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Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

addicted to oil, Alan Greenspan, asset allocation, backtesting, behavioural economics, Black-Scholes formula, book value, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, Everybody Ought to Be Rich, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Money creation, Myron Scholes, new economy, oil shock, passive investing, Paul Samuelson, popular capitalism, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, stock buybacks, stocks for the long run, subprime mortgage crisis, survivorship bias, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, uptick rule, Vanguard fund, vertical integration

Switching returns are defined as the returns to an investor who switches from stocks to bills a given number of months before (or after, if his or her predictions are not accurate) a business cycle peak and switches back to stocks a given num- CHAPTER 12 Stocks and the Business Cycle 215 ber of months before (or after) a business cycle trough. Buy-and-hold returns are defined as the returns from holding the market through the entire business cycle. Excess returns are defined as switching returns minus the returns from the buy-and-hold strategy.7 Over the entire period from 1802 through 2006, the excess returns are minimal over a buy-and-hold strategy if investors switch into bills exactly at the business cycle peak and into stocks exactly at the business cycle trough.

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In fact, investors switching into bills just one month after the business cycle peak and back into stocks just one month after the business cycle trough would have lost 0.6 percent per year compared to the benchmark buy-and-hold strategy. Interestingly, it is more important to be able to forecast troughs of the business cycle than it is peaks. An investor who buys stocks before the trough of the business cycle gains more than an investor who sells stocks an equal number of months before the business cycle peak. The maximum excess return of 4.8 percent per year is obtained by investing in bills four months before the business cycle peaks and in stocks four months before the business cycle troughs.

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-Based Companies 182 PART 3 HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 11 Gold, Monetary Policy, and Inflation 187 Money and Prices 189 The Gold Standard 191 The Establishment of the Federal Reserve 191 The Fall of the Gold Standard 192 Postdevaluation Monetary Policy 193 Postgold Monetary Policy 194 The Federal Reserve and Money Creation 195 How the Fed’s Actions Affect Interest Rates 196 Stocks as Hedges against Inflation 199 Why Stocks Fail as a Short-Term Inflation Hedge 201 Higher Interest Rates 201 Nonneutral Inflation: Supply-Side Effects 202 Taxes on Corporate Earnings 202 Inflationary Biases in Interest Costs 203 Capital Gains Taxes 204 Conclusion 205 Chapter 12 Stocks and the Business Cycle 207 Who Calls the Business Cycle? 208 Stock Returns around Business Cycle Turning Points 211 Gains through Timing the Business Cycle 214 How Hard Is It to Predict the Business Cycle? 216 Conclusion 219 CONTENTS CONTENTS xi Chapter 13 When World Events Impact Financial Markets 221 What Moves the Market? 223 Uncertainty and the Market 226 Democrats and Republicans 227 Stocks and War 231 The World Wars 231 Post-1945 Conflicts 233 Conclusion 235 Chapter 14 Stocks, Bonds, and the Flow of Economic Data 237 Economic Data and the Market 238 Principles of Market Reaction 238 Information Content of Data Releases 239 Economic Growth and Stock Prices 240 The Employment Report 241 The Cycle of Announcements 243 Inflation Reports 244 Core Inflation 245 Employment Costs 246 Impact on Financial Markets 246 Central Bank Policy 247 Conclusion 247 PART 4 STOCK FLUCTUATIONS IN THE SHORT RUN Chapter 15 The Rise of Exchange-Traded Funds, Stock Index Futures, and Options 251 Exchange-Traded Funds 252 Stock Index Futures 253 Basics of the Futures Markets 255 xii Index Arbitrage 257 Predicting the New York Open with Globex Trading 258 Double and Triple Witching 260 Margin and Leverage 261 Using ETFs or Futures 261 Where to Put Your Indexed Investments: ETFs, Futures, or Index Mutual Funds?

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Alan Greenspan, AOL-Time Warner, Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, currency risk, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, Glass-Steagall Act, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, it's over 9,000, John Bogle, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, machine readable, market bubble, mental accounting, Minsky moment, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, proprietary trading, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen, Tyler Cowen: Great Stagnation, uptick rule, Vanguard fund

Sector Allocation Around the World Private and Public Capital Conclusion PART III HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 14 Gold, Monetary Policy, and Inflation Money and Prices The Gold Standard The Establishment of the Federal Reserve The Fall of the Gold Standard Postdevaluation Monetary Policy Postgold Monetary Policy The Federal Reserve and Money Creation How the Fed’s Actions Affect Interest Rates Stock Prices and Central Bank Policy Stocks as Hedges Against Inflation Why Stocks Fail as a Short-Term Inflation Hedge Higher Interest Rates Nonneutral Inflation: Supply-Side Effects Taxes on Corporate Earnings Inflationary Biases in Interest Costs Capital Gains Taxes Conclusion Chapter 15 Stocks and the Business Cycle Who Calls the Business Cycle? Stock Returns Around Business Cycle Turning Points Gains Through Timing the Business Cycle How Hard Is It to Predict the Business Cycle? Conclusion Chapter 16 When World Events Impact Financial Markets What Moves the Market? Uncertainty and the Market Democrats and Republicans Stocks and War Markets During the World Wars Post-1945 Conflicts Conclusion Chapter 17 Stocks, Bonds, and the Flow of Economic Data Economic Data and the Market Principles of Market Reaction Information Content of Data Releases Economic Growth and Stock Prices The Employment Report The Cycle of Announcements Inflation Reports Core Inflation Employment Costs Impact on Financial Markets Central Bank Policy Conclusion PART IV STOCK FLUCTUATIONS IN THE SHORT RUN Chapter 18 Exchange-Traded Funds, Stock Index Futures, and Options Exchange-Traded Funds Stock Index Futures Basics of the Futures Markets Index Arbitrage Predicting the New York Open with Globex Trading Double and Triple Witching Margin and Leverage Tax Advantages of ETFS and Futures Where to Put Your Indexed Investments: ETFS, Futures, or Index Mutual Funds?

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FIGURE 15-1 Stock Prices, Earnings, Dividends, and Recessions 1871-2012 But this is no easy task. To make money by predicting the business cycle, one must be able to identify peaks and troughs of economic activity before they actually occur, a skill very few if any economists possess. Yet business cycle forecasting is a popular Wall Street endeavor not because it is successful—most of the time it is not—but because the rewards are so large if you can identify the turning point of the business cycle. WHO CALLS THE BUSINESS CYCLE? It is surprising to many that the dating of business cycles is not determined by any of the myriad government agencies that collect data on the economy.

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HOW HARD IS IT TO PREDICT THE BUSINESS CYCLE? If one could predict in advance when recessions will occur, the gains would be substantial. That is perhaps why billions of dollars of resources are spent trying to forecast the business cycle. But the record of predicting business cycle turning points is extremely poor. Stephen McNees, vice president of the Federal Reserve Bank of Boston, has done extensive research into the accuracy of economic forecasters’ predictions. He claims that a major factor in forecast accuracy is the time period over which the forecast was made, and it is precisely at business cycle turning points that the errors were “enormous.”9 Yet, as noted above, it is precisely these business cycle turning points that enable a forecaster to become a successful market timer.

The Marginal Revolutionaries: How Austrian Economists Fought the War of Ideas by Janek Wasserman

"World Economic Forum" Davos, Abraham Wald, Albert Einstein, American Legislative Exchange Council, anti-communist, battle of ideas, Berlin Wall, Bretton Woods, business cycle, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, different worldview, Donald Trump, experimental economics, Fall of the Berlin Wall, floating exchange rates, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, Gunnar Myrdal, housing crisis, Internet Archive, invisible hand, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liberal capitalism, low interest rates, market fundamentalism, mass immigration, means of production, Menlo Park, military-industrial complex, Mont Pelerin Society, New Journalism, New Urbanism, old-boy network, Paul Samuelson, Philip Mirowski, price mechanism, price stability, public intellectual, RAND corporation, random walk, rent control, road to serfdom, Robert Bork, rolodex, Ronald Coase, Ronald Reagan, Silicon Valley, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, union organizing, urban planning, Vilfredo Pareto, Washington Consensus, zero-sum game, éminence grise

Kaufmann and Voegelin saw great promise in the subjectivist approach for social theory, with Voegelin especially appreciative of the Austrian focus on the dynamism of human communities and the role of time in human affairs.44 Austrian School scholars revealed their intellectual breadth, especially in their embrace of international developments in economic thought. After a fifteen-month stint in the United States, Hayek published on US banking policy, as he began to make a name for himself in business cycle theory. In particular, he challenged the advisability of the US Federal Reserve’s discretionary banking policy, which was based on maintaining a stable price level to counteract the fluctuations of the business cycle. Hayek thought these policies were often mistimed and disruptive. Martha Stephanie Braun and Fritz Machlup wrote about British banking history and Knut Wicksell’s theories of neutral money, following in Mises’s footsteps.45 The new cohort of Austrians helped reawaken economic discussions in German-speaking lands after a fallow period occasioned by the Great War.

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In a scathing critique of economic forecasting, he rejected the possibility of prediction in macroeconomics and business cycle theory. He was the first of the younger Austrians to evince the skepticism about forecasting that became one of the school’s calling cards.54 Likely encouraged by Hayek and Morgenstern, the complete Geist-Kreis began attending Mises’s seminar, constituting half of the seminar’s number. The lines between the two gatherings blurred. Haberler and Machlup, who both entered Mises’s orbit at this time, displayed the elder’s influence in their earliest efforts. They also showed their growing knowledge of international economic trends regarding statistics, business cycles, and monetary theory.

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Mises and Hayek rejected the work outright, the latter finding it incoherent at best and rude at worst.21 Joseph Schumpeter also fought unsuccessfully against prevailing trends in economics in the name of a more precise science. His 1939 attempt, Business Cycles, met with shrugs. He intended to integrate economic theory, statistical analysis, and historical investigation into a comprehensive study of economic fluctuations during the age of capitalism, from 1789 to 1938. Business events could not be explained solely by economic laws, he argued. Statistical methods also could not yield a better understanding of business cycles without theory. To answer economic questions, Schumpeter turned to history and analysis. While this may sound like a far cry from the deductive approach of his fellow Austrians, it was not.

Globalists: The End of Empire and the Birth of Neoliberalism by Quinn Slobodian

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, Berlin Wall, bilateral investment treaty, borderless world, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, classic study, collective bargaining, David Ricardo: comparative advantage, Deng Xiaoping, desegregation, Dissolution of the Soviet Union, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, full employment, Garrett Hardin, Greenspan put, Gunnar Myrdal, Hernando de Soto, invisible hand, liberal capitalism, liberal world order, Mahbub ul Haq, market fundamentalism, Martin Wolf, Mercator projection, Mont Pelerin Society, Norbert Wiener, offshore financial centre, oil shock, open economy, pattern recognition, Paul Samuelson, Pearl River Delta, Philip Mirowski, power law, price mechanism, public intellectual, quantitative easing, random walk, rent control, rent-seeking, road to serfdom, Ronald Reagan, special economic zone, statistical model, Suez crisis 1956, systems thinking, tacit knowledge, The Chicago School, the market place, The Wealth of Nations by Adam Smith, theory of mind, Thomas L Friedman, trade liberalization, urban renewal, Washington Consensus, Wolfgang Streeck, zero-sum game

By finding the right aspects of economic life to capture and compile in numbers, would it be pos­si­ble not only to comprehend but also to forecast what Columbia University economist Wesley Clair Mitchell called in his foundational work from 1913 “the complicated pro­cesses by which seasons of business prosperity, crisis, depression, and revival come about in the modern world”?17 Although research into the business cycle began before the First World War, it boomed afterward. The U.S. government funded its study, and business 60 GLOBALISTS The spiral of decline in world trade. Monthly Report of the Austrian Business Cycle Research Institute, November 1933. cycle research institutes ­were established throughout Eu­rope and in the Soviet Union.18 One of the preoccupations of researchers was how to express the business cycle visually—­how to make the invisible market vis­i­ble. Techniques of illustrating the business cycle had originated with private ser­ vices for investors.

