We have written about this subject often. Perhaps it is time to start our new season by stating the obvious. The economy goes in waves – waves of prosperity, created by a new technology, or new advance, or some realization.
Who Participates and Who Does Not
This new cycle then gains momentum and strength. Those who were devastated by the last cycle, who had their retirement savings wiped out – they stand on the sidelines and watch – determined not to be economically hurt further.
They hold their investments in bank guaranteed investments, which after inflation and income taxes mean that they are actually loosing purchasing power – yet they are afraid and want to feel safe.
The sad thing is that the onlookers will finally become convinced when the cycle approaches its zenith, when it starts approaching madness, when everyone else has jumped on the bandwagon.
Then the ones wanting safety will finally get involved, just when they should be exiting instead and instead of investing, they should be selling and reaching for safety.
But this is not the way of the world, and it never will be. Perhaps if the common sense of our basic 10 changes to the way Capitalism works are adopted (blog of Dec 9/10), we can moderate this madness.a bit, but I suspect that will not happen.
What Creates a Wealth Cycle?
A recent theory is that the US had to create 75 new billion dollar annual revenue companies a year in order to propel sufficient money flow throughout the US economy.
Another theory is that lower income taxes and lower government spending produce more economic activity. Perhaps this is true, yet the great Republican Ronald Reagan actually increased the government deficit to record levels, so perhaps this theory needs more thought.
Some Irrefutable Facts
When we say the next economic boom is coming, we rely on basic facts.
1. There have always been boom and bust cycles. With a couple of rare exceptions, booms always follow busts. We had a whooper of a boom, fed in part by ever easier money supply (Greenspan), which created and was followed by a whooper of a bust. The bust is not deepening. It is moderating.
2. With the exception of US housing prices, every statistic is looking more positive. Jobs are up. Auto sales are up. Lending is up. Employment is up. Travel is up. Tourism is up. And so on.
3. Increasing prosperity produces greater demands for goods and services, which in of themselves create wealth and prosperity. Think about Europe after WWII. The Marshall plan – created (by the way) when the US had record debts and deficits – created waves of new European consumers, and demand for goods and services skyrocketed, leading after WWII to continually successively greater waves of prosperity.
Think about the explosion in numbers of new Chinese and Eastern Asian prosperous consumers. The greatest explosion in history of consumers searching for goods and services.
4. Lastly, government debt is always dealt with as a relative thing. The enormous government debts of today, will not increase in the future. They will be contained, and perhaps even paid down a bit. But the size of the economy of the debtor nations will increase, and in most cases, dramatically so.
The debts which appear so huge today, will look less huge as their comparison to GNP shrinks.
5. Debt is a relative thing. Canada’s seemingly devastating debt of the 1980’s, simply stopped growing, and as the economy grew, the debt appeared more and more manageable. The effect was that during the recent economic meltdown of 2008-9, everyone thought Canada to be conservative and stable. It was an optical illusion. Canada didn’t do anything except stopped its increase in spending.
6. Booms are usually the result of technological advances, whether it be the telegraph, the railroad, the advent of flight, the production line, the war effort and research, the age of communications, the cold war, the space race, the internet, globalization, miniaturization, social networking, and so on.
Think for a moment about how fast technology is racing ahead today. Think how many more centers of research there are worldwide. Think how many more people there are around the globe inventing, improvising, rethinking.
Have confidence. Waiting means missing your chance.
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