It is hard to overstate just how much macro economist hate the idea of the Business Cycle. Ben Bernake, for one, has made a career out of denying it.
Now this wouldn't make any difference if macro economists were confined to their ivory towers where they could just babble to each other. Sorry to say, they have become influential government advisers. And that is the primary reason why we are starting into the fourth year of the current recession.
In 2009, Carmen M. Reinhart and Kenneth S. Rogoff, published their monumental work on the Business Cycle, "This Time Is Different-Eight Centuries of Financial Folly" Their study of virtually every developed economy over the past 800 years demonstrates the existence of the Business Cycle and the that the characteristics are repeated over and over again. The title is ironic since main stream economists always want to say that the situation is different "this time" because that requires their special knowledge to solve the problem. But, that is a lot of crap!!
About the time Reinhart an Rogoff published their excellent work, I wrote a simple book to explain in layman's language what the Business Cycle is and why it operates and what should be done about it.
Because I think it is extremely important for as many people as possible understand what is really going on with the economy, I am including the first section of The Great Recession Conspiracy. I hope you enjoy it and learn something useful from it.
UNDERSTANDING BUSINESS CYCLES
Edmund Burke noted that, “Those who don’t know history are destined to repeat it.”
William Shakespeare was even more succinct when he said, “Past is prologue.”
If you are going to really understand how Business Cycles work, and how they will affect your life, it will be useful to examine two examples of the Business Cycle at work. One story is very old and the other is very modern.
The Tulip Mania: Here is the first story. It is a story about a tulip bulb. In the middle of the 16th Century, tulips were brought from the Ottoman Empire (Turkey today) to Holland. The first person to plant these new flowers in earnest was a botanist named Charles de l’Ecluse and he discovered that tulips could flourish in the harsh climate of Holland.
The brilliant colors of the flowers soon made them a prized luxury item among wealthy residents of the Low Lands. Then a “tulip breaking virus” invaded the flowers and the result was “flame” colors on the tips of the petals. Tulips became even more valuable. As the flowers gained in popularity, the number of professional growers increased and the bulbs commanded higher and higher prices.
As the popularity of the flowers continued to grow, more and more Dutch citizens began to buy, and sell, tulip bulbs. As this trade continued to grow, it even attracted investors from France. And the prices just went higher and higher. As much as 12 acres of land were traded for one specific bulb. It was reported that one single bulb of a rare form of tulip was paid for with this list of merchandise.
· Two lasts of wheat
· Two lasts of rye
· Four fat oxen
· Eight fat swine
· Twelve fat sheep
· Two hogsheads of wine
· Two tons of butter
· 1,000 lbs. of cheese
· A complete bed
· A suit of clothes
· A silver drinking cup
· Plus a cart and oxen to haul all of the goods away.
Read that list again. The price of a single tulip bulb! Well, that kind of endlessly increasing prices could not go on forever. And the price of tulips did not continue to increase. In fact, by February, 1637, tulip traders suddenly could no longer find buyers for their incredibly expensive flowers. At this point, the demand for bulbs collapsed abruptly and everyone tried to sell the bulbs they owned, but there were no buyers and prices fell even lower.
A few people got very, very rich in the run up of prices, but thousands went bankrupt when the prices collapsed.
There are a lot of stories about exactly what caused the collapse in prices, but no one knows for sure. Our favorite story about the collapse goes like this; a sailor was unloading a cargo of onions from a ship anchored in Amsterdam. He dropped one onion and it rolled down the deck and fell into the harbor and was lost. A tulip trader on the dock witnessed this little scene and mistook the onion for a tulip bulb. Seeing the complete loss of such a valuable property, he rushed to sell his tulips before the news of the loss could upset the market. If you don’t like this story, feel free to make up one of your own.
The point of this little flower story is that the price of a commodity was bid up to outrageous levels because so many Dutchmen thought they could always sell the tulip bulbs they bought to some one else at an ever higher price. This was the beginning of the “greater fool” theory, as in no matter what I pay for something; there will always be a greater fool who will pay me even more than I paid for it.
