009 have been followed by very different recoveries than accompanied business cycles of the past. Two characteristics are particularly troubling. First, in both cases, employment recovered much more slowly than in the past, leaving large numbers of workers unemployed, underemployed, or out of the labor market entirely for longer periods of time. Second, the wage profile of job growth in recent recoveries has proved quite different than in the past.

Americans’ commitment to providing safety and health and decent conditions at the workplace has not changed. But relentless subcontracting can blur responsibility for safety and put workers in harm’s way. Outsourcing management to third parties can lead to violation of minimum wage laws. And franchising, an often unrecognized form of fissured employment, can create incentives that simultaneously demand adherence to product quality and create incentives for franchisees to violate laws. Even the business cycle may be affected by the spread of fissuring. Historically, hiring by large businesses led economic recoveries: as aggregate demand recovered, large firms directly increased employment. Now, employment decisions in many industries are mediated by fissured structures. Not only does this mean that the timing of recoveries may be slowed, since they must flow through multiple layers of fissured relationships; but the composition of jobs added also will reflect those relationships.

In 2007 the share of national income that went to the top 1% of families hit 23.5%. More strikingly, while the real income of the top 1% grew by 58% between 1993 and 2010, that of the rest of the 99% of families rose by a paltry 6.4%.19 Although these shifts arise from a complex set of factors, the changing shape of employment and the outward shift of jobs from large companies to smaller ones play a role. Even our models of the business cycle may be affected by the presence of fissuring. Historically, large businesses led recoveries: as demand returned, large firms directly increased employment. Now, employment decisions in many industries are mediated by fissured structures. Not only does this means that the timing of recoveries may be slowed, since they must “flow through” the fissured relationships; but the composition of jobs added also will reflect those relationships.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, microservices, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, WikiLeaks, women in the workforce

If bank reserves have to match loans made, there can be no expansion of the economy through credit, and there can be little space for derivatives markets, where complexity – in normal times – aids resilience to problems such as drought, crop failure, the recall of faulty motor cars etc. In a world where banks hold reserves equivalent to 100 per cent of their deposits, there would have to be repeated stop-go business cycles and high unemployment. And simple maths shows us that we would go into a deflation spiral: ‘in an economy with an unchanged money supply but rising productivity … prices will on trend decline’, says Schlichter.25 That’s the preferred option of the right-wing money fundamentalists. Their big fear is that, in order to keep fiat money alive, the state will nationalize the banks, write off the debts, seize control of the finance system and kill for ever the spirit of free enterprise.

In his time, Kondratieff ranked alongside globally influential thinkers such as Keynes, Schumpeter, Hayek and Gini. His ‘crimes’ were fabricated. An underground ‘Peasant Labour Party’, of which he was supposed to be leader, did not exist. Kondratieff’s real crime, in the eyes of his persecutors, was to think the unthinkable about capitalism: that instead of collapsing under crisis, capitalism generally adapts and mutates. In two pioneering works of data-mining he showed that, beyond short-term business cycles, there is evidence of a longer, fifty-year pattern whose turning points coincide with major structural changes within capitalism and major conflicts. Thus, these moments of extreme crisis and survival were not evidence of chaos but of order. Kondratieff was the first person to show the existence of long waves in economic history. Though it was later popularized as a ‘wave-theory’, Kondratieff’s most valuable insight was to understand why the global economy goes through sudden change, why capitalism hits structural crisis, and how it morphs and mutates in response.

The events that seem to cause the big turning points – wars, revolutions, discovery of new gold deposits and new colonies – were, he said, mere effects generated by the demands of the economy itself. Humanity, even as it tries to shape economic history, is relatively powerless over the long term. For a time in the 1930s, long-wave theory became influential in the West. The Austrian economist Joseph Schumpeter produced his own theory of business cycles, popularizing the term ‘Kondratieff Wave’. But once capitalism stabilized after 1945, long-wave theory seemed redundant. Economists believed state intervention could flatten out even the minor ups and downs of capitalism. As for a fifty-year cycle, the guru of Keynesian economics, Paul Samuelson, dismissed it as ‘science fiction’.3 And when the New Left tried to revive Marxism as a critical social science in the 1960s, they had little time for Kondratieff and his waves; they were looking for a theory of capitalist breakdown, not survival.


pages: 147 words: 45,890

Aftershock: The Next Economy and America's Future by Robert B. Reich

Berlin Wall, business cycle, declining real wages, delayed gratification, Doha Development Round, endowment effect, full employment, George Akerlof, Home mortgage interest deduction, Hyman Minsky, illegal immigration, income inequality, invisible hand, job automation, labor-force participation, Long Term Capital Management, loss aversion, mortgage debt, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, sovereign wealth fund, Thorstein Veblen, too big to fail, World Values Survey

When bets go sour and the economy nosedives, who gets bailed out and who are left to fend for themselves? At what point does an economy imperil itself politically, as large numbers conclude that the game is rigged against them? Most fundamentally, what and whom is an economy for? Technically, the Great Recession has ended. But its aftershock has only begun. Economies always rebound from declines, even from the depths of the darkest downturns. To this extent, the business cycle is comfortably predictable. Businesses eventually must reorder when inventories grow too depleted, families have to replace cars and appliances that are beyond repair, and modern governments invariably spend what they can and make it easier to borrow money in order to stimulate job growth. The larger and more interesting question is what happens next. If the underlying “fundamentals” are in order—if consumers are subsequently capable of spending and saving; if businesses have good reasons to invest; if governments maintain a fair balance between public needs and fiscal restraint; if the global economy efficiently allocates savings around the world, and if the environment can be sustained—then we can expect healthy and stable growth.

Federal Reserve chief Alan Greenspan—who was no Marriner Eccles—insisted that Clinton cut the federal budget deficit rather than deliver on his more ambitious campaign promises, and Greenspan reciprocated by reducing interest rates. This ushered in a strong recovery. By the late 1990s the economy was growing so quickly and unemployment was so low that middle-class wages started to rise a bit for the first time in two decades. But because the rise was propelled by an upturn in the business cycle rather than by any enduring change in the structure of the economy, it turned out to be a temporary blip. Once the economy cooled, most family incomes were barely higher than before. During the Great Prosperity of 1947–1975, the basic bargain had ensured that the pay of American workers coincided with their output. In fact, the vast middle class received an increasing share of the benefits of economic growth.

Any routine job that requires the same steps to be performed over and over can potentially be done anywhere in the world by someone working for far less than an American wage, or it can be done by automated technology. By the late 1970s, all such jobs were on the endangered species list. By 2010, they were nearly extinct. But contrary to popular mythology, trade and technology have not really reduced the number of jobs available to Americans. Take a look at the rate of unemployment over the last thirty years and you’ll see it has risen and fallen with the business cycle. Jobs were plentiful in the 1990s even though trade and automated technologies were pushing millions of workers out of their old jobs. The real problem was that the new ones they got often didn’t pay as well as the ones they lost. That largely explains why the median wage flattened between 1980 and 2007, adjusted for inflation. Over the longer term, the problem is pay, not jobs. Surely for many Americans, the most traumatic consequence of the Great Recession has been the loss of a job.


pages: 421 words: 128,094

King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey

activist fund / activist shareholder / activist investor, asset allocation, banking crisis, Bonfire of the Vanities, business cycle, carried interest, collateralized debt obligation, corporate governance, corporate raider, credit crunch, diversification, diversified portfolio, fixed income, Gordon Gekko, margin call, Menlo Park, mortgage debt, new economy, Northern Rock, risk tolerance, Rod Stewart played at Stephen Schwarzman birthday party, Sand Hill Road, sealed-bid auction, Silicon Valley, sovereign wealth fund, The Predators' Ball, éminence grise

Fortunately, Blackstone had most of the commitments for its third buyout fund, Blackstone Capital Partners III, signed up by that summer, before the UCAR scandal fully unfolded. To investors, the stupendous profit on Blackstone’s huge investment in UCAR was a mighty draw. Nearly all the 80 percent annualized return that Blackstone touted to investors was attributable to UCAR. It was a pattern that would recur with future funds: One or two great investments made at a trough in the business cycle could make a fund a huge success. The $4 billion third buyout fund, which had its final closing in October 1997, elevated Blackstone to the number-two position in private equity. Only KKR, the industry’s perennial kingpin, boasted a larger fund, a $5.7 billion vehicle raised in 1996. Forstmann Little, long KKR’s leading competitor, had rounded up just $3.2 billion in 1997 for its latest fund.

