The New, Improved Bernanke Business Cycle

Posted: Aug 30, 2012 12:01 AM

As the central bankers of the world try to avoid the impossible, it suddenly occurred to me that the citizens of the U.S. are also attempting the exact same thing. 

As most good economists know, the economic cycle of growth has certain undeniable stages. 

Starting with growth, we then move to the excessive boom

Yet, it seems that after everyone is finally in, the balloon bursts and the bust phase commences.  At this point the inevitable contraction occurs.

Company after company fails, people are unemployed, houses are foreclosed upon, and financial collapse is everywhere. 

Amidst this dramatic contraction event, however, come the first truly green shoots.  New businesses replace old businesses, entrepreneurs jump into the fray, and many people lick their wounds as consolidation takes over. 

Eventually, the cycle repeats itself with growth, boom, bust, contraction, and consolidation being the constant order of events. 

However, in 2008, Ben Bernanke and friends decided that the contraction phase, so necessary to the eventual growth resurgence, could be avoided. 

With historically low interest rates and excessive printing of money, it was the Keynesian belief that the bust phase could jump ahead to growth phase, thus bypassing contraction and consolidation altogether. 

Nevertheless, no matter how many QEs are thrown at the problem the traditional business cycle will not be denied and the inevitable is only postponed.  In addition, the unintended consequence of such a Keynesian strategy only compounds the problem as every issue seems to be more exaggerated and more worldwide. 

Likewise, there is also a cycle of human emotions.  For those who are unemployed, been foreclosed on, or experienced bankruptcy, they know these emotions very, very, well.  Fortunately, the majority of Americans are not experiencing these financial woes. 

Yet, if they did, they would know this cycle almost intimately.  It starts with complacency.  “I know things are bad, but it’s all happening to everyone else, not me.”  Next, concern arises.  “Is it possible my company will layoff, what’s that going to look like?” 

Then, worry enters the equation as unemployment becomes a real possibility and could be inevitable. 

Worry is followed by fear that the hope for a turnaround of individual circumstances may not be a short period of time.

Next, fear flows to panic as everything you think and believed in, including yourself, keeps sliding further and further away and there appears to be no end in sight. 

The complacent ones usually look with a deep degree of sympathy, and sometimes even disdain, at those who have just commenced the cycle. 

And just like the business growth cycle, the human fear cycle is unalterable, even to the point of beginning again. 

Thinking you can avoid the various traditional phases only leads to worse consequences, something Ben Bernanke should definitely ponder.