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As one historian has observed, the 1920s ­were a time when economics became understood as a domain of technical expertise beyond politics.28 The chart was an accessory in this shift. The suffering and thriving national economy was made vis­i­ble in the line of the chart, and the root ­causes of individuals’ pain or prosperity could be seen too. BUSINESS CYCLE RESEARCH AND THE MODERN STATE Institutes responsible for studying the business cycle became standard features of the modern state between the two world wars. Most Eu­ro­pean 64 GLOBALISTS states had their own business cycle institute by the time of the ­Great Depression, and scholars have shown how the League began to export this model of research into Asia by the 1930s.29 One of the most impor­ tant centers worldwide was the National Bureau of Economic Research (NBER) in the United States, which took up a special role of providing economic advice during Herbert Hoover’s administration.

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He also met Charles Bullock, the director of the Harvard Economic Ser­v ice, who recalled being favorably impressed by the young Hayek.31 Hayek brought the idea of business cycle research back to Austria with him.32 In his words, he imported “from Amer­i­ca a new idea of ­great predictions.”33 He wrote to Mitchell in 1926 that his efforts then embodied “some of the slowly ripening fruits of my sojourn in the United States.”34 Mises and Hayek led the campaign to establish a permanent home for business cycle research in Vienna. “In a time when the entire civilized world makes decisions and arrangements on the basis of the knowledge of economic and business cycle institutes,” they wrote, Austria “would demonstrate to the world e­ ither a shameful, indolent backwardness to its own disadvantage or a mistrust-­producing insincerity and secretiveness that would surely place its creditworthiness in question.”35 To be against the institute, they wrote, would be to be “against pro­gress.” ­

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Cyclical factors Yield curve shape is closely related to (interrelated) business cycles, credit cycles, and monetary policy cycles. YC inversions predict recessions as defined by the National Bureau of Economic Research, but the YC tends to steepen fast during recessions and peak near business cycle troughs. A steep YC coincides with a high unemployment rate (correlation +0.45) and predicts fast economic growth. YC countercyclicality may explain its ability to predict near-term bond and stock returns: high required premia near business cycle troughs result in a steep YC, while low required premia near business cycle peaks result in an inverted YC (see Figure 9.11).

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The evidence in this chapter may also help in understanding rational risk premia or procyclical sentiment, and it may give some clues for market timing, style timing, or factor timing—suggesting good and bad environments for various asset classes and dynamic strategies. 26.1 TYPICAL BEHAVIOR OF REALIZED RETURNS AND EX ANTE INDICATORS THROUGH THE BUSINESS CYCLE Business cycles describe broad fluctuations in aggregate economic activity. The U.S. government considers the National Bureau of Economic Research (NBER) to be the final arbiter of the U.S. business cycle. Evaluating a variety of economic series, the NBER’s Business Cycle Committee officially dates—often after a significant delay—the peaks and troughs of economic activity. (I assume that the last recession ended in July 2009.)

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Among more journalistic definitions, the most popular is to call two consecutive quarters of negative real GDP growth a recession. Business cycles in other countries are even more loosely defined. Business cycles are not regular (e.g., recessions became shorter and shallower after World War II). Yet they share common features (e.g., expansions almost always last longer than contractions). Why do business cycles exist at all? We know that they have existed for millennia—recall the seven fat years and seven lean years in the Old Testament. In an agricultural society, such cycles may have reflected weather and harvest fortunes; in an industrial society, business cycles may be caused by technology shocks or by demand fluctuations, which are often related to changes in credit conditions.

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

airport security, Alan Greenspan, banking crisis, Bear Stearns, Bretton Woods, British Empire, business cycle, collective bargaining, complexity theory, creative destruction, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, Gunnar Myrdal, if you build it, they will come, Isaac Newton, Joseph Schumpeter, Kickstarter, liquidationism / Banker’s doctrine / the Treasury view, means of production, military-industrial complex, Mont Pelerin Society, mortgage debt, New Journalism, Nixon triggered the end of the Bretton Woods system, Northern Rock, Paul Samuelson, Philip Mirowski, Phillips curve, price mechanism, public intellectual, pushing on a string, road to serfdom, Robert Bork, Robert Solow, Ronald Reagan, Simon Kuznets, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, Tyler Cowen, War on Poverty, We are all Keynesians now, Yom Kippur War

For members of the Austrian School, the business cycle was thought to be set in motion by the difference between the natural and the market rate of interest. The problem for central bankers was that it was impossible to determine exactly what the natural interest rate was, so they inevitably set the market rate of interest at an inappropriate level, thereby setting off the booms and busts of the business cycle. Hayek believed that by staying true to the natural interest rate, money in an economy could be made “neutral” and that fluctuations of the business cycle in those circumstances would be caused by changes in other factors, such as the development of new products and new discoveries.

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While Mises tried to find Hayek a government-funded research post, Hayek began writing an account of what he had learned in America, reporting that cheap credit there was leading to a boom in capital goods industries that he believed would prove unsustainable. He extrapolated on the nature of the business cycle, what he called “industrial fluctuations,” which would become essential to his contribution to economic theory and the battleground on which he would skirmish with Keynes. To become a paid university lecturer, Hayek had to publish a piece of original work. To this end he began assembling facts and arguments for what he hoped would be an important contribution to the theory of money. This, too, would bring him into conflict with Keynes. While in America, Hayek concluded that the business cycle—in which an economy regularly switches between a period of high activity and prosperity to a period of business bankruptcies and unemployment—was a worthy subject for study.

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Having become familiar with the tools of empirical research that were in widespread use in America, though not yet taken up by European economists, such as time and motion studies of workers’ behavior and recording the output of factories and machines, he hoped to establish an institute in which he could study the business cycle in detail. Hayek put the idea to Mises, who was skeptical to the point of being dismissive. Mises did not believe economics could be treated as a natural science, and he thought that attempts to record the elements of a business cycle would be misleading and pointless. Meanwhile, in Britain, Keynes’s mind was moving fast. He was preparing his Guardian pieces for publication as a book, and in the months before publication in December 1923 he began work on a new book about the role of money in society, A Treatise on Money.

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

airline deregulation, Alan Greenspan, Albert Einstein, bank run, barriers to entry, behavioural economics, Bretton Woods, business cycle, butterfly effect, capital controls, carbon tax, Carmen Reinhart, central bank independence, collective bargaining, congestion pricing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price elasticity of demand, price stability, prisoner's dilemma, profit maximization, public intellectual, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Vilfredo Pareto, Washington Consensus, white flight

As I’ve highlighted, they are best thought of as a scaffolding. The Theory of Business Cycles and Unemployment Ever since Paul Samuelson’s doctoral dissertation, published in 1947 as Foundations of Economic Analysis, economics has been split between microeconomics and macroeconomics. The domain of microeconomics is price theory, the ideas covered in the previous section. Macroeconomics deals with the behavior of economic aggregates—inflation, total output, and employment, in particular. Macroeconomics takes as its central questions the up-and-down fluctuations in economic activity that economists call the “business cycle.” Here, too, there has been no shortage of grand theorizing.

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The classical economists’ approach to the business cycle was typified by their view that the macroeconomy, to use the term anachronistically, was self-stabilizing. Unemployment would eventually be eliminated as the shortage of jobs brought wages down. A burst of inflation similarly would be cured on its own: the resultant loss in international competitiveness would produce a trade deficit, financed by the outflow of gold abroad, which in turn would lead to a corrective reduction in the domestic money supply. These supposedly automatic adjustment mechanisms ensured that the business cycle, inflation, and unemployment would all take care of themselves.

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., 1n Boulding, Kenneth, 11 bounded rationality, 203 Bowles, Samuel, 71n Brazil: antipoverty programs of, 4 globalization and, 166 Bretton Woods Conference (1944), 1–2 Britain, Great, property rights and, 98 bubbles, 152–58 business cycles, 125–37 balanced budgets and, 171 capital flow in, 127 classical economics and, 126–27, 129, 137 inflation in, 126–27, 133, 135, 137 new classical models and, 130–34, 136–37 butterfly effect, 39 California, University of: at Berkeley, 107, 136, 147 at Los Angeles, 139 Cameron, David, 109 capacity utilization rates, 130 capital, neoclassical distribution theory and, 122, 124 capital flow: in business cycles, 127 economic growth and, 17–18, 114, 164–67 globalization and, 164–67 growth diagnostics and, 90 speculation and, 2 capitalism, 118–24, 127, 144, 205, 207 carbon, emissions quotas vs. taxes in reduction of, 188–90, 191–92 Card, David, 57 Carlyle, Thomas, 118 carpooling, 192, 193–94 cartels, 95 Cartwright, Nancy, 20, 22n, 29 cash grants, 4, 55, 105–6 Cassidy, John, 157n Central Bank of India, 154 Chang, Ha-Joon, 11 chaos theory, butterfly effect and, 39 Chicago, University of, 131, 152 Chicago Board of Trade, 55 Chile, antipoverty programs and, 4 China, People’s Republic of, 156, 163, 164 cigarette industry, taxation and, 27–28 Clark, John Bates, 119 “Classical Gold Standard, The: Some Lessons for Today” (Bordo), 127n classical unemployment, 126 climate change, 188–90, 191–92 climate modeling, 38, 40 Cochrane, John, 131 coffee, 179, 185 Colander, David, 85 collective bargaining, 124–25, 143 Colombia, educational vouchers in, 24 colonialism, developmental economics and, 206–7 “Colonial Origins of Comparative Development, The” (Acemoglu, Robinson, and Johnson), 206–7 Columbia University, 2, 108 commitment, in game theory, 33 comparative advantage, 52–55, 58n, 59–60, 139, 170 compensation for risk models, 110 competition, critical assumptions in, 28–29 complementarities, 42 computable general equilibrium (CGE) models, 41 computational models, 38, 41 computers, model complexity and, 38 Comte, Auguste, 81 conditional cash transfer (CCT) programs, 4, 105–6 congestion pricing, 2–3 Constitution, U.S., 187 construction industry, Great Recession and, 156 consumers, consumption, 119, 129, 130, 132, 136, 167 cross-price elasticity in, 180–81 consumer’s utility, 119 contextual truths, 20, 174 contingency, 25, 145, 173–74, 185 contracts, 88, 98, 161, 205 coordination models, 16–17, 42, 200 corn futures, 55 corruption, 87, 89, 91 costs, behavioral economics and, 70 Cotterman, Nancy, xiv Cournot, Antoine-Augustin, 13n Cournot competition, 68 credibility, in game theory, 33 “Credible Worlds, Capacities and Mechanisms” (Sugden), 172n credit rating agencies, 155 credit rationing, 64–65 critical assumptions, 18, 26–29, 94–98, 150–51, 180, 183–84, 202 cross-price elasticity, 180–81 Cuba, 57 currency: appreciation of, 60, 167 depreciation of, 153 economic growth and, 163–64, 167 current account deficits, 153 Curry, Brendan, xv Dahl, Gordon B., 151n Darwin, Charles, 113 Davis, Donald, 108 day care, 71, 190–91 Debreu, Gerard, 49–51 debt, national, 153 decision trees, 89–90, 90 DeLong, Brad, 136 democracy, social sciences and, 205 deposit insurance, 155 depreciation, currency, 153 Depression, Great, 2, 128, 153 deregulation, 143, 155, 158–59, 162, 168 derivatives, 153, 155 deterrence, in game theory, 33 development economics, 75–76, 86–93, 90, 159–67, 169, 201, 202 colonial settlement and, 206–7 institutions and, 98, 161, 202, 205–7 reform fatigue and, 88 diagnostic analysis, 86–93, 90, 97, 110–11 Dijkgraaf, Robbert, xiv “Dirtying White: Why Does Benn Steil’s History of Bretton Woods Distort the Ideas of Harry Dexter White?”