This phenomenon of escalating prices, followed by a complete collapse in prices, has been repeated over and over again during the last five hundred years or so. The understanding of this phenomenon, cause of this phenomenon and what to do about it is the rationale for this book.
High Fashion on the Internet: Now fast forward to 1998 and meet Ernst Malmsten, a six foot five handsome Swede, and Kajsa Leander, a former model with the Elite Agency. Ernst and Kajsa had started an online bookstore, which by 1997 was the world’s third largest after Amazon and Barnes & Noble. In 1998, they sold their online book store and became millionaires.
They decided they could capitalize on their successful experience with an internet business to create a brand new kind of online retailer. They decided to sell sports wear to wealthy, trendy 18 to 24 year olds. Their online store would have a “model’ which the customer could use to “try on” different items of clothing to see how they would look. The model could be viewed from 360 degrees and in three dimensions. There was also to be an “avatar” sales person to comment on choices and to make suggestions. They would sell name brands like Polo, Tommy Hilfiger, Nike, Fila, et al.
With a “business plan” not much more detailed than the description above, the duo faxed a five page version to the leading banks in New York seeking funding for their new vision. Only J. P. Morgan, Inc. responded and they offered Ernst and Kajsa a large line of credit. Based on this, they raised additional funds from Bernard Arnault, the Chairman of LVMH-Moet-Hennessy Louis Vuitton, Luciano Benetton, Chairman of Benetton, Inc. and a couple of smaller banks. Based on those five pages, they raised $125 million immediately.
Boo.com was the name they chose for their company. There is even a cute story here. They wanted to call it “bo” after Bo Derek, but the person who owned bo.com wanted a huge amount of money for the address so they simply added an “o” and the name became Boo.com.
They quickly opened offices on Carnaby Street in London, in New York, Paris, Stockholm, Amsterdam and Munich. Four hundred employees were hired to staff all the new offices. Boo.com was available in UK English, US English, German, Swedish, Danish, and Finnish with local versions for France, Spain and Italy.
First class air travel and five star hotels were standard fare for all employees. Regular mail was sent FedEx. Each of the founders paid themselves $150,000 a year in cash and received $100,000 for apartment rental and $100,000 more to decorate the apartments. The public relations firm, Hill & Knowlton, Inc. was paid $600,000 to arrange luncheons with fashion editors. They spent $42 million on an introductory advertising campaign without having a functioning online store or a product to sell.
All in all, Boo.com went through $185 million in 18 months. By December 2000 all of the money was gone and so was Boo.com.
While the tulip story was based on thousands of unsophisticated investors, the Boo.com story was based on just a couple of very sophisticated investors. Nevertheless, the outcome was exactly the same.
The common theme between both stories is that they illustrate a phenomenon variously called a Business Cycle, an economic cycle or a bubble. For our purposes here, we will simply call it a Business Cycle. We want to examine what happens during the Business Cycle, why Business Cycles occur, and what can be done to live with them.
What is a Business Cycle? The economy of every developed country is always in one condition or the other. The economy is either expanding or it is contracting. This expansion is followed by contraction followed by expansion, etc. is called the Business Cycle. There is no equilibrium point no matter how much governments may try to create one. Instability is built into the business cycle. Instability is simply inherent in the business cycle. A diagram of the business cycle is shown next.
There are only four terms you need to understand.
Contraction: That is when the economy is shrinking and that is exactly what is happening in the United States right now. Two words are associated with, and drive, Contractions; fear and pessimism
Trough: At some point, the Contraction stops and the economy again starts to grow, and that particular point is called the Trough.
Expansion: When the economy is growing, it is called an Expansion. The two words associated with, and drive, Expansions; greed and optimism
Peak: At some point, the Expansion stops and the economy begins to shrink.
The Business Cycle is usually measured as the GNP, the Gross National Product, which is the total amount of goods and services produced by the economy for all of us to share.
Don’t worry about “recession” or “depression”. Those are technical terms that only economists care about. What you need to care about is whether the GNP (the Pie) is getting bigger or smaller, is it expanding or shrinking.