Funds raised by rivals such as Apollo, KKR, and TPG around the same time as Blackstone’s also outperformed the stock market, but not by nearly as much. Their returns were about 40 percent, and returns on most other buyout funds of the early decade were below that, so Blackstone stood out in the crowd. Blackstone’s 2002 fund sustained its lead among the biggest buyout funds, generating roughly a 40 percent annual return through the end of 2008, or two or three times the returns on competitors’ funds raised at the bottom of the business cycle in 2001 to 2003. That performance was the payoff from Schwarzman’s and James’s gut feeling in 2002 that things were bottoming out then and from Chinh Chu’s two knockout deals: Celanese and Nalco. As Blackstone geared up to raise its next fund, its returns gave it a competitive edge. It’s a law of finance and human nature that investment managers who make money for their clients attract more capital over time.

Having snagged Celanese and Nalco at the bottom of the market, Chu understood well the swings of the chemicals industry. He was dumbfounded to learn that Lehman was offering debt of up to seven times Tronox’s current cash flow. He figured the chemical industry was near a crest and that if business slacked off, the company wouldn’t be able to handle such a huge debt load. If earnings fell back to what one might expect at the midpoint in the business cycle instead of the peak, he reckoned, Tronox’s debt could suddenly equate to fourteen times cash flow—a perilous level. “The debt [offered] on that deal was twice what I thought the company was worth,” Chu says. With Lehman’s backing, Blackstone could have paid what Chu considered an absurd price, but Blackstone walked away. No other bidders took Lehman’s bait either, and Kerr-McGee ultimately took Tronox public that November.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, business cycle, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

It created the International Monetary Fund (IMF), as well as the precursor for the modern World Bank. BULLION: Bar or ingot form of gold, silver, platinum, or palladium; occasionally used by central banks for the settlement of international debt. BUSINESS CYCLE DATING COMMITTEE: Committee on the National Bureau of Economic Research that maintains a chronology of the US business cycle. The chronology identifies the dates of peaks and troughs that frame economic recession or expansion. CAPACITY UTILIZATION: This metric measures the extent to which the nation’s capital is being used in the production of goods. The utilization rate rises and falls with business cycles. As production increases, capacity utilization rises, and vice versa. CAPITAL ACCOUNT: The component of a country’s balance of payments that records the nation’s outflow and inflow of financial securities.

The goal is to provide the reader with concise views about challenges that people will confront in the financial service sector over the next few years. There is no way to predict precisely what will come next, but the issues reviewed in this compendium will play a major role in shaping the future. PART I WESTERN HEMISPHERE ECONOMIES 1 THE US RECOVERY David Hale The Business Cycle Dating Committee of the National Bureau of Economic Research has said that the great recession of 2008–2009 ended in July 2009. The US economy had a growth rate of 1.6 percent during the third quarter of 2009 followed by 5.0 percent during the fourth quarter and 3.7 percent during the first quarter of 2010. Growth then slowed to 1.7 percent during the second quarter of 2010 and 2.0 percent during the third quarter.

Their proposals drew immediate fire from House Minority Leader Nancy Pelosi (D-CA) and conservative Republicans for threatening entitlement programs and popular tax allowances, but they at least offered a set of ideas that attempted to hold the tax share of GDP below 21 percent while reducing federal spending to 22 percent of GDP. In 2010, the recession had reduced the tax share of GDP to only 14.8 percent while the Obama stimulus program had boosted the spending share of GDP to 25.4 percent. The resolution of fiscal policy uncertainties will play a major role in shaping the business cycle post-2010. If the government were to introduce a 10 percent VAT in 2012 or 2013, it would depress consumer spending. The Fed might have to offset the fiscal drag by easing interest rates. If there is no change in fiscal policy, bond yields could rise to 7–8 percent and jeopardize the upturn in the housing market. Large interest rate hikes would also raise the cost of capital and depress investment.


pages: 102 words: 30,120

Why Wages Rise by F. A. Harper

business cycle, collective bargaining, fixed income, full employment, means of production, wage slave

The price was especially high for those without work. The agreement between changes in profits and changes in employment is not exact, of course. But the similarity in a general way is clear. It definitely disproves the surplus value theory. Not only is the theory wrong, it is precisely upside down — at least when wage rates are pressing profits toward total disappearance, as in the 1930’s. Sweeps of the Business Cycle The notion persists that business swings upward and downward with more or less regularity, and that this is inherent or inevitable under private enterprise. It is also believed that these swings have been getting worse as we have proceeded into a complex economy since the industrial revolution. This latter notion is a favorite argument of persons bent on socializing this nation, especially those of political inclination.

These conditions would give the maximum of welfare possible for us to attain at any time. It would be as near a utopia as can be hoped for in economic affairs this side of Heaven. ______________ 1Technically, this is an elasticity of demand for labor of -3.0, or a little more. 2See Chapter 3, p. 19. Index A Abilities, exchange of, 35-42 Animals, tools of mankind, 28 B Bargaining, wage, 100 Benefits fringe, 72-83 vacation, 91 Bonds, government, 22 Business cycles (and charts), 107-119 Buying power loss of, 65 production and, 53 selling and, 95 theory, 112 C Capital General Motors, 14 Marxian view of, 25 unemployment and, 113 use of, 19-27 see also, Money Choice-making encouraged, 118 house building and, 117 leisure and, 88 spending and, 63-71 Clark, Colin, 86n Clipped dollars, 51 Communism determining needs, 72 Consumption. See Production Controls.

See Buying power Slave labor, 23 Socialism determining needs, 72 Specialization, 35-42 Spending, choice in, 63-71 Sun’s energy, 28 Supply, labor, 24, 103, 107-119 Surplus labor, 101 value theories, 24, 113 T Taxation double, 22 inflation as, 54 wages affected by, 69 Theories buying power, 112 labor and surplus value, 24, 113 Tools harnessing energy, 28-34 productive, 19-27 Trade. See Exchange Tucker series (chart), 11 U Unemployment. See Labor Unions, labor, 9-13, 89 V Vacation benefits, 91 Value labor and surplus, 24, 113 see also, Choice-making W Wage rates bargaining, 100 benefits to, 72-83 business cycles and, 107-119 contract for, 53-62 cost of government and, 63-71 demand of, 24, 103, 107 depression, 5, 111 division of, 14, 19-27, 109 exchange abilities and, 35-42 lubricant for, 43-52 free market, 14, 19-27, 107-119 inflation and, 49, 53-62 labor pricing, 95-106, 107-119 unions (and chart), 9-13, 89 leisure and, 84-94 monopoly and, 67 prices and. See Prices production and, 14-18 (and chart), 20, 75 real and unreal (chart), 57 roadblocks to, 6 taxation and, 69 tools to harness energy, 28-34 trends (chart), 68 unemployment and (chart), 104 Welfare inflation and, 50 leisure and, 85 States growth of, 74 small, 81 White, Andrew Dickson inflationary views of, 61 Woytinski (W.


pages: 306 words: 97,211

Value Investing: From Graham to Buffett and Beyond by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, Michael van Biema

Andrei Shleifer, barriers to entry, Berlin Wall, business cycle, capital asset pricing model, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, diversified portfolio, Eugene Fama: efficient market hypothesis, fixed income, index fund, intangible asset, Long Term Capital Management, naked short selling, new economy, place-making, price mechanism, quantitative trading / quantitative finance, Richard Thaler, shareholder value, short selling, Silicon Valley, stocks for the long run, Telecommunications Act of 1996, time value of money, tulip mania, Y2K, zero-sum game

The most obvious candidate for a desirable security is a stock that is selling below the reproduction cost of its current assets-cash, receivables, inventory-after all liabilities have been paid. These are Benjamin Graham's famous net-net stocks, and although it was easier to find them during the Depression than it is today, such opportunities can occasionally be located. A second way to calculate the company's intrinsic value is to examine its stream of earnings over a period of years and to estimate how much the company should earn on average over the course of a business cycle. This figure should correspond to a market-level return on the intrinsic (reproduction) value of the assets. When the earnings repeatedly exceed this norm, the company may have earnings power that supports an intrinsic value higher than its adjusted net worth. These situations are not common, but they are much less rare than Graham's net-nets. Finally, but only for those rare companies that possess a sustainable competitive ad vantage, the profitable growth of the firm needs to be incorporated into the valuation.

