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The Business Cycle

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Defining the Business Cycle

BusinessCycle-Waves of Creative Destruction

By Martin Armstrong

There are those that adamantly deny the existence of a Business Cycle for one simple reason; if a regular Business Cycle exists, then man and his government, driven by special interests, are incapable of manipulating its outcome. The entire foundation of Marxism was the recognition of the Business Cycle and the idea that it could be eliminated by confiscating all the wealth of the people. Even John Maynard Keynes (1883–1946) followed this basic tenet of Karl Marx (1818–1883) and assumed that government had a role it could play in preventing the Business Cycle from rising and falling. Yet in the midst of such adversity, what these ideas ignored is that man learns from his mistakes as an individual as well as a group. It has been through the Business Cycle that all advancement and thus economic evolution emerges. Joseph Schumpeter (1883–1950) called these Business Cycle events – Waves of Creative Destruction. Unless oil rises in price to excessively high price levels, alternative fuels will never be developed. There must be a viable economic foundation to open the door to whatever new alternative might exist. This becomes the economic evolution within society.


This assumption that man is even capable of altering the Business Cycle at will is the delusion of demigods. Paul Volcker, former Chairman of the Federal Reserve, expressed in his 1979 Rediscovery of the Business Cycle:

“Not much more than a decade ago, in what now seems a more innocent age, the ‘New Economics’ had become orthodoxy. Its basic tenet, repeated in similar words in speech after speech, in article after article, was described by one of its leaders as ‘the conviction that business cycles were not inevitable, that government policy could and should keep the economy close to a path of steady real growth at a constant target rate of unemployment. … By the early 1970s, the persistence of inflationary pressures, even in the face of mild recession, began to flash some danger signals; the responses of the economy to the twisting of the dials of monetary and fiscal policy no longer seemed quite so predictable. But it was not until the events of 1974 and 1975, when a recession sprung on an unsuspecting world with an intensity unmatched in the post-World War II period, that the lessons of the ‘New Economics’ were seriously challenged.”

Burns Arthur

Keynes-5Even the previous Chairman of the Federal Reserve Arthur Burns (1904-1987) shared the same view. Government with all its power and endorsement of John Maynard Keynes (1883-1946) who argued that the economy can be managed to eliminate the Business Cycle, has been unable to prevent recessions and economic booms.


Indeed, the Business Cycle is as regular as the four seasons for even weather is incorporated within it. As weather has fluctuated according to a 300-year cycle in the energy output of the sun, mankind has been driven hither and yon in search of better weather and food supply. Thus, migration throughout the world has also been a byproduct of the Business Cycle. Even if we look at the economic composition of society since the late 1700s, we can see how nothing remains stagnant but is always captured within the fluctuations of the Business Cycle.

CW-FORCETo a large extent, society was still 70% agrarian in major countries during the mid-19th century. By 1900, still about 41% of the civil work force was employed in agriculture, which fell to 3% finally by 1980. Consequently, one can neither manipulate the weather nor dictate to God what he prefers to see economically. Simply put, you cannot pass a law to prevent droughts or make it rain.


During the 19th century, there were great waves of innovation that certainly helped to bring about recoveries within the U.S. economy. Nonetheless, while these stages of the Industrial Revolution were unfolding to propel the economy out of the depths of recession or depression, money supply was also unpredictable. Because the monetary standard was gold at the time, this cause havoc with the economy for great waves of inflation were unleashed upon the population purely as a factor of new discovery. There was the 1849 Gold Rush is California. This was followed by the Australian Gold Rush where between 1851 and 1861, Australia produced one third of the world’s new gold supply. The silver discoveries in Colorado took place in 1864 and this eventually fueled the huge inflationary boom flooding the economy with silver dollars after 1878 that led to the Panic of 1893. Then in Alaska gold was discovered in large quantities in the Klondike on August 16, 1896. This created another great expansion of money supply. These were similar devastating economic booms and busts  to the great import of precious metals from the New World by Spain that sparked massive inflation for Europe during the 16th and 17th Centuries that resulted in the bankruptcy of Spain.


The Economic Confidence Model (ECM) is a refined theory of the Business Cycle by Martin Armstrong. The Business Cycle has been observed by many over the centuries and the driving mechanism is indeed complex, but it certainly incorporates many aspects from the repetitive forces of nature as in the changing seasons to the human passions of man that to a large extent result in the repetitive forces driven by the passions of man.


Everything is incorporated within the Business Cycle from weather to politics. Nothing moves in a straight line. Even your heart beats in a cycle. Nothing is free of a cycle as long as it lives.


If we look at the Roman Empire, we see the same cyclical forces at work. There is in fact no Empire, Nation, or City-State that has survived the ravages of time and circumstance for all societies are buried within a common grave.

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