What Drives Business Cycles? Here is the absolutely essential thing to understand about the Business Cycle. The Business Cycle is NOT driven by finance, it is driven by psychology. For periods of time, most everyone thinks things are going to get better, and they do get better for a period of time. Think about the growth of the bulb business in Holland or the brief growth euphoria that surrounded Boo.com. Then, for some reason, maybe obvious (the lost “bulb”) or not so obvious (the loss of confidence by investors in Boo.com), people begin to think things are going to get worse. Figure 2 shows this reality in the Consumer Confidence Index poll conducted by the Conference Board.
Business Cycles have been studied by economists for two hundred years and, while they are unable to agree upon or identify the causes, they all agree on these facts;
· Business Cycles have been appearing since capitalist economies emerged.
· Not much changes in the Business Cycle over the years. The general characteristics remain the same.
· Business Cycles occur in all developed economies.
· The actions that are rational from an individual’s point of view are harmful to the whole economy.
The last point is of huge importance. There is an example now in the U.S. economy. From an individual’s point of view, the best possible course of action right now is to conserve as much cash as possible since nobody knows when they might lose their job, but from the larger point of view of the entire U.S. economy, everybody should be spending all the money they can get to move the economy from contraction to expansion. This problem is called the Savings Paradox by economists.
Here is an example of the Savings Paradox at work; for the last few years, it has been the best possible course of action for individual home loan brokers to fund as many loans as possible, but from the view point of the entire economy, too many unsound home loans have been made. This fundamental contradiction is of utmost importance and we will deal with it in more detail later. We will re-visit this paradox shortly.
The Role of Credit: And this leads us to the next point. The Business Cycle is facilitated by Credit. During Expansions, people can easily obtain credit which they use to finance their current get rich quick scheme. As a result, lots of projects can get funded (see Boo.com). The problem is that while many of the projects are solid and will earn profits so the loans can be repaid, some of the projects that get financing are truly unsound and will never earn enough to pay back the loan.
What happens is that credit expands rapidly during Expansion phases and contracts during Contraction phases. And that is why it is usually relatively easy to find funding for new projects during Expansion phases so new jobs are created and so is wealth. On the other hand, during Contraction it is very difficult to obtain funding so many worthy projects do not get started and new jobs are not created.
Expansion Phase: The Expansion phase of the Business Cycle is driven by people’s desire to improve their lot in life. Adam Smith said in the 1700’s, “The desire of bettering our condition comes from us in the womb and never leaves us till we go to the grave.” And we do that by taking chances and trying new things. That occurs in two basic ways; 1) by improving your skills through education and experience, and 2) by investing your savings in projects that promise to bring a larger reward. You can describe this activity as greed built on optimism. It is not a stretch to understand the Expansion phase as driven by greed and optimism. (When Alan Greenspan was President of the Federal Reserve Bank, he called it “Irrational exuberance”.) There are some real positive results of this focus on greed and some really negative results. First, the positive results.
New Industries: If the members of an economy are going to get richer (improve their lot) over time, then they must create more goods and services (GNP) with the same, or a lesser, amount of available resources. That means there is a continuing need to experiment with finding new ways to do things. Each successful new project means that it must dislodge an older way of doing things. The economist, Joseph Schumpeter called this process, “Creative Destruction”, and that is a pretty good description, but a more accurate description might be “Creative Disruption”. Airplane travel did not destroy travel by train, but it certainly disrupted it. The Internet has not destroyed newspapers, but it has certainly have disrupted their business model. So perhaps a better description might be “Creative Relocation”.
Creative Innovation: Here are three examples, one small and two large, of individuals finding a new way to do something better, and in the process, replacing an older method.
Encyclopaedia Britannica was a staple in American homes for 231 years. The bound volumes were sold to families by door-to-door salespeople and the books cost about $1,250 a set. In 1989, Britannica had a sales force numbering 2,300 and revenues of about $650 million.
In 1993, Microsoft approached Britannica about including the Encyclopedia in Microsoft’s Windows software. Britannica turned them down flat, so Microsoft went to encyclopedia publisher Funk & Wagnalls and produced Encarta 99 Encyclopedia. Encarta was given away free with every copy of Windows.