Rectifying accounting misrepresentations, such as frequent "onetime" charges that are supposedly unconnected to normal operations; the adjustment consists of finding the average ratio that these charges bear to reported earnings before adjustments, annually, and reducing the current year's reported earnings before adjustment proportionally. 2. Resolving discrepancies between depreciation and amortization, as reported by the accountants, and the actual amount of reinvestment the company needs to make in order to restore a firm's assets at the end of the year to their level at the start of the year; the adjustment adds or subtracts this difference. 3. Taking into account the current position in the business cycle and other transient effects; the adjustment reduces earnings reported at the peak of the cycle and raises them if the firm is currently in a cyclical trough. 4. Considering other modifications we discuss in Chapter 5. The goal is to arrive at an accurate estimate of the current distributable cash flow of the company by starting with earnings data and refining them. To repeat, we assume that this level of cash flow can be sustained and that it is not growing.

The adjustment consists of finding the average ratio that these charges bear to reported earnings before adjustments, annually, and reducing the current year's reported earnings before adjustment proportionally. 2. Resolving discrepancies between depreciation and amortization, as reported by the accountants, and the actual amount of reinvestment the company needs to make in order to restore a firm's assets at the end of the year to their level at the start of the year. The adjustment adds or subtracts this difference. 3. Taking into account the business cycle and other transient effects. The adjustment reduces earnings reported at the peak of the cycle and raises them if the firm is currently in a cyclical trough. 4. Applying other modifications as are reasonable, depending on the specific situation. The purpose of these adjustments is to arrive at a figure that represents distributable cash flow, or money the owners can extract from the firm and still leave its operations intact.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

"Robert Solow", affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, business cycle, buy and hold, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

In the run-up to the financial crisis, consumers and firms borrowed too much; speculators built houses that never should have been built; Wall Street grew fat dealing in products with limited economic value. These things are now (painfully) fixing themselves. Recessions may actually be good for long-term growth because they purge the economy of less productive ventures, just as a harsh winter may be good for the long-term health of a species (if not necessarily for those animals that freeze to death). The business cycle takes a human toll, as the layoffs splashed across the headlines attest. Policymakers are increasingly expected to smooth this business cycle; economists are supposed to tell them how to do it. Government has two tools at its disposal: fiscal policy and monetary policy. The objective of each is the same: to encourage consumers and businesses to begin spending and investing again so that the economy’s capacity no longer sits idle. Fiscal policy uses the government’s capacity to tax and spend as a lever for prying the economy from reverse into forward.

Consumers were suddenly overburdened with debt and stuck with homes they couldn’t sell. The stock market plunged. The unemployment rate climbed toward 10 percent. America’s biggest banks were on the brink of insolvency. The Chinese started musing publicly about whether they should continue to buy American treasury bonds. We liked it better the first way. What happened? To understand the cycle of recession and recovery—the “business cycle,” as economists call it—we need to first learn about the tools for measuring a modern economy. If the president really did wake up from a coma after suffering a horseshoe accident, it’s a fair bet that he would ask for one number first: gross domestic product, or GDP, which represents the total value of all goods and services produced in an economy. When the headlines proclaim that the economy grew 2.3 percent in a particular year, they are referring to GDP growth.

Purchases generated by the tax cut put workers back on the job, which inspires more spending and confidence, and so on. The notion that the government can use fiscal policy—spending, tax cuts, or both—to “fine-tune” the economy was the central insight of John Maynard Keynes. There is nothing wrong with the idea. Most economists would concede that, in theory, government has the tools to smooth the business cycle. The problem is that fiscal policy is not made in theory; it’s made in Congress. For fiscal policy to be a successful antidote to recession, three things must happen: (1) Congress and the president must agree to a plan that contains an appropriate remedy; (2) they must pass their plan in a timely manner; and (3) the prescribed remedy must kick in fast. The likelihood of nailing all three of these requirements is slim.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

"Robert Solow", Airbnb, Albert Einstein, American ideology, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, laissez-faire capitalism, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, uber lyft, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

12.Ad Hoc Committee on the Triple Revolution, “The Triple Revolution: Cybernation, Weaponry, Human Rights.” 13.Tracy, “Why Some of Google’s Coolest Projects Flop Badly.” 14.Tracy, “Why Some of Google’s Coolest Projects Flop Badly.” 15.Polymath Consulting, “A Brief History of Payments.” 16.Byrnes, “Technology Repaints the Payment Landscape.” 17.Mainelli and Milne, “The Impact and Potential of Blockchain,” 4. 18.Mainelli and Milne, “The Impact and Potential of Blockchain,” 5. 19.Simmons, “George Foster: Are Startups Really Job Engines?” 20.AlixPartners, Press release on “C.A.S.E. – Car of the Future.” 21.Phelps, Mass Flourishing, 19. 22.Pugsley and Şahin, “Grown-up Business Cycles.” 23.Hathaway and Litan, “The Other Aging of America.” 24.Pugsley and Sahin, “Grown-up Business Cycles.” In the private sector, start-up employment went from 4 to 2 percent. 25.Buchanan, “American Entrepreneurship Is Actually Vanishing.” 26.Simon and Barr, “Endangered Species.” 27.Litan, “Start-up Slowdown.” 28.OECD, “The Future of Productivity.” 29.OECD, “No Country for Young Firms?” 30.Decker et al., “Where Has All the Skewness Gone?”

Third, the decoupling of productivity and labor incomes proves the transformational change of technology, and the unequal distributional effects of technological gains mean there are larger economic effects that national accounts fail to record. The first argument can be easily dismissed. Whatever the direction taken by US or European productivity growth in the past decade, it has not been an effect of the business cycle. In reality the cyclical effects on total factor productivity have substantially weakened over time to become acyclical, and labor productivity has been countercyclical – going up in recessions.34 Technology optimists like Brynjolfsson and McAfee would disagree. In their otherwise important book The Second Machine Age, they claim that “part of the recent slowdown simply reflects the Great Recession and its aftermath.”35 They argue that US productivity growth “in the decade following the year 2000 exceeded even the high growth rates of the roaring 1990s, which in turn was higher than 1970s or 1980s growth rates had been.”36 These propositions do not stand up to scrutiny.

After all, many industries have for decades downsized their labor force while the volume of output has multiplied with the help of automation. Intuition, however, is a poor source of information. While the relation between productivity and employment is “ambivalent,”54 to quote three leading economists, it does not lend support to the view that employment is depressed by productivity growth. Importantly, total employment in an economy changes with business cycles and reflects stronger forces in the economy than productivity growth, such as how demand is influenced by fiscal and monetary policy. For instance, the US lost 7 million jobs between 2007 and 2009, and there was productivity growth in the economy during these two years, but few, if any, would tender the view that there is a causal relation between the loss of jobs and productivity during these years.


pages: 550 words: 124,073

Democracy and Prosperity: Reinventing Capitalism Through a Turbulent Century by Torben Iversen, David Soskice

Andrei Shleifer, assortative mating, augmented reality, barriers to entry, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, centre right, cleantech, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, deskilling, Donald Trump, first-past-the-post, full employment, Gini coefficient, hiring and firing, implied volatility, income inequality, industrial cluster, inflation targeting, invisible hand, knowledge economy, labor-force participation, liberal capitalism, low skilled workers, low-wage service sector, means of production, mittelstand, Network effects, New Economic Geography, new economy, New Urbanism, non-tariff barriers, Occupy movement, offshore financial centre, open borders, open economy, passive investing, precariat, race to the bottom, rent-seeking, RFID, road to serfdom, Robert Bork, Robert Gordon, Silicon Valley, smart cities, speech recognition, The Future of Employment, The Great Moderation, The Rise and Fall of American Growth, too big to fail, trade liberalization, union organizing, urban decay, Washington Consensus, winner-take-all economy, working-age population, World Values Survey, young professional, zero-sum game

Collier probably rightly dismisses the Chartist movement of twenty years previously as an important influence; and few commentators saw (or see) the huge and impressive July 1867 demonstration in favor of reform—consisting mainly of middle-class and skilled workers, and led by industrialists—as seriously threatening to the privileged position of elites, let alone revolutionary.14 Acemoglu and Robinson take the demonstration and the ensuing 1867 Reform Act in the UK as key evidence of their hypothesis—as, at first sight, they might well. It is the first case they consider, and is set out on page 3 of their book: “Momentum for reform finally came to a head in 1867…. A sharp business-cycle downturn… increased the risk of violence…. The Hyde Park Riots of July 1867 provided the most immediate catalyst.” Searle (1993, 225) argues that “reform agitation in the country clearly did much to persuade the Derby ministry that a Reform Bill, any Reform Bill, should be placed on the statute book with a minimum of delay.’” Searle is one of the most distinguished historians of Victorian England, but the full quotation starts “his [Bright’s] leadership of reform agitation…” Bright was one of the leaders of the business Liberals/Radicals, and, as Searle explained in his book at the start of the section headed The Reform Crisis 1865–7 (1993, 217), his “purpose is to examine events from the perspective of those Radicals concerned with the maximisation of the interests of the business community”; indeed, the title of his book is Entrepreneurial Politics in Mid-Victorian England (1993).

