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The Business Cycle is Broken

April 19, 2021

Companies have historically gone through a “business cycle” with periods of growth, contraction, stagnation, and so on. In the past, we’d have expansions and recessions, and authorities would generally stay out of the way to let nature take its course. If they did engage, it was in a countercyclical way – when the economy was doing well, they would raise rates, and vice versa.

Now, bodies like the Federal Reserve tend to act in procyclical ways, with an example being the continual easing of monetary policy during a roaring expansion. Frankly, it’s crushed the business cycle such that we’re in a state of perpetual boom, punctuated by the occasional sharp drop where we all have a near-death experience.

Easy monetary policy and going off the gold standard in 1971 caused this situation. Most of the modern economic distortions can be traced to those two things.

It could be argued that without a pandemic, the global recession never would’ve happened. At the same time, we were on a path of 12 straight years of economic expansion – in other words, a perpetual boom with a crisis sprinkled in.

Risk-wise, it’s tricky. You’re supposed to stay fully invested and endure crashes. But this puts people in a position where they need to hedge, which is difficult.

Keep in mind, the “easy money era” is a short experiment of only about 50 years. Thus far, it’s produced an always-on boom mode with more than a quarter of all money in existence “printed” in the last year.

But what if a 50-year bust followed this boom? While that would produce large problems, it would also cause concerns for the traditional retirement investment portfolio of 80 percent stocks and 20 percent bonds.

This present course may be prolonging an inevitable crisis with serious implications.

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