Today, Britannica has less than 400 employees and seems to be tip- toeing around bankruptcy. Today, millions of families have access to an encyclopedia compared to a few thousand families in the past when Britannica volumes were the only game in town. A greatly improved, less costly method of delivering information came into being and replaced an old, less efficient method. Indeed, creative relocation at its best.
But there is more to the encyclopedia story. In 2000, Jerry Wales and Larry Sanger had the idea for a FREE online encyclopedia. They called it Wikipedia and it has been a rousing success. (Wiki for a collaborative effort and pedia as the obvious part.) It currently contains 2,756,219 distinct articles, all of which have been written by volunteers. Wikipedia is now available in nineteen different languages besides English. Wikipedia articles are continually update, something you can’t do with paper or plastic disk encyclopedias. Just how successful has Wikipedia been? In 2008, Wikipedia had 684 million visitors! (And no trees were harmed in creating Wikipedia.)
Creative relocation usually replaces an old way of doing things with a newer, better method of doing the job. And, as the encyclopedia story makes clear, it is an unending process.
The Swiss Watch Industry: Now let’s try a bigger example. At the end of World War II, Swiss companies made about 80% of all the watches made in the world. It was a very profitable and complacent business. But during World War II, the British government needed inexpensive, but accurate timing devices to use in aerial bombs. You can understand the requirements; the timing devices had to be cheap since they would not be making a round trip and they had to be accurate because when the bombs exploded was critical to their successful use.
To do that job, the pin lever mechanism was developed. It was inexpensive and accurate.
By 1950, U.S. Time Company was selling a watch with a pin lever mechanism. By the 1960’s, one out of every three watches sold in the U.S. was a Timex, and the Swiss watch industry began a decline that lasted for decades.
However, traditional jewelry stores refused to handle Timex watches because they were seen as “cheap”. Timex had to find other outlets for its products, and they did in a very big way. Timex turned to mass merchandisers and other non-traditional outlets for watches. By the mid 1970’s Timex watches were being sold in over a quarter million different outlets.
This is a clear example of a new technology replacing an old technology and Creative Relocation at its best.
But wait, there is more to the watch story. In the 1970s’, some Japanese engineers were assigned the task of making the readout mechanisms in medical measuring instruments more legible in normal room lighting conditions. Their work led directly to Light Emitting Diodes (LED) technology and the age of digital watches began. Digital watches decimated the world watch industry. Every watch manufacturer in the U.S., except one, went out of business. Another example of Creative Relocation at work.
But there is even more to the world watch story. By 1983, the Swiss share of the world watch market was less than 30%. In a move born of desperation, the Swiss government forced the remaining two large Swiss watch makers to merge and bring in a new management as a condition for a government backed loan.
The new management re-defined what a watch is and decided that it was more of a fashion accessory than a time piece. Thus, a whole new line of “fashion accessories” were designed, and the Swatch was born. As you know, the Swatch has been a huge success. The Swiss share of the world wide watch business is now around 60%. So we have one more example of Creative Relocation at work and individuals inventing new processes to do a familiar job.
Be certain that there is pain and discomfort in this process of Creative Relocation just described. People lost their jobs. Investors lost their investments. Governments lost tax revenues. Companies went bankrupt or simply closed down. There are real costs to Creative Relocation, but the idea is “No pain, no gain”.
Improved Productivity: And one more story about Creative Relocation. For hundreds of years, people bought books at book stores. In 1995, a thirty-one year old man named Jeff Bezos incorporated a new company he called Amazon.com. His purpose was to vastly improve in the business of selling books and do it online. The success of Amazon.com has been huge. In 2008, Amazon.com had total sales of $19,166 Billion, had 20,700 employees (all new jobs) and has averaged about 30% annual growth in the past three years alone. It now serves 88 million customers.
By way of contrast, Barnes & Noble is the top selling book seller through 799 traditional book stores in fifty states. In 2007, B & N had total sales of $5,411 Billion, had about 40,000 employees, and is currently teetering on the edge of bankruptcy.
