Table of Contents
What is the Boom and Bust Cycle?
The boom and bust cycle (a.k.a. the business cycle, or economic cycle) refers to the alternating phases of economic expansion and contraction. It is a natural, unavoidable part of capitalist economies.
A boom period involves economic growth. Jobs abound, and the stock market generates high. Bust periods involve economic decline. Unemployment rates rise and stock market returns are minimal.
We at the Zero Theft Movement are working to eradicate the rigged parts of the economy so that American businesses and citizens can flourish. While the boom and bust cycle is expected, healthy economic practices can extend periods of expansion and minimize the duration and damage of the decline. In this article, we will take a closer look at how the boom and bust cycle works and examine some recent cycles.
Phases of the Boom and Bust Cycle
| Boom and Bust Phase | Business Cycle |
|---|---|
| Boom | Expansion/Recovery |
| End of Boom | Peak |
| Bust | Contraction/Recession |
| End of Bust | Trough |
Boom
You’ve probably read or heard the following phrase many times before: “The economy’s booming!” That means the economy is growing, and if it continues to increase within a healthy range (2%-3%) each quarter, it can remain in the boom phase for years.
Economic growth typically comes with a ‘bullish’ stock market, low unemployment rates, and rising real estate prices and wages.
Nevertheless, too much growth too fast can create a ‘bubble.’ Excessive amount of liquidity leads to inflation. Furthermore, overzealous individuals become more and more willing to make high-risk speculative investments. A growth rate above 4% for two or more consecutive quarters is an early indication of a bubble economy.
Peak
As the name suggests, the peak refers to when the assets reach their highest point in that specific boom and bust cycle. The bubble has, in other words, expanded as far as it will go. Thus, the high point becomes a turning point, spelling an imminent bust.
Bust
During the bust phase, the economy contracts. The damage is typically comprehensive but swift. The unemployment rate spikes (typically, 7% or higher) and investments plummet in value.
If the bust period lasts more than three months, the economy is in a recession. A bust can be triggered by any number of crises, financial or otherwise. Such as the collapse of ‘too big to fail’ corporations, a natural disaster, or a pandemic.
In the U.S., this period of the boom and bust cycle has lasted, on average, 11 months.
Trough
The trough marks not only the lowest point but also the turning point of the economy. The bust period ends and a new expansionary/recovery period follows.
Why Does the Business Cycle Exist?
When looking at the graph above, you probably noticed that the GDP continues to grow through the boom and bust cycles. The interaction between numerous factors explain why the cycle exists, but it can be boiled down to (1) supply and demand (2) amount of liquidity (3) future expectations/human behavior.
Creating the Boom
During the boom phase, strong consumer demand and confidence drives economic growth.
Citizens have a positive outlook, with their assets and investments increasing in value. Due to the general boost in financial capital, they tend to spend more as well, putting money back into the economy.
To meet and capitalize on the demand, companies increase supply. They hire more workers, expanding job opportunities and decreasing the unemployment rate. Those citizens can thus spend more and further grow the economy. Furthermore, the availability of capital enables consumers and businesses to borrow at low rates.
The boom period operates as a cycle in and of itself, where growth feeds growth.
But as we mentioned above, too much capital will lead to inflation. When this happens, some investors and businesses will try to beat out the market and take excessively high-risk investments in an attempt to secure their bottom line.
The Boom Busts
During the bust phase, the lack of consumer and investor confidence grinds the economy to a halt.
The stock market eventually corrects or sometimes even crashes, causing people to sell their stocks. Instead, they start to invest in stable assets (e.g. bonds, precious metals, the U.S. dollar) and hold onto their disposable income.
Demand drops. Companies have too much supply. Consumers get laid off and spend only on necessities, further decreasing demand. Just as the boom period saw growth feeding growth, contraction leads to more contraction.
The bust phase ends when the supply decreases prices enough to jumpstart demand.
Notable Boom and Bust Cycles
Since 1854, the U.S. has gone through 14 boom and bust cycles (as of June 2021). We all have recently been living through a major bust period due to the worldwide Coronavirus pandemic. Let’s take a look at some cycles, which you might have heard of before.