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, Glass-Steagall Act, income inequality, inflation targeting, It's morning again in America, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, low interest rates, market bubble, market fundamentalism, mass immigration, megaproject, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, Nixon triggered the end of the Bretton Woods system, private sector deleveraging, quantitative easing, reserve currency, risk free rate, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Balance of payments: asset prices and currencies and foreign central banks’ creation of fiat money and foreign exchange reserves global imbalances government finance and quantitative easing and U.S. and foreign exchange reserves Banking sector: commercial banks, credit creation, and decline in liquidity reserves commercial banks’ credit structure current financial health of in Mitchell’s theory of business cycles New Great Depression scenarios and Bank of America Baruch, Bernard Bear Stearns Bernanke, Ben: global savings glut theory of on Milton Friedman policy responses to credit expansion and New Depression Bodin, Jean Bonds: in diversified portfolio effect of stimulus on quantitative easing and Bush, George W. Business cycles, theories of Business Cycles: The Problem and Its Setting (Mitchell) Capital adequacy ratio (CAR) Capitalism, evolution to credit-based, government-directed economic system China: fiat money creation and foreign exchange reserves New Great Depression scenarios and possibility of end to buying of U.S. debt Citibank Commercial banks.

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See also Inflation and deflation consequences of policy options to prevent scenarios leading to Nixon, Richard Obama, Barack Oil prices. See Energy and energy prices Overproduction, in Mitchell’s theory of business cycles Paul, Ron People’s Bank of china (PBOC) Perot, Ross Primary dealer credit facility (PDCF) Private sector debt: contraction of effect of stimulus on Production incomes, in Mitchell’s theory of business cycles Profits: credit expansion’s effect on in Mitchell’s theory of business cycles Property rights, debt-deflation and Protectionism: inflation and New Great Depression scenarios and Purchasing Power of Money: Its Determination and Relation to Credit, Interest and Crises, The (Fisher) Quantitative easing: asset prices and balance of payments and beginning of QE1 QE2 QE3 Quantity theory of credit banking sector crisis and monetarism and principles of quantity theory of money contrasted uses of Quantity theory of money Rational investment option, for U.S.

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Consequently, businesses stop borrowing and investing, so the volume of trade (T) contracts again. This is essentially a clear and simple explanation of the business cycle, or the credit cycle, as it is sometimes called. While the transition period lasts, the increase in the volume of trade (T) produces a temporary increase in PT (real GDP), followed by a bust in which both the volume of trade (T) and real GDP contract again. At the end of the process, GDP is only higher in nominal terms because of the increase in the price level (P ). Fisher was convinced that the duration of the transition period (or business cycle) would always be short-lived because there would always be a limit as to how much the quantity of money (M) could expand.

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, low-wage service sector, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Ibid. 19.  Ibid., p. 271. 20.  Nicolò De Vecchi, 2006, ‘Hayek and the General Theory ’, European Journal of the History of Economic Thought, 13(2), pp. 233–58. 21.  Schumpeter, Business Cycles, vol. I, p. vi. 22.  Schumpeter, Capitalism, p. 83. 23.  Schumpeter, Business Cycles, vol. I, pp. 104–7. 24.  Schumpeter, Capitalism, pp. 93, 99–100. 25.  Ibid., pp. 99–100. 26.  Schumpeter, Business Cycles, vol. I, pp. 243–4. 27.  Ibid., pp. 100–102. 28.  Schumpeter, Capitalism, pp. 167, 170, 190–91. 29.  Ibid., p. xiv. 30.  Joseph Schumpeter, 1955, ‘Social Classes in an Ethnically Homogeneous Environment’, trans.

…

Joseph Schumpeter, 1928, ‘The Instability of Capitalism’, Economic Journal, 38, pp. 361–86. 32.  Schumpeter, Business Cycles, vol. I, pp. 103–4. 33.  World Bank, 1993, The East Asian Miracle: Economic Growth and Public Policy, Washington, DC: World Bank. 34.  Schumpeter, ‘The Instability of Capitalism’, pp. 364–6. 35.  Joseph Schumpeter, 1934, The Theory of Economic Development, Cambridge, MA: Harvard University Press, pp. 75–8. 36.  Schumpeter, Business Cycles, vol. I, pp. 102–3. 37.  Schumpeter, Business Cycles, vol. II, pp. 907–1033. 38.  Schumpeter, Economic Development, pp. 75–8. 39.  Ibid., p. 66. 40.  

…

This was the book that made his name and it was to become one of the classics in economics. An English edition was later published by Harvard University Press in 1934 with the subtitle: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. The ideas in this very early work formed the core of Schumpeterian economics, which were later developed in Business Cycles (1939) and the most popular of his books, Capitalism, Socialism and Democracy (1942). Schumpeter spent five months lecturing in America, which raised his profile, but soon after his return home the First World War broke out. Gladys had returned to England so was cut off from her husband.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, backtesting, bank run, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, currency risk, debt deflation, disinformation, distributed ledger, diversification, financial engineering, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, junk bonds, labor-force participation, Long Term Capital Management, low interest rates, Lyft, margin call, market bubble, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, proprietary trading, public intellectual, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk free rate, risk/return, sharing economy, short selling, short squeeze, sovereign wealth fund, stock buybacks, tail risk, TikTok, Uber and Lyft, uber lyft, yield curve

Once market participants believe that it is more likely that the returns from carry will accrue to them, while losses will be protected or spread around the economy as a result of central bank and government action, then they will resume carry trade activity. A new carry bubble can begin. 8 Carry, Financial Bubbles, and the Business Cycle The Business Cycle in the Carry Regime There have always been different theories about the business cycle, the cycle of recovery, boom, and recession that economies typically experience. A conventional perspective would be that as an economic expansion matures, the economy’s unused capacity is gradually diminished and the “output gap” narrows. Wage growth tends to pick up as unemployment falls.

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The growth in the economy—which is ultimately mostly reversible—is also the result of carry, which produces high profit share and tends to bring GDP from the future, as described in the previous chapter. Carry, Financial Bubbles, and the Business Cycle 127 In the world of extreme carry, high financial asset prices do not guarantee that the economy is “good for now.” The carry crash can occur suddenly—at the point when leverage has reached too great an extreme to be sustainable— and the carry crash means an economic crash and almost certainly a financial and economic crisis. The concept of the business cycle no longer describes a somewhat smooth pattern of oscillations in the economy over time; rather it is a progression of steady but unspectacular growth interrupted by violent shocks—exactly like the pattern of carry trade returns described in this book.

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See Bank of Japan Brazil, 19, 39, 55n6, 65–66 current account, 31 Brazilian real, 11, 30, 66 Bretton Woods system, 218 Brownian noise, 97, 97f Bruno, Valentina, 80–81 bubble-boom economies, carry bubble conditions and, 39 business cycle carry and global, 2 carry bubbles and, 127–134 carry crashes and, 127–134 carry influence on, 57, 69 carry regime and, 125–127 money supply and, 125–126 Caballero, Ricardo, 59 call options, 146–147 Cambridge Associates, 79 capital asset pricing model, 99 Capital in the Twenty-First Century (Piketty), 219 221 222 capital inflows, Australia, 40, 40f, 42 capitalism, 195, 219, 220 carry central banks’ role in, 5–8 compensation incentives for, 70–72 corporate use of, 80–83 as cumulative advantage, 181–184 defining, 2 as flow from weak to strong, 179–181 global business cycle and, 2 hedge funds as agents of, 72–73 insidious structural aspects of, 200–205 leverage importance to, 70–72 lost opportunity to lean against, 220 as luck compounded, 184–186 monetary policy and, 3 as naturally occurring phenomenon, 88 necessary amounts of, 174 omnipresence of, 190–191 as power, 191–192 as rent-seeking, 175–177 rise of, 1 volatility, 86 carry bubbles, 6, 7 business cycle and, 127–134 credit bubbles and, 37–38, 41 credit demand and, 114 disguised, 134–140 economic indicators distorted by, 44–45 economic problems obscured by, 44 inflation and, 39 monetary conditions and, 39 nonmonetary assets and, 169 Ponzi schemes and, 140–143 as risk mispricing, 142 Turkey, 42–46 carry crashes, 6 Asian financial crisis and, 23–25 bailouts limiting losses from, 203 business cycle and, 127–134 carry trade returns and, 36 deflation and, 7, 170 deflation shock and, 121–124 in emerging economies, 201 incentive changes and, 84 inevitability of, 34–35, 108 leverage and, 96–98 liquidity and, 128 money supply and, 122–123 INDEX of 1998, 25–26 Turkey, 42–46 Turkish lira, of 2018, 45 of 2008, 30, 31 Volmageddon, 98, 161 yen melt-up and, 23–24 carry portfolios backtesting, 65–67 BIS data comparison with, 63, 63t constructing, 49–50 lessons from historical study of, 64–65 losses in, 51–56, 54f carry regime, 2 anti-carry regime similarity to, 173–175 asset prices and, 204 business cycle and, 125–127 central bank policies and, 86–89, 107, 208, 210 central bank power and, 123 central banks and collapses of, 215–216 central banks weakened by, 7 debt levels and, 168 defining, 107–108 deflation and, 113–121, 203, 210, 213 development of, 127, 134 economic growth and, 209 economic imbalances from, 201 financial market structure and, 7 fragility of, 201 monetary equilibrium and, 169 monetary growth and, 169 monetary perspective on, 168–170 money in, 108–113 nonmonetary assets and, 112, 114, 122 resource allocation and, 114–115 risk mispricing and, 134–140 S&P 500 importance to, 86–87, 87f theoretical alternative to, 166–168 vanishing point and, 116, 195, 209–210 volatility signs of ending, 214–218 carry trade.