To better understand the positive effects of Creative Relocation, consider this; an average employee at Amazon.com produces $912,000 in sales annually. An employee at B & N produces about $130,000 annually. Jeff Bezos has brought incredible efficiency to the book selling business and since his book “store” is open 24 hours a day, seven days a week, he has brought unprecedented convenience to all of his customers. Joseph Schumpeter would surely be proud of Jeff Bezos.
But always remember that Creative Relocation has a down side. If B & N goes bankrupt, there will be 799 stores standing empty and 40,000 people will have to find new jobs. Yes, progress has a price.
In any event, you have now seen how the Expansion Phase of the Business Cycle creates new industries, improves productivity and creates new jobs.
The Expansion Phase also drives the GNP (the pie that we all have to share), and for most of this century, it has been doing that rather well.
Recent Growth in the Gross National Product: Most economists agree that the U.S. economy’s ideal growth rate is between 2% and 3%. Growing slower than that won’t create enough new jobs for a growing population. At a growth rate faster than 3% and the risk of serious inflation (more about that in Section Four). Here are the GNP’s recent growth rates for the U.S.:
But in the third quarter of 2008, GNP shrank 3.4% and in the fourth quarter it shrank 5.8%. That means there was less for all of us to share in the last half of 2008 and you can easily see that a Contraction in the economy started sometime early in 2008.
The Contraction Phase: The first sign of a beginning Contraction Phase is usually the loss of jobs as sales growth slows and then declines. Since this contraction began in 2008 about five million jobs have disappeared in the United States.
As sales slow down, inventories build up and prices are usually reduced to generate cash. The reduced revenues lead to further job losses as companies attempt to minimize their losses and maintain profitability. Credit becomes increasingly difficult to obtain so few new projects are begun and few new jobs are created.
What Ends An Expansion? The fascinating question is what ends an Expansion Phase and starts a Contraction. Since the entire Business Cycle is driven by consumer psychology, the turning point in each Phase of the Business Cycle is some event that raises questions about the continuation of the Expansion Cycle.
For the tulip phenomena, it was the loss of a single tulip (onion?) bulb. For Boo.com and the dot.com phenomena, it was the potential investor who decided that Ernst and Kajsa did not understand enough about the underlying business model to possibly succeed. Our current Contraction began when it became obvious that the fanciful financial schemes that Wall Street bankers had concocted to make themselves rich were about to implode. From Wall Street, the idea spread quickly that something bad is going on and everyone should be afraid and get very cautious. Bankers stopped lending to each other because they were afraid. Contractions grow out of wide spread fear. Thus began a full scale Contraction.
To say that nobody saw this implosion coming is inaccurate. In Section Two, we will introduce you to some of the people who warned about the coming danger. The problem is that nobody much paid any attention to them. But human psychology makes it difficult to accept warnings when you seem to be getting richer and richer every day.
What Ends A Contraction? The equally fascinating question is what causes a Contraction to end and an Expansion begin. What causes the Contraction to reach a trough? Here the answer is even more difficult. While Contractions can begin with a single event, Expansions seem to require a more broadly based change in attitude. Some people begin to say, “Things are going to get better”, and sure enough they do begin to get better. Rapidly growing new technologies are one way that confidence in the economy begins to return, but the real answer to the question is that nobody knows.
Some Good Things That Come Out Of Contractions: When the always upbeat mind set of the Expansion Phase ends, people begin to re-think much about their lives.
Increased Savings: For over a decade, the savings rate of U.S. households has been very low. In fact, in 2006, it was negative (-0.5%) meaning we were spending more than our income and making up the difference by drawing down our savings. But since the Contraction began, the U.S. household savings rate has increased to somewhere above 4%. In May, 2009, it reached 5.7%, the highest rate in 14 years
To put that in perspective, the current savings rate in Belgium is 14%, in Canada 6%, in France 11% and in the U.K. 6%.
Paying Down Debt: In addition to increased saving, consumers are beginning to pay down their debts. While this change is not yet as dramatic as the increase in savings, it is in the right direction.