Savings and Loan Crisis
When President Reagan signed into law the Garn-St. Germain Depository Institutions Act in 1982, he effectively eliminated loan-to-value ratios and interest rate caps for savings and loan associations (a mortgage-focused alternative to banks). S&Ls could also hold 30% of their assets in consumer loans and 40% in commercial loans. The legislation was enacted in order to support the many S&Ls that had been struggling due to ‘stagflation’ (stagnation + inflation) in the 70s.
The elimination of the ratios and caps gave rise to ‘zombie thrifts/banks’ that paid progressively higher rates to raise funds. S&Ls started investing in high-reward, high-risk commercial real estate and junk bonds. The problem was: the S&Ls or their executives were not the ones shouldering the risk. The government (via tax revenues) would have to take on the losses via the Federal Savings and Loan Insurance Corporations (FSLIC).
Here, we have a classic case of the moral hazard. Where the rewards go to the investors, while the risk gets deferred to an unwitting party (in this case, the public). S&Ls piled on risk, leading to the collapse of over 1,000 institutions. The FSLIC became insolvent by 1987, and the economy went into a recession by the early 1990s.
Removing interest from the equation, sources (including the Federal Deposit Insurance Corporation (FDIC)) calculate the total cost of the S&L bailout to be around $160 billion. Taxpayers will have accounted for $124 billion of that by the end of the effort, according to the Federal Reserve History website.
Dotcom Bubble
With the advent of the internet came a whole new frontier in the late 1990s, a new world filled with economic possibilities. Entrepreneurs started to jump on the technology trend and established internet companies. Hedge funds, enchanted with the great potential for profit, heavily invested in tech startups that had yet to even produce a single solid product. The great eagerness and positive outlook on the future created what’s often called the dotcom bubble.
Source: Write Pass
As you can see from the graph above, NASDAQ (a stock market index with a focus on technology) quintupled in a four-year period but plummeted in two years. The investments eventually dried up, and when it came for the startups to come good on the capital they’d received, many could not.
Consumers, investors, and businesses lost trust in the supposed tech revolution and the contraction period of the boom and bust cycle began. The infamous Worldcom scandal and Enron scandal emerged during the ensuing recession, where two corporate darlings allegedly attempted to hide their failing technology investments.
Subprime Mortgage Crisis
One of the most well-known and deeply tragic boom and bust cycles in U.S. history, the 2008 subprime mortgage crisis and the ensuing Great Recession left millions of Americans reeling.
In short, the rise of NINJA loans (no income, no job, no asset loans) enabled many citizens with less-than-ideal credit scores to bypass the strict application process to easily get loans to buy a home. The housing market, therefore, became a bubble in the mid-2000s.
Source: A Wealth of Common Sense
These financial products often had a teaser rate (a low initial interest rate to attract borrowers), which eventually spiked to match the high-risk involved with subprime mortgages. After the interest rate spiked, many borrowers disappeared, defaulting on the loan. Hence, the ninja in NINJA loans.
The value of the real estate market fell considerably, and so did the value of innumerable financial products tied to these home loans. Soon enough, Bear Stearns and Lehman Brothers, two Wall Street powerhouses, collapsed. The economy followed suit.
Better Markets estimates the crisis caused upwards of $20 trillion in lost GDP. See what your fellow citizens have discovered about potential economic foul play that might have caused the biggest financial collapse in history.
The Lowdown on Boom and Bust Cycles
Boom and bust cycles are expected in economies. Public sentiment, availability of financial capital, and supply and demand keeps the economy dynamic, in a state of flux. While bubbles can seem obvious in hindsight, they might not be so easy to detect in the moment.
While we expect the business cycle to naturally occur, we can look at past boom periods to see how overzealous and at times reckless behavior has triggered disastrous times of recession. While the long-run trend of real GDP trends upwards, that does not mean we have maximized our potential for collective growth.
The dogged pursuit of profits, especially when we’re dealing with multinational companies, can lead to prolonged bust periods that ultimately cause low and middle class Americans to suffer the most. While we cannot remove the bust period from the natural boom and bust cycle, we must work to eliminate excessive risk-taking and speculation, which creates bubbles in the first place.
Eliminate the Rigged Economy with the Zero Theft Movement
The Zero Theft Movement, along with our growing community, works to calculate the most accurate estimate for the monetary costs of corruption in the United States. We achieve this collectively through our independent voting platform.
The public investigates potential problem areas, and everyone votes on whether (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
Only through hard evidence can we prove where the rigged parts of the economy exist and force Congress to hold all the bad actors accountable.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.