The Accidental Theorist: And Other Dispatches From the Dismal Science by Paul Krugman

"World Economic Forum" Davos, Alan Greenspan, Bonfire of the Vanities, Bretton Woods, business cycle, carbon tax, clean water, collective bargaining, computerized trading, corporate raider, declining real wages, floating exchange rates, full employment, George Akerlof, George Gilder, Home mortgage interest deduction, income inequality, indoor plumbing, informal economy, invisible hand, It's morning again in America, Kenneth Arrow, knowledge economy, life extension, new economy, Nick Leeson, paradox of thrift, Paul Samuelson, plutocrats, price stability, rent control, Robert Solow, Ronald Reagan, Silicon Valley, trade route, very high income, working poor, zero-sum game

Part 4 Delusions of Growth Few subjects in economics are as contentious as the business cycle—those fluctuations of output and unemployment around the long-run upward trend. A generation ago economists were all pretty much agreed on what caused business cycles. Then, partly as a result of “stagflation”—the unexpected and unpleasant combination of inflation and unemployment that emerged in the 1970s—but mainly as a result of differences in methodological tastes, economists studying the business cycle divided into rival factions. Some argued for an updated version of the old, mainly Keynesian approach; others wanted to reject it entirely. The great business cycle theory wars did huge damage to the prestige of economics as a profession; they also created a sense that nobody knew anything, which opened the door for various crank doctrines—most notably supply-side economics.

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they’re that country next to us) can attest that the nineties have by no means been always and everywhere as placid as the last few years in the United States. Moreover, we’ve been here before: Near the end of another long recovery, in the late 1960s, pronouncements that the business cycle was dead were just as prevalent as they are today. Why does the business cycle persist? Because, as the bumper stickers don’t quite say, stuff happens: The world refuses to stay put, and policy is always playing catch-up. To look at the causes of booms and slumps since the last time the business cycle was declared dead is to be awed at the sheer variety of curve balls history manages to throw at us. Who in 1969 imagined that a recession could be triggered by a war in the Middle East—let alone a fundamentalist revolution in Iran?

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And because the problems are new, we will handle them badly, and the business cycle will endure. But this is not a message business pundits want to hear; and for them Fischer’s book is the perfect answer. Of course, they can now say, the business cycle has been with us for the last 150 years—but the long view tells us that while instability is the norm while you are passing through a price revolution, it is smooth sailing once you pass through the crisis and reach the new “equilibrium.” And guess what—we have just arrived at the promised land. But the modern business cycle bears no more resemblance to the economic fluctuations that afflicted preindustrial Europe than NATO does to the Holy Roman Empire.

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

Ibid, p. 225. 18. Ibid. 19. Ibid., p. 271. 20. Nicolò De Vecchi, 2006, ‘Hayek and the General Theory’, European Journal of the History of Economic Thought, 13(2), pp. 233–58. 21. Schumpeter, Business Cycles, vol. I, p. vi. 22. Schumpeter, Capitalism, p. 83. 23. Schumpeter, Business Cycles, vol. I, pp. 104–7. 24. Schumpeter, Capitalism, pp. 93, 99–100. 25. Ibid., pp. 99–100. 26. Schumpeter, Business Cycles, vol. I, pp. 243–4. 27. Ibid., pp. 100–102. 28. Schumpeter, Capitalism, pp. 167, 170, 190–91. 29. Ibid., p. xiv. 30. Joseph Schumpeter, 1955, ‘Social Classes in an Ethnically Homogeneous Environment’, trans.

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Joseph Schumpeter, 1928, ‘The Instability of Capitalism’, Economic Journal, 38, pp. 361–86. 32. Schumpeter, Business Cycles, vol. I, pp. 103–4. 33. World Bank, 1993, The East Asian Miracle: Economic Growth and Public Policy, Washington, DC: World Bank. 34. Schumpeter, ‘The Instability of Capitalism’, pp. 364–6. 35. Joseph Schumpeter, 1934, The Theory of Economic Development, Cambridge, MA: Harvard University Press, pp. 75–8. 36. Schumpeter, Business Cycles, vol. I, pp. 102–3. 37. Schumpeter, Business Cycles, vol. II, pp. 907–1033. 38. Schumpeter, Economic Development, pp. 75–8. 39. Ibid., p. 66. 40.

…

This was the book that made his name and it was to become one of the classics in economics. An English edition was later published by Harvard University Press in 1934 with the subtitle: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle. The ideas in this very early work formed the core of Schumpeterian economics, which were later developed in Business Cycles (1939) and the most popular of his books, Capitalism, Socialism and Democracy (1942). Schumpeter spent five months lecturing in America, which raised his profile, but soon after his return home the First World War broke out. Gladys had returned to England so was cut off from her husband.

Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray, Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, asset allocation, Atul Gawande, backtesting, beat the dealer, Black Swan, book value, business cycle, butter production in bangladesh, buy and hold, capital asset pricing model, Checklist Manifesto, cognitive bias, compound rate of return, corporate governance, correlation coefficient, credit crunch, Daniel Kahneman / Amos Tversky, discounted cash flows, Edward Thorp, Eugene Fama: efficient market hypothesis, financial engineering, forensic accounting, Henry Singleton, hindsight bias, intangible asset, Jim Simons, Louis Bachelier, p-value, passive investing, performance metric, quantitative hedge fund, random walk, Richard Thaler, risk free rate, risk-adjusted returns, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical model, stock buybacks, survivorship bias, systematic trading, Teledyne, The Myth of the Rational Market, time value of money, transaction costs

By “normalizing” earnings, Graham sought to adjust for the impact of the business cycle, which pushes earnings up in the boom and down in the bust. The rationale is that the extremes found at the peak and trough of the business cycle do not represent the “normal” earning power of the business, which is likely lower than at the peak and higher than at the trough. Earnings tend to be mean reverting, so we need to normalize the extremes to make them less attractive at the peak and more attractive at the trough. We can achieve this taking an average of earnings over the business cycle. We can't know how long a business cycle will last, so Graham recommended using an average of between 5 and 10 years.

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A sample of stocks with high returns will contain few with a genuine franchise, and many at the peak of the business cycle. Luck and competition will act to drive the high returns on capital to the cost of capital. Teasing out the genuine franchises from the peaking businesses is no easy task. Stocks that cannot maintain high returns over the business cycle do not possess a franchise. We can make an argument that stocks that have maintained high returns over the long term may possess a franchise. Stocks with high, stable returns maintained over the business cycle have demonstrable persistence, and are therefore good candidates for franchises.

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For this reason, return on capital is highly mean reverting. We propose several methods to deal with the high rate of mean reversion in return on capital. First, we seek stocks with a franchise proven over a business cycle. Our CFOA measure seeks to identify stocks that generate masses of cash after capital investments over an average business cycle. The eight-year geometric mean of ROA and ROC measures seek stocks that earn consistently high returns on capital over the business cycle. These metrics are intuitive and identify stocks that we would commonly assume to possess a franchise. Firms possessing a franchise will also maintain growing, or high, stable profit margins.

Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, Japanese asset price bubble, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, low interest rates, market bubble, Meghnad Desai, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Post-Keynesian economics, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

For an overall view across individual countries see Kindleberger, C.P. 7 But by late 1960s the long boom had lasted a long time and economists were talking about the end of business cycles. See Bronfenbrenner (1969) Is the Business Cycle Obsolete? References Adelman, F. and Adelman, I. (1959) ‘The dynamic properties of the Klein-Glodbeger Model’, Econometrica, XXVII, October. Allen, F. and Gale, D. (2003) ‘Asset price bubbles and monetary policy’, in Meghnad Desai and Yahia Said (eds), Global Governance and Financial Crises, Routledge, London. Financial crises and global governance 17 Baranzini, M. and Cencini, A. (1996) Inflation and Unemployment, Routledge, London. Barro, R. (1989) Modern Business Cycle Theory, Basil Blackwell, Oxford.

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The one certainty is that the banks holding the paper of bankrupt firms will suffer delay and perhaps a serious loss on collection. In other words, panics are an integral part of the business cycle. Asset price bubbles and monetary policy 31 Gorton (1988) conducts an empirical study of the panics that occurred in the United States during the National Banking Era (1865–1914) to differentiate between the “sunspot” view and the business-cycle view of banking panics. He finds evidence which is consistent with the view that banking panics are related to the business cycle and which is difficult to reconcile with the notion of panics as “random” events. The five worst recessions were accompanied by panics.

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In the new century, stock markets in G7 countries again witnessed a prolonged decline with widespread failures in the dot.com sector. Events of September 11, 2001 had less impact than the news of accounting malpractice at Enron and World.com. While during the 1990s there was talk of a new paradigm and abolition of the business cycle (as indeed happens in every long boom), by 2002 there was a widespread fear of a double-dip recession in the USA or even a depression. The business cycle was back with us, alive and well. The questions raised during the Asian crisis in those fifteen months between June 1997 and October 1998 and indeed since then in the most recent recession show that the issue of crises and cycles will not go away.

Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

Alan Greenspan, availability heuristic, behavioural economics, Berlin Wall, bitcoin, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, Cass Sunstein, choice architecture, cognitive bias, collapse of Lehman Brothers, Corn Laws, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, double helix, endogenous growth, endowment effect, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, fixed income, Ford Model T, full employment, hindsight bias, income inequality, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, liquidity trap, loss aversion, mass immigration, means of production, mental accounting, Myron Scholes, paradox of thrift, Pareto efficiency, Paul Samuelson, Post-Keynesian economics, price mechanism, pushing on a string, quantitative easing, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, school vouchers, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Toyota Production System, trade route, transaction costs, unorthodox policies, Vilfredo Pareto, women in the workforce

Over that period he developed ideas on a range of subjects. But four areas stand out as having an importance and influence that have continued beyond his lifetime. These are: • an explanation of the business cycle; • the subsequent battle royal with Keynes; • the role of prices in communicating knowledge; • his opposition to central state planning on both a philosophical and economic basis. Chapter 6 • Friedrich Hayek123 Boom and bust/Squaring the business cycle As a free-market economist Hayek subscribed to the view set out by Adam Smith that the economy was driven by the collective power of thousands or millions of decisions by individual consumers, shopkeepers and factory owners.

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But if that were always the case at every moment in time there would never be a hiccough in growth. So how can we explain that? Hayek could see that economies did not follow a straight line but moved around in swings of boom and bust. His business cycle theory was based on the idea of a ‘natural rate of interest’ – the rate at which savings should equal investment. At this point the economy would be in equilibrium. At different times in the business cycle the market rate of interest – the cost of borrowing that people use – either rises above or falls below the natural rate and the economy moves out of equilibrium. Hayek could see that economies did not follow a straight line but moved around in swings of boom and bust.

