Monday, March 20, 2023

We've Forgotten That Business-Cycle Recessions Are Essential

A stagnating zombie economy never recovers.

Four decades of rising markets punctuated by crisis-induced crashes seems to have fostered an unspoken belief that no one should ever get hurt in markets or the economy. Everything "should" always get better for everyone, without any messy loss or pain. Not only is this not realistic, it overlooks the role business-cycle recessions play in restoring the vibrancy of economies and markets distorted by excesses.

The global economy has been plagued by excessively easy financial conditions for 25 years, and so a vast array of marginal and superfluous activity was funded that would never have been funded in more prudent financial conditions. Too many marginal structures were built and too many marginal enterprises and ventures were funded.

As a result, we ended up with too many malls, too much retail space, too many office towers and too many empty houses and flats being kept off the long-term rental market so the investor/owners could feast on the riches of the short-term tourist rental market (AirBnB et al.), a market that is now starting to implode as cities ban or restrict these rentals.

Throw in marginal IPOs, SPACs and meme-stock manias, and we have a Mulligan Stew of excessive risk-taking. When money can be borrowed at near-zero rates, and "opportunities" for quick gains proliferate (FTX, etc.), excessive borrowing and speculation become "the smart thing to do." In this mindset of raging "animal spirits," only chumps hesitate to borrow big and chase some of the easy gains filling everyone's pockets.

Everyone who staked capital or a livelihood in these marginal assets / enterprises will get hurt. Everyone who bought a bond that yields 1% as rates rise to 4% got hurt. Everyone counting on nearly free capital to flow forever will get hurt. Everyone chasing a speculative bubble higher will get hurt. Everyone counting on a greater fool to buy an overvalued asset will get hurt, as all credit-fueled asset bubbles pop and all credit-fueled business-cycle expansions roll over into contraction as marginal borrowers and lenders go bust and enterprises without profits or prospects of profits expire.

The forest fire analogy applies: the occasional lightning-strike ignited fire burns away the deadwood that's collected, enabling new growth to obtain nutrients and sunlight. If authorities suppress these naturally occurring fires out of the mistaken belief that "all fires are bad," the deadwood piles up and when a fire inevitably starts, it turns into a massive conflagration due to the excessive deadwood that piled up during the suppression of natural fires / recessions.

Another useful analogy is the Zombie Economy in which households, enterprises and entities that cannot survive without continual fresh injections of new borrowing are kept alive lest "somebody will get hurt" (usually gamblers and speculators, i.e. "shareholders." After all, markets should be risk-free.).

As a result, debt-dependent Zombies proliferate, crowding out productive lending and investment. The Great Stagnation is the inevitable result of zombie banks being kept alive, zombie corporations being kept alive and zombie consumers being given more credit to enable more consumption.

In speculative frenzies fueled by easy money, the difference between prudent investments and high-risk gambles is obscured. Gains have been so steady that they appear guaranteed. Every new vacation rental flat is filled with guests paying top dollar, every meme stock soars to previously unimaginable heights, and so on.

Eventually the market is saturated, and there's too much of everything: debt, risk, condo towers, strip malls, SPACs, IPOs, shared office spaces, etc.

Recessions are the process that clears the economy of deadwood that chokes off productive growth. Recessionary conflagrations are not fair or just. Previously well-managed companies make a bad bet that in good times gets absorbed but in recessions proves fatal. Previously prudent households lost their discipline and over-leveraged their income on risky bets that went bust. Governments assumed that the flood-tide of capital gains taxes would never ebb. And so on.

The greater the quantity of deadwood that has been allowed to pile up, the greater the intensity of the eventual recessionary conflagration. If systemic adaptation is also at work, one recession might not be enough. The 1970s offers one template for a decade of profound structural adaptations plus recurring business-cycle recessions plus a secular shift from low inflation to embedded inflation.

A stagnating zombie economy never recovers. More credit is dumped into marginal and superfluous entities on life support and so the deadwood piles up, stifling any productive growth. Eventually low productivity and massive debt burdens generate inflation (more credit-money is chasing fewer goods and services) and the resulting conflagration doesn't just burn the deadwood, it burns down the entire forest--needlessly.

Rather than suppress recessions, we should embrace the discipline they impose as the essential dynamic of productive growth.




New Podcast: Turmoil Ahead As We Enter The New Era Of 'Scarcity' (53 min)

My new book is now available at a 10% discount ($8.95 ebook, $18 print): Self-Reliance in the 21st Century.

Read the first chapter for free (PDF)

Read excerpts of all three chapters

Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)


My recent books:

The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $5, print $10, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print)
Read the first section for free


Become a $1/month patron of my work via patreon.com.




NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Andrew D. ($50), for your splendidly generous contribution to this site -- I am greatly honored by your support and readership.

 

Thank you, David B. ($50), for your marvelously generous contribution to this site -- I am greatly honored by your support and readership.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.


Our Privacy Policy:


Correspondents' email is strictly confidential. This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative). If you have other privacy concerns relating to advertisements, please contact advertisers directly. Websites and blog links on the site's blog roll are posted at my discretion.


PRIVACY NOTICE FOR EEA INDIVIDUALS


This section covers disclosures on the General Data Protection Regulation (GDPR) for users residing within EEA only. GDPR replaces the existing Directive 95/46/ec, and aims at harmonizing data protection laws in the EU that are fit for purpose in the digital age. The primary objective of the GDPR is to give citizens back control of their personal data. Please follow the link below to access InvestingChannel’s General Data Protection Notice. https://stg.media.investingchannel.com/gdpr-notice/


Notice of Compliance with The California Consumer Protection Act
This site does not collect digital data from visitors or distribute cookies. Advertisements served by a third-party advertising network (Investing Channel) may use cookies or collect information from visitors for the purpose of Interest-Based Advertising. If you do not want any personal information that may be collected by third-party advertising to be sold, please follow the instructions on this page: Limit the Use of My Sensitive Personal Information.


Regarding Cookies:


This site does not collect digital data from visitors or distribute cookies. Advertisements served by third-party advertising networks such as Investing Channel may use cookies or collect information from visitors for the purpose of Interest-Based Advertising; if you wish to opt out of Interest-Based Advertising, please go to Opt out of interest-based advertising (The Network Advertising Initiative) If you have other privacy concerns relating to advertisements, please contact advertisers directly.


Our Commission Policy:

As an Amazon Associate I earn from qualifying purchases. I also earn a commission on purchases of precious metals via BullionVault. I receive no fees or compensation for any other non-advertising links or content posted on my site.

  © Blogger templates Newspaper III by Ourblogtemplates.com 2008

Back to TOP