Public utilities were widely considered natural monopolies that required state ownership or tight regulatory control, and in areas such as telecommunication and postal services there was also arguably a national-security interest in keeping foreign firms at bay. Regulation or nationalization of banking and insurance were considered necessary to protect markets against mass bankruptcy and to allow governments to steer the national economy in the event of a crisis. Protected service markets could also be used more directly as an employment buffer against business cycle swings, stabilizing the economy and facilitating the government’s commitment to full employment. Finally, protection of services against competition was seen, rightly or wrongly, as a means to ensure universalism in service provision and as inherently inseparable from the goal of modernizing society by extending telephone, postal, transportation, and other services to rural and less developed regions.

This matters because it is plausible that governments reflect the preferred mean level of spending or redistribution of middle classes—or coalitions between these with lower or higher classes—even as fluctuations of spending around these means are better aligned with expressed preferences of the affluent. Elkjær and Iversen (2018) show that this is largely due to those with high education and income being better informed about the changing constraints that affects fiscal policy—which could be a function of the standard business cycle and automatic stabilizers—even as they have little influence on spending levels.12 Our own reading of the comparative evidence points to two broad conclusions. First, in areas that have to do with promotion of the advanced sectors and economic growth, people have enough information to reward and punish governments for performance, and voters tend to agree on what the desirable policies are.


Meghnad Desai Marxian economic theory by Unknown

business cycle, commoditize, Corn Laws, full employment, land reform, means of production, p-value, price mechanism, profit motive

Part of this increase resulted from public welfare and foreign-aid measures; most of it was generated by military expenditures .... It was by way of inflation, debt-accumulation, government-induced production, war-preparation and actual warfare that the dominant capitalist nations reached an approximation of full employment." (pp.122 - 123). In earlier years, business cycles performed the task of destroying accumulated capital. But according to Mattick, at the turn of the century, a point was reached whereby cycles were no longer sufficient. "The business cycle as an instrument of accumulation had apparently come to an end; or, rather, the business cycle became a 'cycle' of world wars." (p.13S). While Mane did not foresee many of these events, Mattick says. they are perfectly consistent with his theory. Indeed the rise of Keynesianism is a socio-economic development predicted by Mane's theory, according to Mattick.

THE M4RXIAN VALUE-PRICE DUALITY Visible Price Invisible Value Domain ....Cl' OP Ezchange Domain Social relations between men Relations between things Class division between capitalist as owner of means of production and means of subsistence and worker as free labourer Equal relation of exchange between buyer and seller Value of labour power equal to the socially necessary labour time required for production and reproduction of the labourer equal to paid labour which is less than total labour expended The wage form Wages are paid for a full day's work Rate of surplus value equals unpaid labour pald labour Rate of profit Total value Surplus value + variable capital + constant capital (1 + rate of surplus value vaiable capital + constant capital, where constant capital has its full value transferred to the final product but creates no surplus value Total profits x Profits of f1Xed capltal + advanced circulating capital ~ock Total revenue·minus total cost Selling price minus cost price. where cost price equals cost of labour (wage bill) plus cost of materials and wear and tear of fixed capital XIII EXTENDED ~PRODUCTION: INTRODUCTION At many points in all the three volUllles of Capital, Mane emphasises that a revolution in value takes place continuously within the productive process under capitalism {34} {47} {68}. Changing technology as well as improvements in methods of utilizing given inputs, revolution in methods of circulation (packaging, transport, credit, marketing) are all occurring all the time. Along with growth and as a necessary part of it are crises - business cycles which force change upon individual capitalists {75}. In addition to these is the course of the class struggle - strikes, trade union growth, growth of new forms of capitalist associations e.g. multinational firms, changes in form of governments, e.g. growth of the welfare state etc. Beyond mentioning these changes, we can do little more because these have not been treated in analytical detail to any great extent.


pages: 1,104 words: 302,176

The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (The Princeton Economic History of the Western World) by Robert J. Gordon

"Robert Solow", 3D printing, Affordable Care Act / Obamacare, airline deregulation, airport security, Apple II, barriers to entry, big-box store, blue-collar work, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Charles Lindbergh, clean water, collective bargaining, computer age, creative destruction, deindustrialization, Detroit bankruptcy, discovery of penicillin, Donner party, Downton Abbey, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, feminist movement, financial innovation, full employment, George Akerlof, germ theory of disease, glass ceiling, high net worth, housing crisis, immigration reform, impulse control, income inequality, income per capita, indoor plumbing, industrial robot, inflight wifi, interchangeable parts, invention of agriculture, invention of air conditioning, invention of the sewing machine, invention of the telegraph, invention of the telephone, inventory management, James Watt: steam engine, Jeff Bezos, jitney, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, labor-force participation, Loma Prieta earthquake, Louis Daguerre, Louis Pasteur, low skilled workers, manufacturing employment, Mark Zuckerberg, market fragmentation, Mason jar, mass immigration, mass incarceration, McMansion, Menlo Park, minimum wage unemployment, mortgage debt, mortgage tax deduction, new economy, Norbert Wiener, obamacare, occupational segregation, oil shale / tar sands, oil shock, payday loans, Peter Thiel, pink-collar, Productivity paradox, Ralph Nader, Ralph Waldo Emerson, refrigerator car, rent control, Robert X Cringely, Ronald Coase, school choice, Second Machine Age, secular stagnation, Skype, stem cell, Steve Jobs, Steve Wozniak, Steven Pinker, The Market for Lemons, The Rise and Fall of American Growth, Thomas Malthus, total factor productivity, transaction costs, transcontinental railway, traveling salesman, Triangle Shirtwaist Factory, undersea cable, Unsafe at Any Speed, Upton Sinclair, upwardly mobile, urban decay, urban planning, urban sprawl, washing machines reduced drudgery, Washington Consensus, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, working poor, working-age population, Works Progress Administration, yellow journalism, yield management

The spread of the city is treated in chapter 5, in which the development of the city is viewed as a corollary of a succession of transportation innovations that steadily increased the distance that was feasible to travel between the home and the workplace. Decisions that encouraged urban sprawl after World War II are reserved for chapter 10, on housing after 1940. Another deliberate omission from this chapter is the effect of the business cycle. The ease or difficulty of finding jobs varied across recession intervals and across decades, and the decline in the standard of living during the Great Depression stands out. But the Great Depression did not cause housing units to become unplugged from the electricity, water, and sewer networks; the appliances purchased before 1929 still worked to improve the standard of living; and the decade of the 1930s witnessed a sharp increase in the diffusion of electric refrigerators and washing machines.

Shifts were twelve hours per day in conditions lacking lockers and having only primitive toilet facilities, and the heat and danger of the job itself paints a portrait of dramatic imbalance between the power of employers and weakness of workers. Managers could dismiss workers instantly for any reason, including a perception that as a worker aged, he or she was becoming physically weaker. The number of hours worked per year varied randomly, not just with the business cycle, but also when any closure for maintenance, reconstruction, or slack demand sent workers onto the streets with no compensation and no unemployment insurance. Women faced a life of hard work, boredom, and drudgery, whether on the farm or in the city. The small percentage of women who entered the labor market found themselves cordoned off into female occupations, working to manufacture apparel or as clerks, nurses, or school teachers.

Urban pawnbroking dates back to medieval times and in American history to colonial times. But its role in providing consumer credit became more prominent in the early nineteenth century with the development of dense urban centers. The services of pawnbrokers were tied to the unpredictable nature of urban employment, which, as we learned in chapter 8, was unstable as a result not only of the macroeconomic business cycle, but also of the instability of employment in particular industries and at particular plants. In the Chicago stockyards, an employee returning home from work on Monday did not know whether he would be offered four, eight, or twelve hours of work on Tuesday. The pawnbrokers’ “cycle of pledging and redemption” followed weekly and seasonal patterns. Weekly events included paychecks and due dates for rent payments.


pages: 128 words: 35,958

Getting Back to Full Employment: A Better Bargain for Working People by Dean Baker, Jared Bernstein

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, business cycle, collective bargaining, declining real wages, full employment, George Akerlof, income inequality, inflation targeting, mass immigration, minimum wage unemployment, new economy, price stability, publication bias, quantitative easing, Report Card for America’s Infrastructure, rising living standards, selection bias, War on Poverty

Chapter 2: Evidence of the Benefits of Full Employment The historical record in the United States supports the notion that, when labor markets are tight, the benefits of growth are more likely to flow to the majority of working people. Conversely, when there’s slack in the job market, as has been the case more often than not in recent years, working families fall behind. Job markets operating below full employment are not confined to recessions. Business cycle expansions over the past 30 years have featured labor markets with too much slack to provide workers with the bargaining clout they need to claim their share of the growth they’re helping to produce (the later 1990s were an important exception). Moreover, the last three recessions have been followed by initially weak “jobless” and “wageless” recoveries, implying that, in recent years, incomes and wages have failed to get much of a lift in bad times or good ones.