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Index A Theory of Moral Sentiments (Smith, 1759) 2, 5–6 Adelman, Irma 110 American Economic Association 170 An Inquiry into the Nature and Causes of the Wealth of Nations see The Wealth of Nations anarchism 156 apartheid system in South Africa 199 Ariely, Dan 234 Arrow, Kenneth 191, 213 AT&T 22 austerity versus stimulus debate 43–4, 140–1 Austrian School of Economics 121–2 autarky concept 184 bank bailouts in the financial crisis 162 Bank of England 161 Barro, Robert 43 Barro-Ricardo equivalence 43–4 Becker, Gary (1930– ) 193–216 approach to human behaviour 212–15 building human capital 200–2, 210 early life and influences 195–7 economic perspective on discrimination 196–7, 198–9 Economics of Discrimination (1957) 196–7, 198–9 economics of the family 213–15 family decision making 203–6 key economic theories and writings 197–212 long-term impact 212–15 new home economics 203–6 Nobel Prize (1992) 194, 195–6 on crime and punishment 207–10 on drug addiction 210–12, 215 rational choice model 197, 212– 15, 216 verdict 215–16 Becker–Posner Blog 215 behavioural economics 218–19, 233–6 Bentham, Jeremy 31, 181 Bergmann, Barbara 206 Bergson, Abram 182 Bergson–Samuelson social welfare function 182–3 Bernanke, Ben 77, 159, 162 Bernoulli, Daniel 229 bias in decision making 222–5 in financial decision making 225–32 Bitcoin currency 138 Black, Fischer 187 Blinder, Alan 215 Bloomsbury Group 94 Blunt, Anthony 94 boom and bust cycles see business cycles Bretton Woods agreement 95, 108–9 Brown, Gordon 3, 42 Burgess, Guy 94 Burns, Arthur F. 147 Bush, George H.W. 139 business cycles 57, 65 Hayek’s explanation 123–6 Samuelson’s oscillator model 174–5 Butler, Eamonn 162 Cambridge School of economics 74, 86 Cambridge spy ring 94 capital flow controls 113 capital-intensive goods, effects of increase in wages 33 capitalism exploitation of the working class (Marx) 56–8, 62–3 Index239 ‘fictitious capital’ concept (Marx) 62 seeds of its own downfall (Marx) 56–8, 61–3 capitalist production process (Marx) 54–6 Carlyle, Thomas 33 cartels evil of 10–11 regulation to prevent 21–2 central banks control of economic activity 161 over-expansion of credit 123–4 central state planning, Hayek’s opposition to 134–6, 140 certainty effect 229, 230 ceteris paribus approach to economic analysis 79–80 Chapman, Bruce 19 Chicago School of economic thought 146, 160, 194 China savings and investment imbalance with the US 113 trade imbalance with the US 45 choice architecture 234 Churchill, Winston 98 classical economics 40, 54 Coase, Ronald 73 cognitive biases (Kahneman) 222–5 communism 19, 50 Communist Manifesto (Marx and Engels) 52, 58–61 company bailouts in the financial crisis 162 comparative advantage 35–8, 183–4 complex adaptive systems, science of 138 complex financial products 61–2, 187 computer-games-based money 138 confirmation bias 227 consumer demand marginal rate of substitution 180 revealed preference theory 180–1 consumption smoothing concept 149, 163 Corn Laws, attack by Ricardo 33–5 costs of production, relationship to value 75–7 credit expansion, as a driver of boom and bust cycles 123–4 crime and punishment, views of Becker 207–10 Darling, Alistair 112 Das Kapital (Marx) 52, 53–4, 59–61, 62, 67–8 decision making biases and errors in financial decisions 225–32 heuristics and bias in 222–5 Prospect Theory (Kahneman) 228–32, 234 under risk 228–32 demand side economics 127 depression Keynesian interventionist view 92–3, 94, 105–6 see also Great Depression (1930s) dialectic style of analysis 52, 54 Diamond, Peter 179 diminishing marginal utility 82 discrimination economic perspective of Becker 196–7, 198–9 views of Friedman 157 distribution of economic value (Marx) 54–6 division of labour and productivity 11–14 car production 20–1 in daily life 20–1 divorce rates 205 drug addiction, views of Becker 210–12, 215 Dubner, Stephen 234 Eastern Europe, influence of Hayek 140 Ebenstein, Larry 158 Economics: An Introductory Analysis (Samuelson, 1948) 168, 171–3, 188–9 Economics of Discrimination (Becker, 1957) 196–7, 198–9 Efficient Market theory 111, 112, 187 240Index elasticity of demand 82–4 Elizabeth II, Queen 158 emerging markets, offshoring of jobs to 41 endogenous growth 202 endowment effect 232, 234 Engels, Friedrich 52, 58–61 ethical judgements in economics 182–3 European Central Bank 161 exchange rates, impact of trade on 185–6 expected utility theory (EUT) 228, 229–30, 232 externalities 85 factor price equalisation theorem 186–7 Fama, Eugene 160, 187 family decision making economic perspective 183, 203–6, 213–15 welfare decision making 183 fiat currency 152 ‘fictitious capital’ concept (Marx) 62 financial decision making, biases and errors in 225–32 financial economics, work of Samuelson 187 First World War 95 Folbre, Nancy 206 Ford Model-T car, assembly-line production system 21 Foundations of Economic Analysis (Samuelson, 1947) 168, 169–70 Fox, Charles James 23 Freakonomics (Levitt and Dubner) 234 free-market mechanism of supply and demand 8–9 free market system view of Adam Smith 13–14, 16–18 view of Hayek 131–3 view of Friedman 155–7 free rider problem in public goods 177–8 Free to Choose (Friedman and Friedman, 1980) 158 free trade, influence of Adam Smith 22–3 Freeman, Richard 201 frictional unemployment 155 Friedman, David 156 Friedman, Milton (1912–2006) 94, 110, 145–64, 190–1, 196 advocate of the free market 155–7 belief in individualism 155–7 criticism of Keynesianism 149–50 early life and influences 147–8 economics in action 160–3 fiat currency 152 Free to Choose (1980 ) 158 influence of the Great Depression (1930s) 148 influence on modern economic theory 158–60 limited role of government in the economy 152, 155–7 long-term legacy 157–63 monetarism 151–2 monetarist rule 152 monetary policy 151–2 ‘natural’ rate of unemployment 153–5 new explanation for the Great Depression 150–1 Nobel Prize in economics (1976) 146, 147–8, 154, 161 non-accelerating inflation of unemployment (NAIRU) 153–5 permanent income hypothesis 148–50 role of money supply in the economy 151–2 verdict 163–4 Friedman, Rose (formerly Rose Director) 147, 148, 157, 158, 160 FTSE-listed plcs 86 Funk, Walter 108 Funk Plan 108 Galbraith, J.K. 159 gambler’s fallacy (misconception of chance) 224 General Agreement on Tariffs and Trade (GATT) 40 Index241 general equilibrium theory 8 genetically modified foods 42 geographical effects in economics 84–6 Giffen goods 84 global financial crisis (2007–8) 92, 174 and Keynesianism 111–13 global stimulus package 113 Marxist view 61–3 global free trade influence of Adam Smith 22–3 influence of Ricardo 40–2 global public goods 177–8 global recession (2009) see Great Recession (2009) gold standard, criticism by Keynes 95, 98, 107 government debt and the Great Recession (2009) 43 taxpayer view of (Ricardo) 38–9 government role in the economy anti-central planning view of Hayek 134–6, 140 Keynesian view 92–3, 94, 105–6 view of Adam Smith 9, 10, 16–18 view of Friedman 152, 155–7 Great Crash (1929) 98, 99 Great Depression (1930s) 19, 22–3, 85, 92 explanation of Friedman and Schwartz 150–1 influence on Friedman 148 influence on Keynes 99–100 role of the Federal Reserve 159 Great Recession (2009) 23 and government debt 43 arguments against protectionism 42 austerity versus stimulus debate 43–4, 140–1 Greece, sovereign debt crisis 113–14 Greenspan, Alan 111–12, 235 Grossman, Michael 212 Hansen, Lars Peter 160 Hayek, Friedrich (1899–1992) 110, 111, 119–42 business cycle theory 123–6 clash with Keynes 120, 126–31 collapse of the Soviet Union 140 early life and influences 120 emphasis on individual freedom 134–6, 140 explanation for boom and bust cycles 123–6 First World War 121 focus on supply side economics 127 influence in Eastern Europe 140 influence on George H.W.

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

. ——— (1986b) “Spurious Volatility in Historical Unemployment Data.” Journal of Political Economy 94 (1): 1–37. ——— (1989) “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908.” Journal of Political Economy 97 (1): 1–37. ——— (1992) “What Ended the Great Depression?” Journal of Economic History 52 (4): 757–84. ——— (1994) “Remeasuring Business Cycles.” Journal of Economic History 54 (3): 573–609. ——— (1999) “Changes in Business Cycles: Evidence and Explanations.” Journal of Economic Perspectives 13 (2): 23–44. ——— (2009) “New Estimates of Prewar Gross National Product and Unemployment.”

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FREQUENCY AND DURATION OF RECESSIONS Some of the hazards involved in attempting to compare pre– and post–Federal Reserve Act measures of real volatility can be avoided by instead looking at the frequency and duration of business cycles. Doing so, Francis Diebold and Glenn Rudebusch (1992: 993–34) observe, “largely requires only a qualitative sense of the direction of general business activity,” while also allowing one to draw on indicators apart from those used to construct measures of aggregate output. The National Bureau of Economic Research’s (NBER) conventional business cycle chronology suggests that contractions have been both substantially less frequent and substantially shorter on average, while expansions have been substantially longer on average, since World War II than they were prior to the Fed’s establishment.

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Besides supplying a more accurate account of the frequency of banking panics before and after the Fed, Jalil’s chronology of panics allows him to revise the record concerning the bearing of panics on the severity and duration of recessions. Whereas DeLong and Summers (1986), employing their own series for the incidence of panics between 1890 and 1910, conclude that banking panics played only a small part in the pre-Fed business cycle, Jalil (2009: 34) finds that they were a “significant source of economic instability.” Nearly half of all business cycle downturns before World War II involved panics, and those that did tended to be both substantially more severe and longer lasting than those that did not: between 1866 and 1914, recessions involving major banking panics were on average almost three times as deep, with recoveries on average taking almost three times as long, as those without major panics (p. 35).27 This evidence suggests that, by serving to eliminate banking panics, deposit insurance also served, for a time at least, to reduce the frequency of severe recessions.

Wall Street: How It Works And for Whom by Doug Henwood

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, bond market vigilante , book value, borderless world, Bretton Woods, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, capital controls, Carl Icahn, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, disinformation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, Glass-Steagall Act, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, junk bonds, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, long and variable lags, Louis Bachelier, low interest rates, market bubble, Mexican peso crisis / tequila crisis, Michael Milken, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, planned obsolescence, plutocrats, Post-Keynesian economics, price mechanism, price stability, prisoner's dilemma, profit maximization, proprietary trading, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Savings and loan crisis, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, stock buybacks, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Shown nearby are idealized — idealized by averaging, not by imagination — representations of the behavior of the stocks and interest rates around business cycle peaks and troughs. Interest rates fall sharply as a recession matures; because the average post-World War 11 recession has lasted about nine months, you can say that short-term rates begin drop- WALL STREET financial markets and the business cycle 105 95 90 85 peaks -9 -6 -3 T +3 +6 +9 -9 -6 -3 P +3 +6 +9 These charts show the behavior of interest rates and stock prices around business cycle peaks and troughs, based on the average of nine U.S. business cycles between 1948 and 1995, with either the peak or trough month indexed to 100.

