Economic Cycles

The Two Main Economic Cycles

 

What are Economic Cycles in General?

Economic cycles are the time periods of economic fluctuations between growth (economic expansion) and recession (economic contraction).

What Defines the Duration of each Cycle?

The starting and the ending of each economic cycle (Growth and Recession) are determined and measured by macroeconomic factors such is the course of GDP (Goss Domestic Product), the course of National Income & Consumption and the Level of Employment, in a economy.

 

How Central Bank get Involved with the Duration of each Economic Cycle?

Central Banks are able to control the money flows of an economy by using mainly as a tool the Level of Interest Rates. Of course central banks can use additional tools such is the Printing of New Money or the Devaluation of the National Currency.

“The game between Growth and Recession can be seen also as the game between Inflation and Unemployment”

i) Growth Cycle: Dealing with Inflation

At periods when the economy is growing too fast, the central bank has to deal with inflation. As inflationary concerns grow, the central bank increase the level of interest rates and thus money supply is reduced. As money supply is reduced, consumption and inflation are both reduced. This is a sign that the growth cycle is coming to an end.

ii) Recession Cycle: Dealing with Unemployment

At periods when recession strikes an economy, the central bank has to deal with unemployment and thus aim to increase the money supply and the consumer spending in an economy. This can be done mainly via the reduction of the level of interest rates. As money become cheaper, investment and consumption becomes easier and that means the start of a new growth cycle. 

Graph: The two main Economic Crisis in the US during the past 100 years and how the US Central Bank (FED) has reacted

Production Growth and Debt Growth

Ray Dalio, the manager of the world's largest hedge fund, Bridgewater Associates, argues that three main variables form the duration of each cycle:

◘ The Production Curve

◘ The Short-Term Debt Curve

◘ The Long-Term Debt Curve

For Ray Dalio, the following template can show with detail the start and the end of each economic cycle.

Graph: The Correlation between Productivity, Debt and Growth

According to Ray Dalio, the economy phase two cycles that form 3 periods:

1) Leveraging Period (Growth) –Duration 50-80 years

2) Depression Period –Duration 2-3 years

3) Reflation Period –Duration 7-10 years

 

Graph: The Duration of Economic Cycles

 

Read More: » Warren Buffett Investing Tips | » George Soros Investing Tips | » Forex Trading Tips

 

◘ Giorgos Protonotarios, Financial Analyst

Capital Investor

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