Some forms of spending are better than others in terms of reinvigorating demand, and one of the best forms is public infrastructure investment, which can employ hundreds of thousands of workers in projects that yield long-term, continuing returns on the dollar. The second policy idea is to launch a system of publicly funded jobs that can ramp up and down, expand and contract, as needed, in tandem with the business cycle. Under such a system the federal government, working through local intermediaries, would supply funds to subsidize hiring in the private sector as well as in important community services like education, child care, and recreation. Finally, we can take steps to ameliorate the disemployment effects of a downturn by sharing work, and we can counteract productivity-driven drops in demand for labor by restructuring work.

Cambridge, MA: National Bureau of Economic Research. Holzer, Harry. 2013. “Workforce Development Programs.” In Legacies of the War on Poverty, ed. Martha J. Bailey and Sheldon Danziger, 121-151.New York, NY: Russell Sage Foundation. Johnson, Clifford M., Amy Rynell, and Melissa Young. 2010. “Publicly Funded Jobs: An Essential Strategy for Reducing Poverty and Economic Distress Throughout the Business Cycle.” Paper prepared for the Georgetown University and Urban Institute Conference on Reducing Poverty and Economic Distress after ARRA, January 15. Washington, DC: The Urban Institute. http://www.urban.org/uploadedpdf/412070_publicly_funded_jobs.pdf Kocherlakota, Narayana. 2010. “Inside the FOMC.” Speech at Northern Michigan University, Marquette, August 17. http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?


Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Albert Einstein, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, Lao Tzu, Long Term Capital Management, market bubble, market microstructure, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Sharpe ratio, systematic trading, the scientific method, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

For example, when he states that “what Mills and Lowry have are still trend following tools, with all their advantages and limitations,” he seems to mean something more like “trend-lagging”—such as when a moving average turns higher after a trend has already begun. In other words, trend following was not yet a fully formed concept. “Trend” was not yet a noun adjunct, nor “following” a gerund. The individual who finally made the connection was perhaps William Dunnigan, a trader, technical analyst, and writer who ran a business cycle forecasting company in Palo Alto, California, in the 1950s. Dunnigan had many books and other publications to his credit, beginning with the academic Forecasting the Monthly Movement of Stock Prices in 1930, and following with a more technically oriented, mimeographed publication called “Trading With the Trend” in 1934, to name two. His major works, however, came out in the early and mid 1950s.

When the economic weather changes, we will change our course with it and will not try to forecast the future time or place at which the wind will change.”20 William Dunnigan today remains an underrated trading researcher, although he was highly, if not widely, regarded in his day, even by academic economists. Elmer Clark Bratt, for example, refers to Dunnigan’s “trading with the trend” in his Business Cycles and Forecasting, one of the premier economics textbooks of his day: “Intermediate movements in the stock market do not last any stated length of time, so we never know just when a rally or a reaction will take place. What has been called “trading with the trend” by Dunnigan appears to be the only important forecasting principle which can be derived.”21 Next in line among the pioneers of trend following was the much better known Richard Donchian, whose article “Trend-Following Methods in Commodity Price Analysis” appeared in the Commodity Yearbook of 1957.

Jones, “Some a Posteriori Probabilities in Stock Market Actions.” Econometrica, July 1937, p. 286. 18. Alfred Winslow Jones, “Fashions in Forecasting.” Fortune, March 1949, p. 180. 19. William Dunnigan, New Blueprints for Gains in Stocks and One-way Formula for Trading in Stocks and Commodities. United Kingdom: Harriman House Limited, 2005, reprint of 1954 and 1956 editions, p. 31. 20. Ibid., p. 32. 21. Elmer Clark Bratt, Business Cycles and Forecasting, fourth edition. Homewood, Illinois: Richard D. Irwin Inc., 1953, p. 497. 22. Richard D. Donchian, “Trend-Following Methods in Commodity Price Analysis.” Commodity Year Book, 1957, p. 35. 23. William Baldwin, “Rugs to Riches.” Forbes, March 1, 1982, p. 143. 24. Darrell Jobman, “Richard Donchian: Pioneer of Trend-Trading.” Commodities, September 1980, p. 42. 25. Soren Kierkegaard.


pages: 398 words: 111,333

The Einstein of Money: The Life and Timeless Financial Wisdom of Benjamin Graham by Joe Carlen

Albert Einstein, asset allocation, Bernie Madoff, Bretton Woods, business cycle, business intelligence, discounted cash flows, Eugene Fama: efficient market hypothesis, full employment, index card, index fund, intangible asset, invisible hand, Isaac Newton, laissez-faire capitalism, margin call, means of production, Norman Mailer, oil shock, post-industrial society, price anchoring, price stability, reserve currency, Robert Shiller, Robert Shiller, the scientific method, Vanguard fund, young professional

., regarding Baby Pompadour, the poorly received play he cowrote: “The probabilities are that it wasn't good enough for Broadway and that it deserved to fail.”19) Graham's memoirs, intended only for posthumous publication, are among the most candid that I have read. Consequently, I am inclined to believe Graham's contention that he had formulated his own conceptions on these matters independently of Hobson, Keynes, and Edison. In any case, conscious of the scourge of insufficient demand during business-cycle downturns, Graham believed that his commodity-reserve system would help smooth out the business cycle by ensuring a consistent minimum level of demand for his basket of “basic durable raw materials.”20 Unfortunately (or not, depending on one's opinion of the merits of Graham's economic prescriptions), Graham was too focused on his work at Newburger in 1921 to do much about his plan other than discuss it with his uncle, Maurice Gerard, who found it very intriguing.

Just as Graham would have anticipated, the average price impact was found to be both negative and statistically significant, but, from a long-term investment perspective, the duration of this negative price impact was less than sixty days.15 For the likes of Graham, Buffett, and others, a two-month-long price dip has little consequence because, as investors (not speculators), such a time frame is entirely insignificant. As value-investor-extraordinaire Charles Brandes wrote in 2004, “Any contemplated holding period shorter than a normal business cycle (typically 3 to 5 years) is speculation.”16 As well, contrary to what many assume about the world's most famous Graham acolyte, Warren Buffett, is similarly detached from the market's short-term movements. As acclaimed author and investor Robert Hagstrom observed, Buffett “has no need to watch a dozen computer screens at once; the minute-by-minute changes in the market are of no interest to him.”17 The problem with these minute-by-minute changes is that they are rarely anchored in events of long-term consequence.

Establishing that “ordinary consumption tends to fall short of production during a period of business expansion,”52 Graham observes that “credit extension”53 then becomes the most obvious (but hardly the most farsighted) means to “make up the difference.”54 Having witnessed both the heights of the 1920s credit boom and the depths of the 1930s Depression (during which he initially lost over two-thirds of his money), Graham was wary of a business cycle in which “each period of prosperity has been said to bear within itself the seeds of its own collapse.”55 Through government purchases/sales and storage/delivery, his proposed system was designed to necessitate stable pricing and demand for the fundamental inputs of production (raw materials). As such, in Graham's view, it had the potential to take the place of “speculative credit expansion (or of government deficits) as the marginal or effective factor in maintaining prosperity.”56 STORAGE AND GLOBAL STABILITY In the early 1930s, when Graham revisited the commodity-backed-currency idea (the general contours of which he had already conceptualized ten or eleven years earlier), and in the mid-1930s, when he wrote a full-length work on the subject, he was motivated by the unprecedented paralysis of the US economy.


pages: 338 words: 104,684

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, Bretton Woods, business cycle, capital controls, central bank independence, collective bargaining, COVID-19, Covid-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, Gini coefficient, global reserve currency, global supply chain, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, mortgage debt, Naomi Klein, new economy, New Urbanism, Nixon shock, obamacare, open economy, Paul Samuelson, Ponzi scheme, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

MMT reckons that since the government imposes the tax that causes people to look for ways to earn the currency, the government should make sure that there is always a way to earn the currency. With a job guarantee in place, the economy can pass through a rough patch without throwing millions of people into unemployment. The rough patches are inevitable. There isn’t a capitalist economy on earth that has found a way to eradicate the business cycle. Economies grow and create jobs and then, eventually, something happens to throw them into recession. We can and should use discretionary policy to try to tame the business cycle. Smoother rides are preferable to bumpy ones. But no country has figured out how to steer clear of every possible hazard. Over the past sixty years, the US has been hit with recessions in 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007–2009. Good times are followed by bad times, which eventually set the stage for the next round of good times.