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These pages were a residue of another casualty of budget constraint, the Business Conditions Digest, snuffed in 1990; the BCD's yellow pages were folded into the Survey. (The BCD was origianlly known as the Business Cycle Digest, but in the optimistic days of the late 1960s, when it was thought the business cycle had been conquered by adept Keynesian management, the Cycle was changed to Conditions.) They join in death the Survey's "blue pages," another compendium of useful indicators, snuffed in 1994. No doubt, the Conference Board will do a fine job in assembling and distributing the indicators. But they apparently feel no sense of public duty in pricing their new service, Business Cycle Indicators; a year will go for $95 and up. A subscription to the Survey of Current Business, however, was $41 in 1996, and the journal also contains huge amounts of original information. 9.

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"Mergers: Causes, Effects, Policies," International Journal of Industrial Organizations!, pp. 1-10. Mullin, John (1993). "Emerging Equity Markets and the Global Economy," Federal Reserve Bank of New York Quarterly Review 18 (Summer), pp. 54-83. Mullineux, A.W. (1984) The Business Cycle After Keynes: A Contemporary Analysis (Toto-wa., N.J.: Barnes & Noble Books). — (1990). Business Cycles and Financial Crises (New York and London: Harvester WheatsheaO. Munnell, Alicia H., and Nicole Ernsberger (1987). "Pension Contributions and the Stock Market," New England Economic Review Novemher/Decemher, pp. 3-14. Munnell, Alicia H., Geoffrey M.B.

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

Albert Einstein, banking crisis, behavioural economics, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, foreign exchange controls, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, low interest rates, means of production, Meghnad Desai, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, Tragedy of the Commons, unorthodox policies, Vilfredo Pareto, zero-sum game

Certainly investment in consumer goods would expand, but increased expenditures for consumer goods would do little or nothing to construct a bridge, build a hospital, pay for a research program to cure cancer, or provide funds for a new invention or a new production process. According to business-cycle analysts, retail sales and other measures of current consumer spending are lagging indicators of economic activity. Almost all of the components of the U.S. Commerce Department's Index of Leading Economic Indicators are production and investment oriented, for example, contracts and orders for plant equipment, changes in manufacturing and trade inventories, changes in raw material prices, and the stock market, which represents long-term capital investment (Skousen 1990, 307-12). Typically in a business cycle, consumption starts declining after the recession has already started; similarly, consumer spending picks up after the economy begins its recovery stage.

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As a prophet Marx was colossally unlucky and his system colossally useless" (1967, 622). 3. There is little evidence of increased concentration of industries in advanced capitalist societies, especially with global competition. 4. Socialist Utopian societies have not flourished, nor has the proletarian revolution inevitably occurred. 5. Despite business cycles and even an occasional great depression, capitalism appears to be flourishing as never before. Update: Marxists as Modern-Day Doomsdayers In The Communist Manifesto, Marx and Engels warned, "It is enough to mention the commercial crises that by their periodical return put on its trial, each time more threatening, the existence of the entire bourgeois society" (1964 [1848], 11-12).

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The Curious Case of Nikolai Kondratieff One famous Russian economist to contradict the official Marxist prediction of capitalism's inevitable demise was Nikolai Kondratieff (1892-1938). In 1926, he delivered a paper before the prestigious Economic Institute in Moscow, making the case for a fifty- to sixty-year business cycle. Based on price and output trends since the 1780s, Kondratieff described two-and-a-half upswing and downswing "long wave" cycles of prosperity and depression. Kondratieff found no evidence of an irreversible collapse in capitalism; rather, a strong recovery always succeeded depression. In 1928, Kondratieff was removed from his position as head of Moscow's Business Conditions Institute and his thesis was denounced in the official Soviet encyclopedia (Solomou 1987, 60).

End the Fed by Ron Paul

affirmative action, Alan Greenspan, Bear Stearns, Bernie Madoff, Bernie Sanders, Bretton Woods, business cycle, crony capitalism, currency manipulation / currency intervention, fiat currency, Fractional reserve banking, guns versus butter model, hiring and firing, housing crisis, illegal immigration, invisible hand, Khyber Pass, Long Term Capital Management, low interest rates, market bubble, means of production, military-industrial complex, Money creation, moral hazard, Ponzi scheme, price mechanism, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, Savings and loan crisis, too big to fail, tulip mania, We are all Keynesians now, Y2K

But I assure you, especially in this post-meltdown world, that it is irresponsible, ineffective, and ultimately useless to have a serious economic debate without considering fundamental issues about money and its quality, as well as the Fed’s massive role in manipulating money to our economic ruin. What is the Fed and what does it do? To answer these questions, you can read books, study pamphlets issued by the Fed, or attend economics lectures at your local college. You can even consult the Fed’s comic books on its own Web site. 1 You will be told how the Fed serves to stabilize the business cycle, control inflation, maintain a solvent banking system, regulate the financial system, and more. Certainly, the Fed’s spokes-men claim that they do all this and do it well. I disagree on each point. After all is said and done, the Fed has one power that is unique to it alone: it enables the creation of money out of thin air.

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Without the Fed, the federal government would have to live within its means. It would still be too big and too intrusive, just like all state governments are today, but the outrageous empire at home and abroad would have to come to an end. There are other benefits as well, such as stopping the business cycle, ending inflation, building prosperity for all Americans, and putting an end to the corrupt collaboration between government and banks that virtually defines the operations of public policy in the post-meltdown era. Ending the Fed would put the American banking system on solid financial footing.

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Here is a general overview, courtesy of the American Institute for Economic Research: 10 Purchasing Power in the United States of Gold and Selected Currencies (1913 = 1.0) Note: Purchasing power calculated from the implicit price deflator for U.S. GDP and the exchange rates of foreign currencies for U.S. dollars. As for business cycles and the abolition of panics, the data show otherwise. Recessions of the twentieth century as documented by the National Bureau of Economic Research include: 1918–1919, 1920–1921, 1923–1924, 1926–1927, 1929–1933, 1937–1938, 1945, 1948–1949, 1953–1954, 1957–1958, 1960–1961, 1969–1970, 1973–1975, 1980, 1981–1982, 1990–1991, 2001, and 2007, which is the current panic of which there is no end in sight.

The Levelling: What’s Next After Globalization by Michael O’sullivan

"World Economic Forum" Davos, 3D printing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Toffler, bank run, banking crisis, barriers to entry, Bernie Sanders, Big Tech, bitcoin, Black Swan, blockchain, bond market vigilante , Boris Johnson, Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, business cycle, business process, capital controls, carbon tax, Celtic Tiger, central bank independence, classic study, cloud computing, continuation of politics by other means, corporate governance, credit crunch, CRISPR, cryptocurrency, data science, deglobalization, deindustrialization, disinformation, disruptive innovation, distributed ledger, Donald Trump, driverless car, eurozone crisis, fake news, financial engineering, financial innovation, first-past-the-post, fixed income, gentrification, Geoffrey West, Santa Fe Institute, Gini coefficient, Glass-Steagall Act, global value chain, housing crisis, impact investing, income inequality, Intergovernmental Panel on Climate Change (IPCC), It's morning again in America, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, low interest rates, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, opioid epidemic / opioid crisis, Paris climate accords, pattern recognition, Peace of Westphalia, performance metric, Phillips curve, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Solow, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, Steve Bannon, Suez canal 1869, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

At times policy makers will feel they are masters of the business cycle, but most of the time they are simply its passengers. The good ones, at least, will adapt their rhetoric to it: upturns will be carefully managed to channel animal spirits, whereas downturns are caused by wild speculators who need to be reined in. In seeking to understand business cycles, Minister Chidley might be interested to know that the NBER of the United States has a dedicated business cycle website.5 To noneconomists, this may seem like a very quirky, specialized undertaking, but the business cycle can govern our lives and can make or break political careers.

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In seeking to understand business cycles, Minister Chidley might be interested to know that the NBER of the United States has a dedicated business cycle website.5 To noneconomists, this may seem like a very quirky, specialized undertaking, but the business cycle can govern our lives and can make or break political careers. The NBER has collected business cycle data going back to the 1850s and breaks business cycles into phases of expansion and contraction. Cycles have lasted for about five years on average (fifty-six months). Globalization has changed all that. The two business cycles that characterized this era of globalization (July 1990 to March 2000 and November 2001 to December 2007) are by a decent stretch two of the longest in economic history. (Those cycles spent 92 and 120 months in expansion compared to an average of about 30 months. The 1960s are the only other period to come close in terms of duration of economic expansion.)

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Bank managers, investors, and companies can become overconfident and can overinvest (often taking on debt to do so). Historically, shorter business cycles had the opposite effect: indebtedness was lower and more frequent, and recessions had the habit of clearing out imbalances, by which I mean, for instance, uneconomic loans, zombie companies (a company—state owned or private—that needs bailouts in order to survive), and asset bubbles. Business cycles, as the saying goes, don’t die of old age but, rather, are usually brought to an end by the consequences of imbalances, most often ignited by rising interest rates. Not only is the current business cycle very long by historical standards, but it is peculiarly marked by an unprecedented amount of monetary and fiscal stimulus internationally, in return for relatively low growth, meager investment, and slowing productivity, to the extent that nearly six years through this “expansion,” academics spoke of “lower for longer” and “secular stagflation.”6 The notion of lower growth for longer periods has, at least in the United States, been pushed to the sidelines by President Trump.

Austerity: The History of a Dangerous Idea by Mark Blyth

"there is no alternative" (TINA), accounting loophole / creative accounting, Alan Greenspan, balance sheet recession, bank run, banking crisis, Bear Stearns, Black Swan, book value, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial engineering, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Greenspan put, Growth in a Time of Debt, high-speed rail, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, low interest rates, market bubble, market clearing, Martin Wolf, Minsky moment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, Phillips curve, Post-Keynesian economics, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Solow, savings glut, short selling, structural adjustment programs, tail risk, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, Two Sigma, unorthodox policies, value at risk, Washington Consensus, zero-sum game

I concentrate on Schumpeter’s 1942 volume rather than his 1939 two-volume set, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process (London: McGraw Hill, 1939) because Business Cycles is much more a restatement of his earlier work than a reaction to contemporary developments. That is, except for one line, where he states that “there seems in fact to be an element of truth in the popular opinion that there must be help from outside of the business organism, from government action or some favorable chance or event for instance, if there is to be a recovery at all.” It remains, however, one line. Schumpeter, Business Cycles, 1:154.

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One1 of Joseph Schumpeter’s lasting contributions to economic thought was his concept of gales of “creative destruction” that sweep through the economy.2 Torn asunder by the entrepreneurial utilization of technology, continual organizational innovation, and the rigors of competition, businesses rise and fall, driving the business cycle over time. It is, then, hard to imagine a less Schumpeterian economy than Germany’s. Consider, for example, when some of Germany’s flagship companies, which are still with us today, were founded: BASF (chemicals), 1865; Krups (appliances), 1846; ThyssenKrupp (metalworks), 1891 and 1811; Daimler/Mercedes Benz (automotive), 1901 and 1926; Siemens (engineering), 1847, to name but a few. These firms have survived two world wars, occupation, partition, the Cold War, and reunification—let alone conglomeration and the ups and downs of the business cycle. Unlike in Schumpeter’s world of entrepreneurs and competitive small firms, these companies in many cases started as large-scale concerns made possible by the complex state and banking linkages typical of late-industrializing states.

