Are Shorter Business Cycles The Next Big Change In Economies?

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Imagine if some major pattern in our lives, for example the length and nature of the seasons, were to change. With increasing climate losses, this may well become the case. In other aspects of human life, such as longevity and the length and form of the working day, long-established patterns are already changing – on balance we will lead longer active lives, and work continuously from home.

Another profound change is the business cycle. There aren’t many people who spend time thinking about the business cycle, because it’s a dull corner of economics, but the ups and downs of the cycle affect us fundamentally through pensions, jobs, investments and wealth. .

Further recession?

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I have mentioned the business cycle several times in recent posts, in the sense that the rhythm of the business cycle may soon change, and I now want to expand on this a bit.

To put it in this context, according to the benchmark of history, we have lived through an unusual period of time over the past thirty years, characterized by three of the four longest business cycles in modern history (as of 1870 according to the NBR). . With the fall of communism and the rise of globalization in 1990, they lasted an average of 120 months, which is twice the long-term average. If we go further back in history, using mostly UK data, business cycles get even more jumpy.

In fact, these stagnant business cycles were driven by factors such as a bad harvest (1880), war (Napoleon War) and debt crisis (1870) – each of which is problematic today. In that context, my hypothesis is that the world economy will rejoin the rhythm of shorter business cycles for the following reasons.

small circle

The first, as regular readers would expect, is that globalization is broken. Several components of this, such as long-lasting secular trends in technology, deflationary exports from China and a settled geoeconomic climate, to name a few, were drivers of the long period of expansion. Now the boons of globalization – low inflation and rates, geopolitical stability and fluid trade/supply chains – are all being reversed.

The second reason is that a series of imbalances have occurred in the latter part of the globalization period. The next ten or so years will be marked to correct these imbalances. In particular, there are three that I will flag – central bank balance sheets and monetary policy in general, GDP levels and climate damage from international debt. Correction of these imbalances will be one of the defining pre-occupations of policy makers in this decade.

The balance sheet of the central bank is going to start a hard contraction from next week, with the advent of ‘QT’, which will result in a sharp negative money effect, a return to ‘normal’ of the markets in the sense that they provide the world Much better, realistic indication of the situation. A side-effect is that the credit market will function better, there may be fewer zombie companies and a better allocation of capital, although its potential impact on the business cycle will be small.

debt burden

In turn, an environment where inflation and interest rates are ‘low low’ makes it harder to manage debt, and emerging markets are already facing a short-term debt crisis. One of my dramatic hypotheses is that in 2024 (the centenary of the 1924 debt crisis) we have a World Debt Convention that aims to reduce debt levels through a grand program of restructuring and forgiveness. Such a convention may be needed only because of the style crisis of 2008 – which at the current rate is not beyond policymakers.

It is a dramatic scenario and more likely that the debt burden across countries and companies is an uphill task to replicate the long expansion cycles of recent times.

Sticking with debt, my favorite comparison is the rate at which the climate is warming (a percentage ranking of recent world average temperatures) and rising indebtedness. Both are symptoms, not so much of globalization but of sustainable development – in both cases increasing existential risks, and the failure of collective action to address them. Therefore, as the world economy recovers from the debt crisis of 2024, it will end in the climate crisis of 2028.

Doom is enough but I want to focus on collective action. In recent times, the major developed and emerging economies of the world were synchronized in two ways. First, structurally the West provided capital and consumption while the East brought manufacturing. This has now been disrupted – in very broad brush terms, the West seeks to shore up again, while the East is happy to consume its wares and enjoy its own riches.

Second, policy was coordinated across all blocs, or at least there was a sense of openness and fluidity to policy discussions – the Plaza Agreement is an early example, as is the ‘Committee to Save the World’ that brought the Asian crisis to a close. And then the G20 intervention in 2008 is another. Today, China and the US are barely in a position to speak, and the idea of ​​strategic autonomy means that Europe increasingly needs to see for itself.

A final complication to the business cycle is that so many aspects of economics are changing – the nature and structure of work, the troubling trend in low productivity, the economic drawbacks of high wealth inequality and the way in which perceptions of strategic autonomy will be distorted. . investment trends. This creates a lot of economic noise, and in my understanding it all adds up to a world where the business cycle is constantly disrupted and where businesses and policy makers need to think in terms of a four rather than ten year business cycle. Is.

Credit: www.forbes.com /

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