As Keynes famously observed, “You can’t push on a string.” What he meant was that the Fed can make it cheaper to borrow, but it cannot force anyone to take out a loan. Borrowing money puts companies and individuals on the hook for the debts they incur. Loans must be repaid out of future income, and there are good reasons why the private sector might be reluctant to increase its indebtedness at various stages of the business cycle. Remember, households and businesses are currency users, not currency issuers, so they do need to worry about how they’re going to make their payments. In the wake of the Great Recession, which was itself precipitated by a massive buildup in private (subprime mortgage) debt, it became clear that the Fed was struggling to fix the economy on its own. It had already cut the interest rate to zero, and it had embarked on a new strategy known as quantitative easing.18 It was doing everything in its power to hold things together.

It’s not enough just to provide training and other temporary forms of assistance to workers whose jobs are lost to foreign competition. Federal programs like Trade Adjustment Assistance (TAA)14 are important, but something more is needed. That something is a federal job guarantee. By no means is it a panacea, but at a minimum, it begins to tackle the problem of unemployment directly (as opposed to subsidizing the effects of unemployment). Through the thick and thin of the business cycle, we leave tens of millions of Americans idle in the belief that this makes political, economic, and social sense. Consider the closure of the Harley-Davidson manufacturing facility in Kansas City, Missouri, the city in which I taught for seventeen years. The company’s eight hundred workers were left stunned by the announcement that ultimately resulted in a net loss of 350 jobs.15 The timing was particularly pernicious, coming as it did against the backdrop of a dividend increase for shareholders and an announcement that the company would spend millions buying back up to fifteen million shares of its own stock.


pages: 261 words: 10,785

The Lights in the Tunnel by Martin Ford

"Robert Solow", Albert Einstein, Bill Joy: nanobots, Black-Scholes formula, business cycle, call centre, cloud computing, collateralized debt obligation, commoditize, creative destruction, credit crunch, double helix, en.wikipedia.org, factory automation, full employment, income inequality, index card, industrial robot, inventory management, invisible hand, Isaac Newton, job automation, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, knowledge worker, low skilled workers, mass immigration, Mitch Kapor, moral hazard, pattern recognition, prediction markets, Productivity paradox, Ray Kurzweil, Search for Extraterrestrial Intelligence, Silicon Valley, Stephen Hawking, strong AI, technological singularity, Thomas L Friedman, Turing test, Vernor Vinge, War on Poverty

This book is available for purchase in paper and electronic formats at: www.TheLightsintheTunnel.com CONTENTS A Note to Kindle Users Introduction Chapter 1: The Tunnel The Mass Market Visualizing the Mass Market Automation Comes to the Tunnel A Reality Check Summarizing Chapter 2: Acceleration The Rich Get Richer World Computational Capability Grid and Cloud Computing Meltdown Diminishing Returns Offshoring and Drive-Through Banking Short Lived Jobs Traditional Jobs: The “Average” Lights in the Tunnel A Tale of Two Jobs “Software” Jobs and Artificial Intelligence Automation, Offshoring and Small Business “Hardware” Jobs and Robotics “Interface” Jobs The Next “Killer App” Military Robotics Robotics and Offshoring Nanotechnology and its Impact on Employment The Future of College Education Econometrics: Looking Backward The Luddite Fallacy A More Ambitious View of Future Technological Progress: The Singularity A War on Technology Chapter 3: Danger The Predictive Nature of Markets The 2008-2009 Recession Offshoring and Factory Migration Reconsidering Conventional Views about the Future The China Fallacy The Future of Manufacturing India and Offshoring Economic and National Security Implications for the United States Solutions Labor and Capital Intensive Industries: The Tipping Point The Average Worker and the Average Machine Capital Intensive Industries are “Free Riders” The Problem with Payroll Taxes The “Workerless” Payroll Tax “Progressive” Wage Deductions Defeating the Lobbyists A More Conventional View of the Future The Risk of Inaction Chapter 4: Transition The Basis of the Free Market Economy: Incentives Preserving the Market Recapturing Wages Positive Aspects of Jobs The Power of Inequality Where the Free Market Fails: Externalities Creating a Virtual Job Smoothing the Business Cycle and Reducing Economic Risk The Market Economy of the Future An International View Transitioning to the New Model Keynesian Grandchildren Transition in the Tunnel Chapter 5: The Green Light Attacking Poverty Fundamental Economic Constraints Removing the Constraints The Evolution toward Consumption The Green Light Appendix / Final Thoughts Are the ideas presented in this book WRONG?

These things, which an economist might refer to as capital, are very hard to quickly get rid of. For example, if you just bought a lot of new automated machines for your factory, then you are stuck with them. You can’t just return them and get your money back if demand for your products suddenly starts to fall. For this reason, a business which sees rapidly falling demand usually has only one choice in order to survive: cut more jobs. We see this, of course, as part of the normal business cycle. Businesses routinely lay off workers in bad times and then rehire in good times. In the tunnel, we now see that the businesses are beginning to cut more and more jobs. They are becoming more desperate and, in many cases, they must eliminate even key employees that they formerly felt were crucial to their operations. As this happens, we begin to see some of the brighter lights in the tunnel rapidly begin to dim.

As a growing percentage of the population is exposed to direct evidence of ongoing job losses, many people will begin to experience a greatly heightened level of stress and worry. Facing this, individuals will take the obvious action: they will cut back on consumption, perhaps quite dramatically, and try to save more in anticipation of a very uncertain future. It is important to note that what we are talking about here is really not the same as what occurs in the normal business cycle. In a typical recession, many consumers will also cut back on spending as they worry about losing their jobs, and this will tend to deepen the downturn. However, this worry is predominantly a short-term concern because people realize that, in the long run, when the economy recovers, businesses will have to again begin hiring. But what if, at some point in the coming decades, there is a general coalescence of belief that suggests the basic character of the economy has changed to such an extent that jobs may not be available—or at least will be very hard to obtain—in the future?


pages: 126 words: 37,081

Men Without Work by Nicholas Eberstadt

business cycle, Carmen Reinhart, centre right, deindustrialization, financial innovation, full employment, illegal immigration, jobless men, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labor-force participation, low skilled workers, mass immigration, moral hazard, post-work, Ronald Reagan, secular stagnation, Simon Kuznets, The Rise and Fall of American Growth, War on Poverty, women in the workforce, working-age population

And the snapback in per capita GDP since its mid-2009 low has averaged only 1.1 percent a year, barely half of our long-run annual per capita growth rate of 2.2 percent for 1947–2007 or 2.0 percent for 1987–2007. In other words, the U.S. economy currently is not nearly on track to return to its historic growth patterns. Why is this recovery so much more fitful than other postwar recoveries?3 Some economists suggest the reason has to do with the unusual nature of the Great Recession. Downturns born of major financial crises intrinsically require longer correction periods than business cycle downturns.4 Others theorize that the scale of recent technological innovation is unrepeatable or that we have entered into an age of “secular stagnation” with low “natural real interest rates” consistent with significantly reduced investment demand.5 What is incontestable is that the ten-year moving average for U.S. per capita economic growth is lower today than at any time since the Korean War and that this slowdown commenced in the decade before the 2008 crash.

We cannot hope to settle that question here, but we can review some of the evidence suggesting that the impact of such structural and macro-economic changes may have been more qualified than some believe. First, there is a remarkably steady decline in LFPRs for prime-age U.S. men over the past fifty years. This decline has now proceeded with nearly clocklike regularity, almost totally uninfluenced by the business cycle, for half a century (see figure 7.1). America suffered seven recessions between 1965 and 2015, but knowing when these recessions occurred gives us no additional information on the trajectory of the prime-age male LFPR decline. (If fact, it actually looks as if recessions may slightly slow the flight from work.) By the same token, knowing whether the U.S. economy was growing rapidly or slowly or, for that matter, contracting provides almost no help in anticipating the pace at which prime-age men would be leaving the labor force.