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“Yes,” said Hayek, “but … it would take a very long mathematical argument to explain why.”41 By 1944, Hayek found himself similarly ignored, in semiretirement, writing on the dangers of socialism in his epic The Road to Serfdom. Hayek’s earlier Prices and Production, his Meisterwerk on business cycle theory, like Schumpeter’s 1939 Business Cycles, arrived dead at the presses. First ignored and then defeated in Europe, Austrian ideas survived in America, where their popularity has ebbed and flowed for nearly a century. Although battered and beaten-down by the Keynesian revolution after World War II, Austrian ideas never quite disappeared from the American scene.

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, market clearing, Martin Wolf, means of production, Money creation, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, We are all Keynesians now, Y2K

The British Classical economists of the so-called Currency School (David Ricardo, Lord Overtone, and others) demonstrated this in the middle of the nineteenth century. But it was the economists of the Austrian School of Economics, in particular Ludwig von Mises and Friedrich August von Hayek, who from 1912 to 1932 developed this insight into a complete theory of the business cycle. This theory is known today as the Austrian theory of the business cycle. Although it is probably the most compelling theory of economic fluctuations in modern times, it did not obtain a prominent place in the developing macroeconomic mainstream of the twentieth century. That mainstream was shaped by Keynesianism and later Monetarism, schools of thought that, despite their ideological differences, both embrace state-issued elastic money.

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Per executive order, Roosevelt confiscated all privately held gold in the United States and banned private ownership of it. In what should have been the shining hour of the Austrian theory, as it was by the early 1930s not only practically uncontested in the realm of business cycle theory but had also proven useful for predicting and explaining an economic disaster, it was instead ignored. By 1933, the major contributions from Mises and Hayek on the origins of business cycles had been published and the theory had found its way into the English-speaking world.36 Yet, it had practically no impact on policy. The political mainstream now embraced state action, mistrusted the market, and harked back to old mercantilist ideas, which found a popular restatement in the 1930s in the works of John Maynard Keynes.

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There is no reason to assume that the recessionary forces will somehow feed on themselves and lead to ever worsening conditions. The recession will end when structures are again more closely aligned with the preferences of consumers. Policy Implications of the Austrian Theory As mentioned previously, what we describe here is a business cycle theory, usually called the Austrian theory of the business cycle. I give a stylized and compressed version of the theory, which should be sufficient for our purposes but necessarily neglects some of the finer points of the theory. This theory is called the Austrian theory because it was first formulated by Viennese economists working in the methodological tradition of Carl Menger (1840–1921), who elaborated the principles of what became the Austrian School of Economics in the latter part of the nineteenth century.8 Building on Menger’s methodological foundation, Eugen von Boehm-Bawerk (1851–1914) made crucial advances in the theory of capital and interest,9 and Ludwig von Mises (1881–1973), who became the leading intellectual light of the Austrian School in the twentieth century, did seminal work in several areas, among them notably the theory of money.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

"World Economic Forum" Davos, accounting loophole / creative accounting, Ada Lovelace, Adam Curtis, Airbnb, Alan Greenspan, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, behavioural economics, Ben Bernanke: helicopter money, bitcoin, Bletchley Park, blockchain, Bretton Woods, Brexit referendum, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, crowdsourcing, cryptocurrency, data science, David Graeber, deep learning, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, Glass-Steagall Act, Higgs boson, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, Large Hadron Collider, Lewis Mumford, liquidity trap, London Whale, low interest rates, low skilled workers, M-Pesa, machine readable, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, Michael Milken, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, power law, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, robo advisor, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, seminal paper, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, Stuart Kauffman, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Vitalik Buterin, Von Neumann architecture, Washington Consensus

The first DSGE models were known as Real Business Cycle (RBC) models were introduced in the early 1980’s and were based on the concepts detailed by Finn E. Kydland and Edward C. Prescott in 1982. RBC models were based on the assumptions of perfect competition on the goods and labor markets and flexible prices and wages, and increasingly gained traction thanks to their success in matching some business cycle patterns (Slanicay, 2014). These models saw business cycle fluctuations as the efficient response to exogenous changes which implied that business cycles were created by ‘real’ forces and that productivity shocks were created by technological progress.

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This was because the Chicago led thought considered that all that was needed to face business cycles and/or recessive trends was an active monetary policy. Some thought that not even that was needed since they believed that free market adjustment will always find the way out (Garcia, 2011). This belief was also shared by the new‐neo‐Keynesians, who believed that fiscal policy was not needed to deal with business cycle or recessive trends. Hence both schools of thought converged in the idea that all that was needed to avert the risks of business cycles or recessive trends was a clever monetary policy guided by a monetary rule (García,2010).

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Their model showed that if we were to manufacture and inject a sovereign digital currency equal to 30% of the GDP, it would result in a 3% increase in GDP, owing to reductions in interest rates, tax rates, and transaction cost savings (they chose 30%, as it was similar in magnitude to the QE conducted by central banks over the last decade. Their DSGE model was calibrated to match the US economy in the pre-crisis period). Furthermore, the authors found that such a regime would offer policy makers with a new tool to stabilize the business cycle. As the quantity and/or price of the digital currency could be tempered by the government, it would allow them to leverage this flexibility in a countercyclical manner to the changing business cycle. While the supply of money today is dependent on private lending decisions, having a policy instrument that controls the price and quantity of cash becomes especially effective in times of economic shock when private money demand fluctuates.

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

3D printing, Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Glass-Steagall Act, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, market bubble, market clearing, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

There were short lapses from full employment, but these were quickly corrected thanks to the “built-in” stabilizers – unemployment compensation, social security, old age pensions – which kept demand up even when unemployment was rising. The result of the continuous full employment was that any interest in business cycles disappeared from academia just 20 years after Schumpeter had written his two-volume classic, Business Cycles. The view that business cycles of the prewar type were a thing of the past gained popularity. There would be small recessions which would be short-lived, but not cycles which the policy-makers could not control. In 1970, a collection of articles came out with the title Is the Business Cycle Obsolete?7 It seemed prophetic, though it proved to be hasty. During the 1950s and even into the 1960s, Keynesian economics informed the economic thinking of academics, especially of the generation born since 1920.

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Riding the Waves with Eugen Slutsky If you plot the course of income or sales or investment, it will look like a wave. The literature on business cycles often uses the term long waves to describe the data. There are often systematic reasons why there are cycles. Indeed, as we’ve seen, Marx, Wicksell and Schumpeter among others looked for explanations of the cycles. At Columbia University in the immediate aftermath of World War I, Wesley Clair Mitchell (1874–1948) launched an extensive program of measuring business cycles. He chose a variety of time series – rail shipments, bank loans, agricultural output and prices, sales and inventories, etc.

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In Selection of Reports and Papers of the House of Commons: Banking – Currency, vol. 30, p. 467, para. 5758. House of Commons, 1832. Aubrey, T., Profiting from Monetary Policy: Investing through the Business Cycle. Palgrave Macmillan, London, 2013. Bellofiore, R. and G. Vertova, eds, The Great Recession and the Contradictions of Contemporary Capitalism. Edward Elgar, Cheltenham, 2014. Black, F. and M. Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, 81.3 (May–June 1973): 637–54. Bronfenbrenner, M., ed., Is the Business Cycle Obsolete? Wiley, New York, 1970. Corry, B., Money, Saving and Investment in English Economics 1800–1850. Macmillan, London, 1962.

Samuelson Friedman: The Battle Over the Free Market by Nicholas Wapshott

2021 United States Capitol attack, Alan Greenspan, bank run, basic income, battle of ideas, Bear Stearns, Berlin Wall, Bretton Woods, business cycle, California gold rush, collective bargaining, coronavirus, corporate governance, COVID-19, creative destruction, David Ricardo: comparative advantage, Donald Trump, double helix, en.wikipedia.org, fiat currency, financial engineering, fixed income, floating exchange rates, full employment, God and Mammon, greed is good, Gunnar Myrdal, income inequality, indoor plumbing, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, light touch regulation, liquidity trap, lockdown, low interest rates, Machinery of Freedom by David Friedman, market bubble, market clearing, mass immigration, military-industrial complex, Money creation, money market fund, Mont Pelerin Society, moral hazard, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, paradox of thrift, Paul Samuelson, Philip Mirowski, Phillips curve, price mechanism, price stability, public intellectual, pushing on a string, quantitative easing, rent control, road to serfdom, Robert Bork, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, seminal paper, Simon Kuznets, social distancing, Tax Reform Act of 1986, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, trickle-down economics, universal basic income, upwardly mobile, urban renewal, War on Poverty, We are all Keynesians now, Works Progress Administration, zero-sum game

One of Samuelson’s earliest contributions to economic theory was a diagnostic tool used to analyze business cycles, called the multiplier-accelerator, later known as the Hansen-Samuelson model,20 which attempted to explain the reasons market economies proceed in an established cycle, from boom to bust, and so on. He observed the effect of outside influences on an economy, such as foreign investment, and how such exogenous factors contribute to the ebb and flow of the business cycle. He concluded that neither Keynes’s multiplier nor J. M. Clark’s acceleration principle was adequate to explain business cycles and he offered his own explanatory formula.

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In 1951, Samuelson first unveiled his ingenious synthesis of economics old and new. In Principles and Rules in Modern Fiscal Policy: A Neo-Classical Formulation, he spelled out how government policy could minimize unemployment by countering the natural ebb and flow of the business cycle. He said the success of public works programs during the New Deal had been overestimated and that cutting taxes as a means of stimulus had been underestimated. The key to taming the business cycle was fiscal policy: a mixture of public spending and tax changes. He did not mention the role money and the Fed might play in maintaining the appropriate money supply. For Samuelson in 1951, in a period of economics he later referred to as “Model T Keynesianism,”46 money did not matter.

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“But a long list of important cases arises where economics suggests that governments should intervene.”1 The Keynesianism he described in his textbook Economics: An Introductory Analysis, by the mid-Sixties in its seventh edition, envisioned “a progressive full-employment economy in which the excesses of the business cycle are moderated. We want to control the ‘mad dance of the dollar’ as the business cycle passes from boom to crisis and slump.”2 Besides, he told Newsweek readers in 1968, “the New Economics really does work.” He continued, “Wall Street knows it. Main Street, which has been enjoying 92 months of advancing sales, knows it. The accountants who chalk up record corporate profits know it.

Unfinished Business by Tamim Bayoumi

Alan Greenspan, algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, Glass-Steagall Act, Greenspan put, hiring and firing, housing crisis, inflation targeting, junk bonds, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Rubik’s Cube, Savings and loan crisis, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

In response to the observation that there was no change in behavior over the business cycle, proponents of the tighter monetary policy explanation argued that the earlier work looking at the business cycle had not included measures of inflation expectations. They argued that it was the anticipation of low and stable future inflation that was the main conduit through which tighter monetary policy had lowered inflation and reduced output fluctuations. Under this view the surprise was less that a different monetary policy altered the business cycle, but that it could simultaneously improve outcomes for growth and inflation.

