A boom is a period of increasing demand, increasing productivity, increasing sales and increasing wages. A bust is a period when inflation decreases, unemployment rises, income falls, and demand decreases. The governments are definitely more active now. We can say the governments are able to act as thermostats, able to stem the bust and prolong the boom. But, there is a catch that Tarun explains, in the weekly column, exclusively in Different Truths.
In economics, one of the most fascinating and important studies has been the cycles. The cycles of the booming economy followed by bursting of the bubble, of inflation-deflation, of high-interest rates and low-interest rates and so on. As a businessman, who has to allocate capital, I naturally got interested into what goes into these cyclical trends. I wanted to go into the real causes, not the post-mortems that economic textbooks tell us, by way of explanations, after all, has happened. So, I sat down to investigate.
A boom is a period of increasing demand, increasing productivity, increasing sales and increasing wages. A bust is a period when inflation decreases, unemployment rises, income falls, and demand decreases. The nature of the economy is cyclical, which means boom is followed by bust, and bust by a boom. Why is that? This is supposed to be natural, as natural rhythms of seasons. My theme here is not the cycles, but the frequency of cycles, whether the cycles are increasing in frequency, or scale, or both. This is of a high interest anywhere, as businesses and governments need to be forward looking, and plan their investments and policies accordingly.
Before 1929, the cycles were not much talked about or given any real attention. After the great depression set in, John Maynard Keynes argued, and began to be taken seriously, against the free economy, and said that the governments can regulate the cycles favourably with fiscal, and monetary policy. His arguments of government intervention in markets were adopted, by many governments, and the markets worked smoothly till the 1970s when stagflation hit, and he began to lose relevance. However, the 2008 financial crisis made his policies more relevant again.
The governments are definitely more active now, with more tools at their disposal than ever before. This is due to several measures over the years. The governments do not link their currencies to gold or silver anymore like they did till the 1930s. This has allowed them to issue unlimited currencies. The use of digital modes of payments has made them more able to control people’s finances, through appropriate taxation and interest rate controls. Thus, a government has the ability to alter the trajectory and scale of cycles, at least in the short run.
We can say the governments are able to act as thermostats, able to stem the bust and prolong the boom.
But, then, there has to be a catch somewhere. Doesn’t it? It cannot be all that hunky dory. What can be the problem? The governments can only prolong the natural rhythm, not avoid it completely. The government intervention only ushered in stagflation in the 1970s and the severe financial crisis of 2008. This is so because all the financial engineering cannot set right the basic malaise, and that malaise is overproduction. That happens because of the easy availability of credit (due to government intervention), and the pursuit of profit (due to high private consumption). The virtuous cycle happens because all the companies have to show higher growth and profits, to shore up their stock profiles. The companies have to keep on increasing their sales and profits, thus taking on more risks, and more loans from the markets to keep the show moving on. The advent of technology makes products more redundant sooner than before. We have seen Kodak and Nokia kind of big names lose out in the technology race, while there are umpteen cases who lost the bankruptcy battle. So much is for the individual cycles. The governments too have to meet aspirational values of a more aware public, and thus, the pressure is there to show their economic hand more than before.
Now, we started out to examine whether we are facing more cycles than ever before.
As we have seen, the pressure of newer technology, of continuously having to show great results, of availability of easy credit is increasing risks to the individual companies, what about economies as a whole? The governments are doing well as thermostats, but they are giving rise to new phrases or idioms, like stagflation, disinflation, recession, deflation- many phases of a bust, rather than a single bust. As for boom, they are able to give eternal hopes to public at large, through managing media, and showing to the public their hand at ability to do things, like hand out loans, loan waivers, lower interest rates, subsidies, direct cash transfers, and the last but the most potent of those weapons, financial wars, and low intensity conflicts, (yes, even wars and conflicts are methods to aid economies), as we are seeing in many parts of the world.
I concluded thus, that while extremes of economic cycles are being avoided by government intervention, yet, the frequency, as well the kind, of economic cycles, is on the rise.
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