Is history a cycle?
Sine wave. Source: Constructonomics
The philosopher George Santayana said that those who cannot remember history are condemned to repeat it. Mark Twain quipped that history doesn’t repeat itself, but it does rhyme. Since the financial crisis, economist Marvin Minsky’s view has become quite popular, that stability leads to excessive risk-taking, which sows the seeds for the next crisis.
But this theory requires that people act against their own interest – that they become blind to the risks that are facing them. While that was true for many folks in the years leading up to the Financial Crisis, not everyone was fooled. Indeed, one reason the Financial Crisis did not become another Great Depression is that the government acted decisively to restore confidence in the financial system. While many banks failed, the system did not collapse.
There’s a view out there that recessions are inevitable. Since the US has gone 8 years now since the last recession, they say, we’re due for a downturn, and soon. But that’s like saying a Major League Baseball hitter in a slump is “due” for a hit, because he’s currently below his long-term batting average. But in fact, hitters in a slump tend to stay in a slump until they address what got them there. And economies that are expanding tend to keep expanding, until imbalances and policy errors knock them off track.
Business cycles aren’t like the seasons or the movements of the planets. There’s no law of nature that causes our economy to go into recession every 5 years or so. Economic growth isn’t like retrograde motion. Some countries have gone decades without a downturn. In Australia it’s been 26 years since their last economic contraction.
Apparent retrograde motion. Illustration: Brian Brondell. Source: Wikipedia
Eventually, the US economy will experience another recession. We don’t know exactly when. But our leading economic indicators are still positive. Let’s hope they stay that way.
Douglas R. Tengdin, CFA