Photo: Bruno Glätsch. Source: Pixabay
We observe the weather, we feel the seasons. The grapes are swelling on the vine. We know when it’s time to pick apples and gather the harvest. When we walk outside, we know that winter is on its way. Why is it so difficult to see the seasons of economic growth, to know when an economic “hard frost” is coming?
Seasons are regular, economies are irregular. The weather for certain days may be hard to predict, whether tomorrow will be rainy or clear, windy or calm. But we know the seasons. We know in that New England October will be colder than August. If you haven’t harvested your tomatoes by Columbus Day up here, they’re likely to be spoiled. By contrast, someone who goes apple-picking on the Fourth of July is missing something.
But economies are indeterminate. They expand and contract with long and variable lags. They don’t depend on anything as regular as the earth’s orbit around the sun and the tilt of the earth’s axis. Our economy is structured around consumer demand, private property, technological innovation, and finance. There are feedback loops, choke points, and rational (or irrational) actors all along the way. Decision makers adapt to perceived conditions, changing the future state.
Feedback loops. Source: Wikimedia
And economists can’t even agree on history. One school of thinking says that overly tight monetary policy in 2005 and 2006 caused the Great Recession ten years ago, another says it was the financial meltdown the followed Lehman’s bankruptcy. Still another (Nobel Prize winner) says that he has no idea why the economy went into recession in 2008, just that our policies made it worse. No wonder the economy can seem chaotic!
We can’t predict recessions, but we know the conditions necessary for growth: free and fair markets, sound property rights, rule of law, personal security, accountable public institutions. Within such a framework there’s room for all kinds of diversity. Self-reinforcing expansions will lead to excess, excesses will correct and contract, growth will start over again – like a phoenix rising from its own ashes.
Photo: Elisabeth Leunert. Source: Pixabay
That’s why it’s important to stay diversified in our investments, to be ready for upturns and downturns, for recession or expansion or disruptive change. We don’t – and can’t – know the future. The best that we can do is to watch the weather and be prepared.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”