Booms and Recessions

While oversimplified, we can easily say that a rising standard of living comes from increased productivity-that is, more produced per hour worked.

Booms occur for at least two reasons. One, from a significant increase in productivity which is then often followed by item two, a state of over optimism-leading to broad-based speculation where the value of things (stocks) is bid up and up-thus going beyond the historically accepted returns on investment; i.e. the price-earnings (PE) ratio.

Speculators ignore low earnings and pin their hopes on future prices and values being much higher. Speculation is fueled by either savings or by easy credit. Today people are even borrowing on their home equity.

Booms usually lead to over building, over spending, too much debt, etc. and are followed by periods of adjusting the excesses, which we call recessions and depressions. This is an unemotional, matter-of-fact statement of an economic fact. However, the reality of a serious economic downturn comes with serious pain for the nation in general and for unemployed and unprepared individuals specifically. The belief by some is that small corrections (small pain) now will avoid much larger corrections (large pain) later. The Great Depression is also referred to as "the crash."

In the 1980s, reductions in the taxation rate began an increase in economic activity. People had more money to spend. This in turn increased profits and wages-and the amount of taxes collected increased.

In the 1990s there began a speculative fever that led to economist, Dr. Richebacher, saying, "The U.S. economy of the 1990s ranks as the worst bubble economy [boom] in history...A vanishing supply of domestic savings was more than subsidized by boundless credit creation. . . "

The Federal Reserve Bank has the ability to expand or restrict credit. Richebacher continues, "The power of the American credit machine to create credit out of the blue is unique and unprecedented." Too much easy credit over the last few years has led to, not only too much consumer debt, but also to too much business debt. The increasing numbers of bankruptcies in these so-called "good times" have become a serious matter.

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Going just back to 1992, consumer-type credit, as a percentage of disposable personal income, stood close to 16 percent. Today it is over 25 percent. And that means an overwhelming majority of people's discretionary income today goes towards interest. and paying down debts.

These are averages and many people are so far in debt they can't keep up. Some are able to refinance and consolidate. From this, some learn financial discipline, but still others do not. "This downturn differs dramatically from all previous postwar recessions. It has not been brought about by tight money, but by unsustainable spending excesses..." (Dr. Kurt Richencache)