A Question About The Economic Cycle

[DoctorJ]

I have been pondering the so-called 'economic cycle' as it is mentioned a lot on here. I'm still not sure about how it all works.

My question is: What brings about the downturn in the economic cycle?

an extension to this is - for what reason would BoE/government have to stop printing money?

Edited July 2, 2007 by DoctorJ

[bomberbrown]

an extension to this is - for what reason would BoE/government have to stop printing money?

(Hyper) Inflation?

[AteMoose]

I have been pondering the so-called 'economic cycle' as it is mentioned a lot on here. I'm still not sure about how it all works.

My question is: What brings about the downturn in the economic cycle?

an extension to this is - for what reason would BoE/government have to stop printing money?

if people stop spending and getting loans....

[DoctorJ]

(Hyper) Inflation?

but if everyone does the same - does it maintain a balance worldwide? ie can we keep going with 14% M4 forever and HPI forever. This is my concern

Edited July 2, 2007 by DoctorJ

[AteMoose]

but if everyone does the same - does it maintain a balance worldwide? ie can we keep going with 14% M4 forever and HPI forever. This is my concern

we can continue at 14% until the majority of the population cannot afford the repayment on on the debt money (money supply), when this happens people stop getting mortgages, people stop getting loans, people go bankrupt, business fail because no one is spending, house prices crash.... When do you think we will reach this date?

[THE BALD MAN]

we can continue at 14% until the majority of the population cannot afford the repayment on on the debt money (money supply), when this happens people stop getting mortgages, people stop getting loans, people go bankrupt, business fail because no one is spending, house prices crash.... When do you think we will reach this date?

The signs are it is just starting (see posts on households missing paying bills). We could miss a full scale downturn but who knows??

[redwing]

I have been pondering the so-called 'economic cycle' as it is mentioned a lot on here. I'm still not sure about how it all works.

My question is: What brings about the downturn in the economic cycle?

I know this is going to sound stupid but...

What causes the downturn is the previous upturn.

If everything just stayed flat and we had no cycle at all, there wouldn't be a problem. But there's always someone, somewhere who wants to speculate.

[DoctorJ]

we can continue at 14% until the majority of the population cannot afford the repayment on on the debt money (money supply), when this happens people stop getting mortgages, people stop getting loans, people go bankrupt, business fail because no one is spending, house prices crash.... When do you think we will reach this date?

Who knows - but it feels close.

I am starting to realise that I don't understand this as much as I thought.

[huw]

Here's one way of looking at it.

Every now and again, some world-changing innovation comes along that kicks off a bout of economic growth. The invention and mass-production of the automobile is one of the most significant of these in recent times. Looking further back, the invention of the steam engine and the mechanical loom, and the opening of new territories and trade routes would have had similar effects. In one sense, WWII could perhaps be considered an "innovation" in that it created a huge amount of demand.

Anyway, whatever the innovation might be, it drives GDP growth upward because of the increased demand. Production rises along with the money supply and things keep humming along for a while ... until the market matures and approaches saturation, or another economy starts exploiting that market more successfully (eg Japan vs USA in cars, probably from the 1970s onwards). At this point, demand stagnates or declines and the economy slows. Debt that was taken on in the good times becomes harder to support. If a speculative bubble was permitted in the good times, this is the point where it pops.

Note that the economy can keep growing throughout the above process, the fact that the rate of growth is reduced is enough to cause job losses, bad debt and other pain...until the next smart-aleck comes along with another world-changing innovation...

It seems to me that the world-changing innovation in the UK in recent years has been in exotic financial engineering mainly built around property, meaning that a bubble is pretty much built in. At least where the innovation is a real product, the increased money supply can be soaked up by real growth.