Sociologists and economists once remarked on the curious and counterintuitive nature of this trajectory and presumed it would have to be reversed.3 Today they accept it as a fact of life.4 As Alan Kruger, Princeton economist and former chairman of the Council of Economic Advisers for President Obama, remarked in a speech in 2015, “According to CPS data, the monthly rate for transitioning from out of the labor force to back in the labor force is unrelated to the business cycle.”5 Second, unlike LFPRs, work rates for U.S. men (including prime-age men) fell in recessions and stabilized in recoveries. But work rates for women seem less affected—and in some recessions seem basically unaffected (see figure 7.2). Between 1965 and the late 1990s—over the course of five recessions—prime-age female work rates rose by a cumulative total of over thirty percentage points.


When the Money Runs Out: The End of Western Affluence by Stephen D. King

Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, business cycle, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Having seen living standards rise at a 1.5 per cent annual rate in the years leading up to the Panic, the newly unified nation saw living standards effectively stagnate all the way through to 1880. Meanwhile, the US economy, which had lived off the railroad boom, was suddenly looking extraordinarily vulnerable. The National Bureau of Economic Research estimates that the ‘contractionary phase’ of the business cycle, which began in October 1873, lasted until March 1879. At 65 months, this was longer than the contractionary phase of the Great Depression, a mere 43 months. Even the subsequent, powerful, recovery proved short-­lived: a further 38-­month contraction began in March 1882.6 The Panic, the ensuing economic stagnation and the persistence of deflation were all reflections of the now near-­universal attachment of monetary systems to the Gold Standard, the nineteenth-­ century equivalent of inflation targeting.

Akerlof, ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, Quarterly Journal of Economics, 84.3 (Aug. 1970): 488–500. 2. J. Wood and P. Berg, ‘Rebuilding Trust in Banks’, Gallup Business Journal, at http:// businessjournal.gallup.com/content/148049/rebuilding-­trust-­banks.aspx#2 (accessed Jan. 2013). 3. B. Stevenson and J. Wolfers, ‘Trust in Public Institutions over the Business Cycle’, Federal Reserve Bank of San Francisco Working Paper Series 2011-­11, San Francisco, Mar. 2011. 4. See Barclays, ‘Our History’, at http://www.barcap.com/about-­barclays-­capital/our-­ firm/our-­history.html (accessed Jan. 2013). 268 4099.indd 268 29/03/13 2:23 PM Notes to pp. 127–159 5. See Barclays, ‘Our Culture’, at http://www.barcap.com/about-­barclays-­capital/our-­ firm/our-­culture.html (accessed Jan. 2013). 6.

In 1817, the sovereign was introduced, valued at 20 shillings: it contained 113 grains of gold. 3. D. Ricardo, ‘Evidence on the Resumption of Cash Payments’, Testimony before a Committee of Parliament, 1819, in The Works and Correspondence of David Ricardo, ed. P. Sraffa, vol. 5: Speeches and Evidence (Cambridge University Press, Cambridge, 1952). 4. Senator John H. Reagan, 1890. 5. James Laurence Laughlin, 1886. 6. ‘US Business Cycle Expansions and Contractions’, National Bureau of Economic Research, Cambridge, MA, 2012. 7. J. Bacon, The Illustrated Atlas of Jewish Civilization (André Deutsch, London, 1990). 8. See, for example, A. Liptak, ‘Blocking Parts of Arizona Law, Justices Allow Its Centerpiece’, New York Times, 25 June 2012, at http://www.nytimes.com/2012/06/26/ us/supreme-­court-­rejects-­part-­of-­arizona-­immigration-­law.html?


pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

The lower interest rates will induce borrowing; and with more borrowing and lower prices, spending will soon find its way back to where it was before the shock. One reason this will happen is that not all consumers are workers, and those who are not, and whose incomes therefore are unimpaired, will buy more goods and services as prices fall. The flaw in this classical economic theory of the self-correcting business cycle is that not all prices are flexible; wages especially are not. This is not primarily because of union-negotiated or other employment contracts. Few private-sector employers in the United States are unionized, and few nonunionized workers have a wage guaranteed by contract. But even when wages are flexible, employers generally prefer, when demand for their product drops, laying off workers to reducing wages.

It may turn out that if the asset-price bubbles of the last decade are subtracted from measures of economic growth, the U.S. economy will be adjudged to have been stagnant—that rather than being productive during this period, Americans were living on borrowed money. 4 Why a Depression Was Not Anticipated An Article on the front page of the business section of the New York Times of October n, 2008, attributed the almost universal failure to anticipate the financial crisis (certainly to anticipate its gravity) to "insanity"—more precisely, to a psychological inability to give proper weight to past events, so that if there is prosperity today people assume it will last forever even though they know that in the past booms have always been followed by busts. For many people in many of life's settings, the best predictive method is to assume that the future, especially the near future, will resemble the past, especially the recent past. I remember when the best method of forecasting tomorrow's weather was to assume it would be like today's. But it seems unlikely that such experts on the business cycle as the Federal Reserve's chairman, Ben Bernanke, are constrained to base their predictions on naive extrapolation. This makes his neglect, and that of other experts both inside and outside the government, of warning signs of a coming crash extremely puzzling. Real estate bubbles are common. The supply of "good" land is fixed in the short run, the housing stock is extremely durable and therefore does not expand rapidly when demand increases, and land and the improvements on it cannot be sold short.

Depressions, even recessions, have had political consequences in the United States as well —the election of Franklin Roosevelt in 1932 and of Bill Clinton in 1992, and Barack Obama's margin of victory and the strengthening of Democratic control of Congress in 2008 — but as yet no disastrous consequences. Of course all three of these examples might be thought positive consequences of an economic downturn —and this is appropriate to note because my objective in this chapter is to try to cheer up the reader by pointing out that a depression can have good consequences as well as bad, even if the latter preponderate. To begin with, a depression backs up efforts to moderate the business cycle. The housing bubble could not expand indefinitely; leverage could not keep growing indefinitely. When the ratio of borrowed to equity capital reaches 35 to 1 —Bear Stearns' ratio when it collapsed (and UBS's reached 50 to 1) —a mere 3 percent fall in the value of the firm's assets will plunge the firm into insolvency. The government was doing nothing to prick the bubble and too little to keep leverage within safe bounds.


Multicultural Cities: Toronto, New York, and Los Angeles by Mohammed Abdul Qadeer

affirmative action, business cycle, call centre, David Brooks, deindustrialization, desegregation, edge city, en.wikipedia.org, Frank Gehry, game design, ghettoisation, global village, immigration reform, industrial cluster, Jane Jacobs, knowledge economy, market bubble, McMansion, new economy, New Urbanism, place-making, Richard Florida, risk tolerance, Silicon Valley, Skype, telemarketer, the built environment, The Chicago School, The Death and Life of Great American Cities, the scientific method, urban planning, urban renewal, working-age population, young professional

There is a big market for ethnic businesses serving their communities, other New Yorkers, and visitors. Immigrants and minorities form niches in mainstream jobs and businesses and spawn ethnic economies. Taxi services are often the entry niche for newly arriving immigrants. The construction industry is dominated by Italians. West Indian nurses form a niche in medical services, as do Jewish doctors. The city’s economy swings with the business cycles of the national economy. It has recovered steadily from the recession of 2008–9. Catastrophic events such as the terrorists attack in 2001 and “Superstorm” Sandy in 2012 shocked the local economy, but it bounced back quickly. 98 Multicultural Cities Table 5.2 Percentage of labour by industry Industry Toronto CMA (2006)* Manufacturing 13.5 2.4 11.3 5.4 3.7 3.5 16.6 13.5 17.6 9.4 13.4 6.8 14.4 24.8 16.1 7.7 10.3 11.4 Construction Trade, wholesale and retail Finance, insurance, real estate Education, health Entertainment, accommodation, arts, and food services New York City (2009)* Los Angeles County (2009)* Sources: For Toronto – Statistics Canada, Census 2006, Table, “ Profile of Labour Market Activity, Occupation, Education for Census Metropolitan Areas and Agglomerations.”