Smarter Spending: Reduced incomes, or the threat of reduced income, have prompted U.S. consumers to review their household budgets carefully to identify which expenditures they can do without. Many families have found they can cut back 10% without much change in their lives
Reduced Prices: As many companies have reduced their prices to clear out inventories, real bargains are now available for many things some people really have to buy.
Better Service: We will treat how companies produce better services for their customers in detail in Section Three. For the moment, the facts are summed up nicely in the AP headline from January 21, 2009. “For years, retailers could afford to be sloppy about running their businesses because customers kept buying.”, but no longer.
New Businesses: Many people who lose their jobs decide it is time to be their own bosses and start new businesses. In March, 2009, over 10,000 people attended the Southwest by Southwest Interactive Festival in search of ideas for new businesses.
Weak Banks Close: When the Federal Deposit Insurance Corporation takes over a failed bank it gives someone else the chance to start over. Since the beginning of 2008, the FDIC has taken over a total of 42 banks out of over 9,000 member banks. As a result, the whole banking system gets stronger.
Weak Retailers Go Under: We have far too many auto dealerships, shopping malls, restaurants and other retail stores that opened during the last Expansion phase. For example, between 1990 and 2009, the number of restaurants grew from 361,000 to 537,000. This was a 49% increase in the number of outlets while the population to eat in them only grew 23%.
Ponzi Schemes Get Blown Out Of The Water: As you know, a Ponzi scheme relies on new investor money to pay early investors a return on their investments. In this way, Ponzi schemes rely on an unending supply of new money to keep the scheme going.
While everyone has now heard of Bernard Madoff and his $50 Billion scam that ran for decades, and many have heard of Robert Allen Stanford who is charged with running an $8 Billion Ponzi scheme for almost as long, based in Antigua, those are just the headline grabbers.
But there were lots and lots of “little” Ponzi schemes that may not have made headlines, but were just as destructive to their investors. WG Trading Company, headquartered in Greenwich, Connecticut is accused of running a $550 Million swindle.
A Pennsylvania investment manager is charged with running a $50 million Ponzi scheme, and an Atlanta company, CRE Capital Corp. is charged with running a $25 Million Ponzi scheme. Agape World, Inc. of Hauppauge, New York is accused of running a $370 Million Ponzi scheme. An Orange County, California man is accused of running an $800 Million Ponzi scheme. The SEC says money manager Bruce Friedman simply spent $17 Million of his investor’s money for his own personal accord. And there are more, but you get the idea.
One Ponzi scheme, run by Maximum Return Investors, Inc. just focused on Latino investors. The woman who ran this scheme collected $23 Million from investors, diverted $3.5 Million for her personal use, paid out $13 Million to investors and simply lost the rest on bad investments. In any case, there is no money left.
The Better Business Bureau claims that today there are over 23,000 Ponzi schemes online, and more are appearing every day. They especially seem to flourish on YouTube. Consider yourself warned.
Ponzi schemes can only exist in Expansion Phases of the Business Cycle because that is when everyone thinks they are getting rich, and nobody wants to ask why or how. As acutely painful as it can be, it is better to have Ponzi schemes exposed than it is to have them continue to bilk people.
Some Others: And then there are the scams that want to make you laugh, except that they are not laughing matters to the investors. Here is just one;
In 2006, Donald Trump made some sort arrangement with a company called Irongate Wilshire to use his name on a five star condominium development to be built on the Pacific Ocean coast of Baja California about ten miles south of the border near San Diego. (And, indeed, the location is beautiful.) The first sales was held in a hotel in San Diego in 2006, and 80% of the units, priced at $275,000 to $3 Million, were sold out immediately. Irongate demanded a 30% down payment immediately. Now it is 2009, the money is all gone, the only thing on the site is a tattered flag, and the investors are suing Donald Trump and he is suing the Irongate partners.
Some Bad Things That Come Out Of Contractions: The bad outcomes during Contractions range from horrific to tragic.
Bank Robberies: The FBI reports that there were 1,617 bank robberies in the 4th quarter of 2008 compared with 1,358 in the 3rd quarter, and 1,561 in the 4th quarter of 2007. And the stories behind some of these robberies are just heart wrenching.
