"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Tuesday, May 31, 2011

Recessions in one easy lesson.

Much has been written about business cycles. Marx thought Capitalism is doomed because of them, that they are an inherent part of the capitalist system that will cause it to self destruct.

Of course, he never explained why they are an inherent part of the system, or what makes them happen, but everyone believed him. It's now commonly accepted by the mainstream that deep down in the innards of capitalism, so deep it cannot be exposed to logical explanation, and so deep it cannot possibly be eradicated, lies that deadly virus, the mystery cause of booms and busts.

And you, dear reader, are about to enter a secret society. You are about to become one of the select few who knows what exactly causes business cycles.

You can in fact create your own personal version of a business cycle right now in your own life. It's very simple. Max out all your credit cards, far beyond what you can possibly ever repay. Spend it all extravagantly. Do this month after month, for as long as you can get away with. That's the boom. Lots of fun, no?

One day the credit card companies come after you. They want their money, and they want it now. Sadly, you cannot repay, ever. You lose everything. That's the bust.

That's what a business cycle is, on a grand scale.
The whole country borrows lots of money it cannot possibly repay = boom.
The time comes to repay, and the country suffers the consequences of being unable to repay = bust.

Note that there are three elements in this scenario, money, borrowers, and lenders. The lenders [usually banks] lend the money to the borrowers [=deadbeats], who don't pay it back.

And it's not enough to have only one or two deadbeats. In order for the whole economy to be affected, to have a real business cycle, we must have these loans happen over and over, with huge amounts of money involved.

That being the case, we have to ask the same question about each element. Where did he come from?

1. Where did all the money come from that was lent to these deadbeats? It doesn't grow on trees.
2. Where did the banks come from? By which I mean, why did the banks make these doomed loans in the first place? Don't they want their money back?
3. Where did the deadbeats come from in such large numbers? Aren't most people responsible?

OK guys. This post grows long. Time for a break. BTW, I'd love some feedback.

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