The Dynamics of The Boom/Bust Cycle:
The primary goal of Capitalism is to generate a perpetually expanding income from capital investments. A perpetually growing volume of profits & capital gains, however, requires a perpetually growing volume of debt.
All of the profits and costs of business, including debt servicing costs, are passed to consumers through prices. All of the costs of government, including debt servicing costs, are passed to consumers through taxes (any taxes that businesses pay were already taken from consumers through prices).
As the total volume of profit & debt in the economy increases, so does the total volume of interest payments. Consumers must be willing and able to carry the entire burden of debt servicing costs in the economy or else the economy will fail.
As interest and profits consume more and more of wages & salaries, consumers become maxed-out and the economy weakens. Once the total burden of interest and profit grows beyond 60% of wages consumer debt exhaustion occurs and the threat of a recession begins. This marks the start of the Bust cycle. The table below clearly shows the relationship between recessions and the total burden of interest and profit in the economy.
The Bust Cycle:
Missed consumer debt repayment schedules trigger loan call backs which in turn trigger loan defaults. Fear builds in credit markets and new lending drops sharply. Leveraged financial investments tied to consumer credit collapse as debt securities are devalued. Credit-driven purchases of major assets decline and business inventories grow.
Layoffs occur and businesses find borrowing more difficult. Missed business debt repayment schedules trigger loan call backs which in turn trigger more loan defaults. Fear grips credit and stock markets and new lending and investment dries up. Leveraged financial investments tied to business credit collapse as corporate stocks and debt securities are devalued. Foreclosures and takeovers occur and downsizing pushes unemployment levels even higher.
Purchasing stalls as consumers worry about losing their jobs and attempt to increase savings. Trillions of dollars of wealth & debt are wiped off the books as the economy spirals downward. Eventually the carnage levels off and fear begins to subside. By this time, credit markets have been purged of an enormous amount of unrepayable debt and total interest costs are once again well below 40% of total personal disposable income. Profit expectations have moderated and prices are lower and relatively stable. This lays the foundation for the start of the Boom cycle.
The Boom Cycle:
Once the marketplace is confident that the worst is over, credit restrictions are eased and a new round of lending begins. New consumer borrowing stimulates consumption, idle inventories disappear and factories start recalling workers. As consumer demand strengthens, unused production capacity is depleted and businesses start borrowing again for expansions. The demand for higher profits is renewed again in corporate boardrooms and stock markets. Expansions fuel new wages and salaries which in turn further boost consumption levels. Those with incomes that exceed their day-to-day needs once again seek out lucrative financial investments to feather their retirement nests. The boom cycle is the battleground for wealth acquisition and the raison d'etre of Capitalism.
As long as consumers are still willing and able to absorb the profits and debt servicing costs that are embedded into prices and taxes, the marketplace will continue to grow. But inevitably, the total volume of profit and debt in the economy will once again rise to the level where the total volume of interest costs consumes about 67% of wages and consumer debt exhaustion will re-occur, causing another recession.
Capitalism doesn't want to fix this:
Although this repetitive cycle causes so much misery for the people who lose their jobs and/or retirement savings in the process, true Capitalists really don't want to fix the system. Nor do they care that Capitalism recklessly squanders our most precious human and natural resources which are the real sources of our collective wealth. True Capitalists believe that the use of unrestrained human greed in the pursuit of wealth and happiness is their birthright and that their extraordinary success in achieving it is clear evidence that God has favoured them.
Capitalism is really like a casino. Credit and debt are the chips. The House is owned by the giants of Capitalism, the captains of industry, banking, investment, etc. They are the big players in the marketplace, the guys that everyone else must watch to try and figure out what is really going on. Their size gives them a huge advantage because their actions will trigger other reactions, and they know it ahead of time, so that they can predict and even cause future market moves before anyone else knows what's really happening. They can pull their money out of a hand before any big losses occur, but doing so sends a signal to all of the other players watching them that they too should fold. Like a self-fulfilling prophesy, as they scramble to get their money out, the value of the investment plummets andthey lose their bets.
The House controls all of the chips and only lends them to players in the marketplace who have already acquired capital assets. Anyone who has tried to get a loan without having any collateral assets to pledge can attest to this. Now the House doesn't really care who wins or loses out on the gaming tables of Capitalism. It knows that the chips themselves aren't really that important. It knows that only the underlying assets and the interest revenues that the chips generate really matter.
So the House provides chips (credit & loans) to the governments, businesses and consumers who want to play at the market tables. No matter who the winners are, the House collects interest payments from them while the games are being played. No matter who the losers are, the House collects interest payments from them until they go broke and then claims the underlying assets that were pledged when the players rented the chips.
If too many chips are put into circulation and the games end because the House is demanding too much interest or the players are demanding too much profit, who really cares? The winners of the games certainly don't. They simply cash out their chips and start looking for the assets of distressed companies that might be available at bargain basement prices. The House doesn't care either. It just leans over the tables and scoops up the remaining chips, then begins liquidating the losers' assets. The total volume of money and debt that is left in circulation is as meaningless to the House as who the winners and losers were. It is easy to create new chips for the next game. The only thing that really matters is who gets control of the productive assets that were pledged or generated during the game. None of the underlying tangible assets are ever lost, they are simply redistributed to the people God has favoured.
The bust cycle may actually be the most important part of Capitalism. It enables the rich to get richer and consolidate their control of the economy more quickly than at any other time. The bust cycle provides excellent opportunities for corporate mergers and takeovers. Many valuable corporate and personal assets become available for a fraction of their original cost. Tight credit markets give those with deep pockets the upper hand and governments become much more pliable and considerate of corporate needs.
Reckless government bailout packages and knee-jerk deficit spending programs that increase the long term debt liabilities of taxpayers don't even begin to address the serious structural problems inherent in Capitalism. Without eliminating the need for perpetual profits and interest bearing debts, the best that society can hope for is a futile return to the beginning of yet another boom/bust cycle.
Once the general public fully understands that Capitalism is a crude and primitive form of social order that by design must continue forever to rely on human exploitation and war to achieve its ambitions, they will surely demand that their governments change directions. A fair and sustainable society is not only possible, it is easy to achieve once the tyranny of our monetary system is abolished forever.
There Is A Better Way explores one possible solution.