Vandalism and Petty Theft: National crime statistics support the idea that property crimes increase with increases in unemployment. In addition to break-ins, shoplifting, auto thefts, a new kind of property crime has developed in response to increased joblessness. Houses up for sale are ransacked and anything of value from appliances to copper piping is stolen.
And here is a really good one. Ranchers are reporting that rustlers are stealing cows at an alarming rate.
Stimulus Scams: There seem to be an unending number of people running scams concerning getting stimulus funds, mortgage relief, credit card debt reduction, etc.
Violent Crimes: Repo (repossession) men are facing increased physical danger as they got about their jobs. Judges and prosecutors across the nation are receiving so many threats that hundreds are receiving 24 hour protection from armed U.S. Marshalls. In Ohio, a man with serious financial problems killed his wife and son, and then committed suicide. And there are more stories pretty much like that one occurring with increasing frequency.
Florida’s Secretary of Department of Children and Families reports a 40% increase in domestic violence cases related to the state of the economy.
There is no question that the economic turmoil of unemployment, foreclosures, and loss of investments can result in a whole host of negative health problems. The Department of Health and Human Services has a website at http://wwwsamhsa.gov/economy/warningsigns that raises warning signs for people suffering from persistent depression, anxiety, sleeplessness, excessive irritability, anger or substance abuse.
So Here Is the Take Away on Business Cycles: Business Cycles have been observed in capitalist economies for hundreds of years. They consist of two phases. In one phase, the economy is Expanding, in the other it is Contracting. There are no known equilibrium points between Expansion and Contraction or between Contraction and Expansion, in spite of repeated government attempts to create equilibrium stages.
Since there are definitely known characteristics of each phase of the Business Cycle, sensible government actions should emphasize the good things that happen in each phase and offset, or minimize, the bad things that happen. In Section Two, we will outline what a sensible government policy would look like in response to a Contracting Phase of the Business Cycle, and then examine what the U.S. Treasury Department has actually done. The differences are quite striking.
The May 30, 2009 issue of the Economist magazine offered this summary; “America has experienced a failure of finance, not of capitalism. Its broader economy remains an astonishing Petri dish of creative destruction. Even in boon times (read Expansion Phase), 15% of American jobs disappear each year. Their places are taken by new ones created by startups and expansions. This dynamism remains evident today, amid the most crushing economic conditions most businesses have encountered. As icons of consumer excess like Starbucks and Neiman Marcus stumble, purveyors of frugality like Burger King and Wal-Mart prosper. Americans are adept at finding opportunity in adversity.”
A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.
Believe it or not, this next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a grocery bag and walk around with it.
While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet...
But before we go on, it will be useful for you to have some idea of what a Million dollars, a Billion dollars, and a Trillion dollars actually look like. Jim Sinclair, who runs a blog at www.jsmindset.com, asked himself the same question and produced a good visualization to answer that question.
“To put the issues here into perspective........
All this talk about "stimulus packages" and "bailouts"...
A billion dollars...
A hundred billion dollars...
Eight hundred billion dollars...
One TRILLION dollars...
What does that much money look like.?
All this talk about "stimulus packages" and "bailouts"...
A billion dollars...
A hundred billion dollars...
Eight hundred billion dollars...
One TRILLION dollars...
What does that much money look like.?
Let’s start with a $100 dollar bill, currently the largest U.S. denomination in general circulation. Most everyone has seen them, slightly fewer have owned them. Guaranteed to make friends wherever they go.
And $1 BILLION dollars... now we're really getting somewhere...
Next we'll look at ONE TRILLION dollars. This is that number we've been hearing about so much. What is a trillion dollars? Well, it's a million million. It's a thousand billion. It's a one followed by 12 zeros.
You ready for this?
It's pretty surprising.
Ladies and gentlemen... I give you $1 trillion dollars...
(And notice those pallets are double stacked.)
So the next time you hear someone toss around the phrase "trillion dollars"... that's what they're talking
To see the illustrations, you will have to get the book from Scribd since I can't figure out how to include them here.