The Cyclical Economy

This is a gross generalisation but economies through the ages have tended to move through cycles in which they do well and not so well. This is sometimes (and even more simplistically) described as the boom and bust economy. 

What might happen is that an economy is doing well, there is not a lot of unemployment, wages are good, people are buying goods so businesses are making profits, and the sun shines every day – at least that’s how we remember it!

But the economy has got carried away with itself, though in truth it is always people who get carried away with themselves. We get complacent, take our eye off the basic principles: buy what we can’t afford, borrow too much. Crash!

The storm clouds have been gathering, we haven’t been looking out for them, and we get a soaking. Time to tighten our belts. Borrowing is curtailed as interest rates rise, unemployment has been creeping up and now it accelerates.

Boom and bust! Why it is worth sketching this out (and I emphasise that I have given a very simplistic model) is that it helps us understand President Hoover’s reaction in 1930 and 1931. He thought the economy was simply going through a bad patch and that the “natural” cycle would rectify it and the sun would come out again. He was wrong but so were millions of others. So perhaps we should give Governor Roosevelt the credit for having tremendous foresight in 1930 and 1931 rather than pouring scorn on President Hoover. Something to think about anyway.