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Understanding The Boom and Bust Cycle

Have you ever noticed roughly after every six to ten years the economy shifts from an expansionary period to a recessionary period? It’s a continuous cycle that occurs like clockwork, and in economic terms, this is called the Boom and Bust Cycle.

What is the Boom and Bust Cycle?

The expansionary economic period is the boom period. During this period, commercial activity proliferates, sending signals that the economy is doing great. Usually, we’ll see positive economic indicators such as low unemployment, an increase in job growth, and an increase in Gross Domestic Product (GDP).

Even though these indicators are favorable for the economy what’s often not seen is the cause of rapid growth. In the boom period, interest rates are low, which allows consumers to borrow more money than usual.

It is not unusual for home prices to rise during this period; in fact, they often do. However, it’s not just home prices that rise, stocks, and various other assets or collector items also rise rapidly during this time.

Furthermore, the boom generally only lasts for a few years until the bust next cycle begins. Moreover, the bust cycle is a reflection of the boom period, and the bigger the boom, the bigger the bust.

A great example would be the 2008 great recession that took place due to the boom that occurred from 2002-2006. The boom and bust cycle occurred due to the low-interest-rate policy that was set by the Federal Reserve in 2000.

Federal Funds Rate - 62 Year Historical Chart
Federal Funds Rate – 62 Year Historical Chart

Why Does the Boom and Bust Cycle Harm the Economy?

Because the Federal Reserve sets interest rates, the effects of the rates occur on a national level affecting industries and consumers from California to Maine. Thus, the boom and bust cycle does not only affect the local industries, but it affects the entire economy.

During the boom consumers or businesses are encouraged to borrow and consume rather than save and invest. This is why all-time debt levels occur during the boom periods as consumers and entrepreneurs take advantage of low borrowing costs.

However, the bill eventually comes due causing consumers and businesses to slow down on their spending. Once this occurs, it becomes difficult to finance the levels of debt that has occurred during the boom years, and thus the bust cycle begins anew.

Though, for each boom and bust cycle that occurs, the US standard of living declines. As the US government often steps in to stimulate the economy with more borrowing and spending that ultimately devalues the US dollar.

Where Are We In the Current Cycle?

From1929 to today, there have been fourteen boom and bust cycles in the US. Moreover, we went from a one income family that supported five or six children down to a two-income family that is barely able to provide for one child.

The course of the fourteen booms and bust cycles has severely reduced the American standard of living. Furthermore, it has also increased the US national debt from $17 billion in 1929 to $22 trillion today.

Currently, we’re in the second most prolonged economic boom period in US history where consumer debt is at an all-time high and savings rate below historical standards. While economic indicators are positive, Trump and other government administrators are asking the FED to cut interest rates by 1%.

Even the Fed itself stated there would be no rate hikes for the rest of 2019. If the president and officials are asking the Fed to stop their rate hikes, something must be aloof. Perhaps they understand that the boom cycle is coming to an end.

It’s just a matter of time, possibly only months away before we begin to see the next bust cycle. Moreover, when it occurs, this bust cycle will be much worse the previous one in 2008.

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