Blacks everywhere lagged in businesses and professional jobs. Similarity of ethnic niches in the three cities points to a parallelism of ethnic strategies and cultural resources among the respective groups. Just as culture and race matters, so does place. New York has been consistently getting more polarized in income and employment, with the middle class shrinking and lower and upper classes expanding through all phases of the business cycles of the 1990s and 2000s. Los Angeles has also experienced polarization, but its disparities have steadied in the 2000s, perhaps with its increasing role as the connecting point for the Pacific trade, particularly with China, and unionization drives for service workers.39 Manufacturing is still strong in Los Angeles. Toronto is a smaller economy. It has retained manufacturing. The Canadian social-welfare state provides a floor, particularly through its public health insurance.

Ethnic segmentation also operates in consumer markets. For some groups it is possible to meet most of their everyday needs within their ethnic network. 10. Ethnic economies are fully embedded in urban economies. They are subject to the same labour, finance, public health, and taxation regulations, though accommodations are made to respond to cultural/religious differences. Similarly, they are subject to national and local business cycles, global trade patterns, and technological change. Yet the common ground of local and national economic order frames the opportunities and structures of ethnic economies and niches. 11. Ethnic economies are a relatively small part of urban economies. A majority of ethnics and immigrants work in mainstream establishments. Yet their entry into the labour market is facilitated by formal and informal social networks, which tend to be based on ethnic ties.


pages: 782 words: 187,875

Big Debt Crises by Ray Dalio

Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, break the buck, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, declining real wages, European colonialism, fiat currency, financial innovation, German hyperinflation, housing crisis, implied volatility, intangible asset, Kickstarter, large denomination, manufacturing employment, margin call, market bubble, market fundamentalism, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, refrigerator car, reserve currency, short selling, sovereign wealth fund, too big to fail, transaction costs, universal basic income, value at risk, yield curve

My curiosity and need to know how these things work in order to survive them in the future drove me to try to understand the cause-effect relationships behind them. I found that by examining many cases of each type of economic phenomenon (e.g., business cycles, deleveragings) and plotting the averages of each, I could better visualize and examine the cause-effect relationships of each type. That led me to create templates or archetypal models of each type—e.g., the archetypal business cycle, the archetypal big debt cycle, the archetypal deflationary deleveraging, the archetypal inflationary deleveraging, etc. Then, by noting the differences of each case within a type (e.g., each business cycle in relation to the archetypal business cycle), I could see what caused the differences. By stitching these templates together, I gained a simplified yet deep understanding of all these cases. Rather than seeing lots of individual things happening, I saw fewer things happening over and over again, like an experienced doctor who sees each case of a certain type of disease unfolding as “another one of those.”

Since there was about a 75 percent correlation between the amounts of their foreign debts and the amounts of inflation that they experienced (which is not surprising, since having a lot of their debts denominated in foreign currency was a cause of their depressions being inflationary), it made sense to group those that had more foreign currency debt with those that had inflationary depressions. Typically debt crises occur because debt and debt service costs rise faster than the incomes that are needed to service them, causing a deleveraging. While the central bank can alleviate typical debt crises by lowering real and nominal interest rates, severe debt crises (i.e., depressions) occur when this is no longer possible. Classically, a lot of short-term debt cycles (i.e., business cycles) add up to a long-term debt cycle, because each short-term cyclical high and each short-term cyclical low is higher in its debt-to-income ratio than the one before it, until the interest rate reductions that helped fuel the expansion in debt can no longer continue. The chart below shows the debt and debt service burden (both principal and interest) in the US since 1910. You will note how the interest payments remain flat or go down even when the debt goes up, so that the rise in debt service costs is not as great as the rise in debt.

The typical bubble sees leveraging up at an average rate of 20 to 25 percent of GDP over three years or so. The blue line depicts the arc of the long-term debt cycle in the form of the total debt of the economy divided by the total income of the economy as it passes through its various phases; the red line charts the total amount of debt service payments relative to the total amount of income. Bubbles are most likely to occur at the tops in the business cycle, balance of payments cycle, and/or long-term debt cycle. As a bubble nears its top, the economy is most vulnerable, but people are feeling the wealthiest and the most bullish. In the cases we studied, total debt-to-income levels averaged around 300 percent of GDP. To convey a few rough average numbers, below we show some key indications of what the archetypal bubble looks like: The Role of Monetary Policy In many cases, monetary policy helps inflate the bubble rather than constrain it.


pages: 327 words: 103,336

Everything Is Obvious: *Once You Know the Answer by Duncan J. Watts

active measures, affirmative action, Albert Einstein, Amazon Mechanical Turk, Black Swan, business cycle, butterfly effect, Carmen Reinhart, Cass Sunstein, clockwork universe, cognitive dissonance, coherent worldview, collapse of Lehman Brothers, complexity theory, correlation does not imply causation, crowdsourcing, death of newspapers, discovery of DNA, East Village, easy for humans, difficult for computers, edge city, en.wikipedia.org, Erik Brynjolfsson, framing effect, Geoffrey West, Santa Fe Institute, George Santayana, happiness index / gross national happiness, high batting average, hindsight bias, illegal immigration, industrial cluster, interest rate swap, invention of the printing press, invention of the telescope, invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, lake wobegon effect, Laplace demon, Long Term Capital Management, loss aversion, medical malpractice, meta analysis, meta-analysis, Milgram experiment, natural language processing, Netflix Prize, Network effects, oil shock, packet switching, pattern recognition, performance metric, phenotype, Pierre-Simon Laplace, planetary scale, prediction markets, pre–internet, RAND corporation, random walk, RFID, school choice, Silicon Valley, social intelligence, statistical model, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, The Death and Life of Great American Cities, the scientific method, The Wisdom of Crowds, too big to fail, Toyota Production System, ultimatum game, urban planning, Vincenzo Peruggia: Mona Lisa, Watson beat the top human players on Jeopardy!, X Prize

In practice, therefore, social scientists invoke what is called a representative agent, a fictitious individual whose decisions stand in for the behavior of the collective. To take a single example, albeit an important one, the economy is composed of many thousands of firms and millions of individuals all making decisions about what to buy, what to sell, and what to invest in. The end result of all this activity is what economists call the business cycle—in effect, a time series of aggregate economic activity that seems to exhibit periodic ups and downs. Understanding the dynamics of the business cycle is one of the central problems of macroeconomics, in no small part because it affects how policy makers deal with events like recessions. Yet the mathematical models that economists rely on do not attempt to represent the vast complexity of the economy at all. Rather, they specify a single “representative firm” and ask how that firm would rationally allocate its resources given certain information about the rest of the economy.

Rather, they specify a single “representative firm” and ask how that firm would rationally allocate its resources given certain information about the rest of the economy. Roughly speaking, the response of that firm is then interpreted as the response of the economy as a whole.9 By ignoring the interactions between thousands or millions of individual actors, the representative agent simplifies the analysis of business cycles enormously. It assumes, in effect, that as long as economists have a good model of how individuals behave, they effectively have a good model for how the economy behaves as well. In eliminating the complexity, however, the representative-agent approach effectively ignores the crux of the micro-macro problem—the very core of what makes macroeconomic phenomena “macro” in the first place. It was for precisely this reason, in fact, that the economist Joseph Schumpeter, who is often regarded as the founding father of methodological individualism, attacked the representative-agent approach as flawed and misleading.10 In practice, however, methodological individualists have lost the battle, and not just in economics.

Payne, John W., James R. Bettman, and Eric J. Johnson. 1992. “Behavioral Decision Research: A Constructive Processing Perspective.” Annual Review of Psychology 43 (1):87–131. Perrottet, Charles M., 1996. “Scenarios for the Future.” Management Review 85 (1):43–46. Perrow, Charles. 1984. Normal Accidents. Princeton, NJ: Princeton University Press. Plosser, Charles I. 1989. “Understanding Real Business Cycles.” The Journal of Economic Perspectives 3 (3):51–77. Polgreen, Philip M. Yiling Chen, David M. Pennock, and Forrest D. Nelson. 2008. “Using Internet Searches for Influenza Surveillance.” Clinical Infectious Diseases 47 (11):1443–48. Pollack, Andrew. 2010. “Awaiting the Genome Payoff.” New York Times, June 14. Pontin, Jason. 2007. “Artificial Intelligence, with Help from the Humans.” New York Times, March 25.


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, business cycle, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, land reform, liberal world order, liberation theology, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, mega-rich, moral hazard, Nelson Mandela, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

For one thing, being prudent does not mean that the government has to balance its books every year, as is preached to developing countries by the Bad Samaritans. The government budget may have to be balanced, but this needs to be achieved over a business cycle, rather than every year. The year is an extremely artificial unit of time in economic terms, and there is nothing sacred about it. Indeed, if we followed this logic, why not tell governments to balance its books every month or even every week? As Keynes’s central