rvicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion. A period of credit liquidation ensues and a new downtu

Why is there a business cycle? Someone once noted that people could tolerate any condition except the possibility of one. This one condition is prolong periods of prosperity. Incredible as it seems, this observation contains more than just a kernel of truth, and helps to explain where we are in our current business cycle.

When the economy starts to recover from a stiff downturn, people are understandably doubtful about the tenacity of the young expansion. They hold back on their discretionary spending and their use of debt. As the upswing continues to gather force, people tend to become less risk averse. You might say that the greed factor becomes more prevalent.

As the upturn ages, people become more confident and think that the expansion will last indefinitely. (This has a similar ring to peoples’ attitudes towards real estate today.) Business people take on more debt to leverage their profit margins. The consumer will also be increasing their debt burdens to finance their growing consumption habit. This increase confidence of consumers is also reflected in their disregard of saving. Soon a point of no return is reached where the cost of servicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion. A period of credit liquidation ensues and a new downtur

in our current business cycle.

When the economy starts to recover from a stiff downturn, people are understandably doubtful about the tenacity of the young expansion. They hold back on their discretionary spending and their use of debt. As the upswing continues to gather force, people tend to become less risk averse. You might say that the greed factor becomes more prevalent.

As the upturn ages, people become more confident and think that the expansion will last indefinitely. (This has a similar ring to peoples’ attitudes towards real estate today.) Business people take on more debt to leverage their profit margins. The consumer will also be increasing their debt burdens to finance their growing consumption habit. This increase confidence of consumers is also reflected in their disregard of saving. Soon a point of no return is reached where the cost of servicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion. A period of credit liquidation ensues and a new downtu

nd to become less risk averse. You might say that the greed factor becomes more prevalent.

As the upturn ages, people become more confident and think that the expansion will last indefinitely. (This has a similar ring to peoples’ attitudes towards real estate today.) Business people take on more debt to leverage their profit margins. The consumer will also be increasing their debt burdens to finance their growing consumption habit. This increase confidence of consumers is also reflected in their disregard of saving. Soon a point of no return is reached where the cost of servicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion. A period of credit liquidation ensues and a new downtu

ke on more debt to leverage their profit margins. The consumer will also be increasing their debt burdens to finance their growing consumption habit. This increase confidence of consumers is also reflected in their disregard of saving. Soon a point of no return is reached where the cost of servicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion. A period of credit liquidation ensues and a new downtu

rvicing the debt is growing faster than consumers’ income. This scenario also holds true for over-indebted businesses.

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion. A period of credit liquidation ensues and a new downturn begins. The severity of the downturn depends on several factors. These include the oversupply of goods and services, the level of debt buildup, and government economic policies (namely tax and trade policies).

The business cycle will always be with us. You might say it is the result of the genetic make-up of mortals. No government policy or regulation can abolish it.

For argument purposes, let’s say it is possible to eliminate the business cycle. Then the question is--what is the price to be paid. What price you ask! Yes, there is always a price because the cardinal law of economics is--there is no such thing as a free lunch.

The price paid is lost opportunities and slower long-term economic growth. Downturns, recessions as they are called, have a beneficial purpose. Their purpose is to provide renewed liquidity to the business system. Think of it as the catharsis of the economic system. Recessions cleanse the system of marginal companies and transfer their resources to stronger more productive enterprises. They also force consumers to start saving more to pay-off some of their massive debts they have accumulated during the expansion.