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* * * The Way We Were The pre-crisis macroeconomic orthodoxy had a precise and relatively narrow view of policy challenges. It focused on business cycle fluctuations around a slowly evolving path for underlying output (underlying output was determined by technology and was thus not part of the analysis). These fluctuations were primarily ascribed to wages and prices being sticky in the sense that they responded slowly to changes in economic slack. The challenge for policymakers was to minimize these temporary deviations from a slowly moving baseline. The central bank of each country was viewed as the main institution responsible for responding to such business cycle fluctuations. Its policies were ideally guided by an inflation target, since an overheating economy would generate upward inflationary pressures while an economy with too much slack would exhibit downward inflationary pressures.

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For example, there appears to be an increasing consensus that financial stability and macroeconomic stability should be treated as separate objectives and assigned to separate policies—macro-prudential policies for financial risks and monetary policy for the business cycle. This reflects an evolving belief that monetary policy is too blunt an instrument to support financial stability, which is better left to more focused and specialized policies and policymakers.2 Hence, while macroprudential policies have been elevated to new macroeconomic instrument, the basic pre-crisis assignment that financial regulators should take care of financial risks and that monetary policymakers should focus on stabilizing the business cycle has been largely maintained. Equally strikingly, central banks continue to use inflation targets as their basic framework, even though in the run-up to the crisis it was asset prices and trade deficits rather than inflation that most clearly pointed to overheating in the United States and the Euro area periphery.

The Investopedia Guide to Wall Speak: The Terms You Need to Know to Talk Like Cramer, Think Like Soros, and Buy Like Buffett by Jack (edited By) Guinan

Albert Einstein, asset allocation, asset-backed security, book value, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, clean water, collateralized debt obligation, computerized markets, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, equity risk premium, fear index, financial engineering, fixed income, Glass-Steagall Act, implied volatility, index fund, intangible asset, interest rate swap, inventory management, inverted yield curve, junk bonds, London Interbank Offered Rate, low interest rates, margin call, money market fund, mortgage debt, Myron Scholes, passive investing, performance metric, risk free rate, risk tolerance, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, short squeeze, statistical model, time value of money, transaction costs, yield curve, zero-coupon bond

Related Terms: • Bear Market • Fundamental Analysis • Uptrend • Downtrend • January Barometer Business Cycle What Does Business Cycle Mean? The recurring and fluctuating levels of economic activity that an economy experiences over a long period; the five business cycles are growth (expansion), peak, recession (contraction), trough, and recovery. At one time business cycles were thought to occur on a regular and predictable basis, but today they are thought of as being more irregular, varying in frequency, magnitude, and duration. Investopedia explains Business Cycle Since World War II, most business cycles have lasted three to five years from peak to peak.

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The best examples of gearing ratios include the debt-to-equity ratio (total debt/total equity), times interest earned (EBIT/total interest), equity ratio (equity/assets), and debt ratio (total debt /total assets). A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because it must continue to service its debt regardless of how bad sales are. A larger proportion of equity provides a cushion and is seen as a measure of financial strength. Related Terms: • Business Cycle • Debt/Equity Ratio • Leverage • Debt Ratio • Equity Generally Accepted Accounting Principles (GAAP) What Does Generally Accepted Accounting Principles (GAAP) Mean? The overriding accounting principles, standards, and procedures that companies follow when compiling their financial statements.

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Technically, a recession is said to have occurred when there have been two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP). Investopedia explains Recession Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. A recession generally lasts from 6 to 18 months. Interest rates usually fall are lowered in recessionary times to stimulate the economy by offering cheap rates at which to borrow money. Related Terms: • Bear Market • Consumer Price Index—CPI • Gross Domestic Product—GDP • Business Cycle • Market Economy Record Date What Does Record Date Mean? The date established by an issuer of a security for the purpose of determining the holders who are entitled to receive a dividend or distribution.

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, W. E. B. Du Bois, We are all Keynesians now, working-age population, Y2K, Yom Kippur War

We believe that there is an easy and simple test to prove that what we are saying is correct—not only correct, but also more correct than the modeling that fails to deal with the three blank questions in current mainstream macroeconomics. We think that our description of how the economy operates fits almost any business cycle. If we take the most recent business cycle, starting in 2001 and continuing to the present day, we think that our description of the economy, with animal spirits at center stage, gives a remarkably good rendition of what has actually occurred. Let’s review the current U.S. economic cycle (we could do this as well for other countries) and see how the themes in this book have played themselves out.

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As we write this concluding chapter we do not know the extent to which the problems of the various non-bank banks—the investment houses and the hedge funds, all but unsupervised and holding literally trillions of dollars of assets and liabilities—will contribute to this problem.9 This is the story of our time. It is the story of the business cycle that began in 2001. When the current downturn will end, we do not know. But the point of our book, and the test of our theory, is that we could have told this same story, or a similar story, using our description of the animal spirits and how they operate, to describe almost any other business cycle. For the United States, we could have gone back to the collapse of 1837, with its land speculation and state bank collapses, and told a similar story.

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FOURTEEN Conclusion Notes References Index Preface to the Paperback Edition * * * The worldwide recession that was raging just as the hardcover edition of this book was published in February 2009 seems to many observers, as of this writing in October 2009, to be coming to an abrupt end. There are definite signs of improvement. These observers could be right. Maybe this is just another recession that will eventually be forgotten among the annals of business-cycle history. But the theory that we lay out in this book gives us cause to worry that we may be in a sick economy over much of the world for years to come. Even the stirring success stories of the past decade or so in the developing world, notably China and India, may see their economic growth reduced to a disappointing level.

The Future of Money by Bernard Lietaer

agricultural Revolution, Alan Greenspan, Alvin Toffler, banks create money, barriers to entry, billion-dollar mistake, Bretton Woods, business cycle, clean water, complexity theory, corporate raider, currency risk, dematerialisation, discounted cash flows, diversification, fiat currency, financial deregulation, financial innovation, floating exchange rates, full employment, geopolitical risk, George Gilder, German hyperinflation, global reserve currency, Golden Gate Park, Howard Rheingold, informal economy, invention of the telephone, invention of writing, John Perry Barlow, Lao Tzu, Lewis Mumford, low interest rates, Mahatma Gandhi, means of production, microcredit, Money creation, money: store of value / unit of account / medium of exchange, Norbert Wiener, North Sea oil, offshore financial centre, pattern recognition, post-industrial society, price stability, Recombinant DNA, reserve currency, risk free rate, Ronald Reagan, San Francisco homelessness, seigniorage, Silicon Valley, South Sea Bubble, The Future of Employment, the market place, the payments system, Thomas Davenport, trade route, transaction costs, trickle-down economics, two and twenty, working poor, world market for maybe five computers

Last but rot least, the use of a GRC in complement with conventional national currencies would automatically tend to counteract me prevalent business cycle, thereby improving me overall stability and predictability of the world's economic system. This is so because there is always an excess of raw materials when the business cycle is weakening (weakening of raw material picas is one of the key indicators of a recession). Corporations would therefore tend at this point of the business cycle to sell more raw materials for storage to GRC Inc., which would pay for them with Terra. The Terra would be used immediately by these corporations to pay their suppliers, so as to avoid me demurrage charges.

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Both Keynes and Friedman have shown that with conventional money, the velocity of money is pro-cyclical (each for different masons: the former on me basis of changes in interest rates, the lathe on the basis of the predominant role of Friedman's 'Permanent Revenue' in determining the demand for money). The fact that the quantity of Terra in circulation would be counter-cyclical to me business cycle would therefore tend to counteract the pro-cyclical nature of the conventional money system. In summary, the introduction of a GRC would tend automatically to dampen the business cycle by providing additional monetary liquidity in counter-cycle with the business cycle relating to the conventional national currencies. Theoretical and practical soundness The box on 'Economic tech talk' synthesises some key effects of the Terra for those who prefer a purely economic language.

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What is important to realise is that these 'strategic layoffs' are of a totally different nature from the traditional cyclical layoffs. It was considered normal for example that factory workers would be let go whenever inventories of finished goods piled up as the business cycle moved into low gear. They would also be re-employed as soon as those inventories were absorbed and the good days of the cycle returned. But with strategic layoffs, there is no reason to expect that the business cycle will reverse the trend. What is going is gone forever. Growth without increased employment is not a forecast; it is an established fact. William Greider's statistic is worth repeating: the world's 500 largest corporations make and sell seven times more goods and services than 20 years ago, but have managed simultaneously to reduce their overall workforce.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

"Friedman doctrine" OR "shareholder theory", Abraham Wald, activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, Andrei Shleifer, AOL-Time Warner, asset allocation, asset-backed security, bank run, beat the dealer, behavioural economics, Benoit Mandelbrot, Big Tech, Black Monday: stock market crash in 1987, Black-Scholes formula, book value, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, card file, Carl Icahn, Cass Sunstein, collateralized debt obligation, compensation consultant, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, democratizing finance, Dennis Tito, discovery of the americas, diversification, diversified portfolio, Dr. Strangelove, Edward Glaeser, Edward Thorp, endowment effect, equity risk premium, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Glass-Steagall Act, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Bogle, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, low interest rates, mandelbrot fractal, market bubble, market design, Michael Milken, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, power law, prediction markets, proprietary trading, prudent man rule, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, rolodex, Ronald Reagan, seminal paper, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, Skinner box, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, statistical model, stocks for the long run, tech worker, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, Two Sigma, Tyler Cowen, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

Veblen was a lowly instructor in an economics department dominated by neoclassicists. But he made a big impression on Mitchell, who stayed on at Chicago for his Ph.D., then went on to become the nation’s foremost authority on the business cycle. Mitchell subscribed neither to Roger Babson’s simplistic action-begets-reaction formula nor to Fisher’s belief that the “dance of the dollar” explained all fluctuations. He seemed to subscribe to no theory at all. Instead, he saw the business cycle as a natural part of the workings of capitalism and hoped that close examination of the data would enable him to understand it better. Mitchell’s commitment to the drudgery-filled work of assembling better economic evidence so impressed Irving Fisher that he tried to lure the younger scholar to Yale, inviting the Mitchells up to New Haven one weekend in 1912 and throwing a dinner party in their honor.

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“The one name by which the eager young men swore was the only one I had not known…Wesley Clair Mitchell,” he later wrote. “Indeed business cycles and institutionalism were the two main topics of discussion.”11 Fred Macaulay, Mitchell’s student at Columbia and one of his first hires at NBER, was said to have “worshiped Mitchell as though he were a god.”12 When the great crash and the Depression came, the moment seemed ripe for Mitchell and the institutionalists to seize control of American economics once and for all. The business cycle had asserted itself in all its ferociousness. Irving Fisher’s talk of a “permanently high plateau” for stock prices proved to be nonsense, and near-complete shutdowns of the financial system—as occurred in the early 1930s—certainly weren’t covered in Alfred Marshall’s standard neoclassical textbook.

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The phrase “random walk” appears to have been coined in 1905, in an exchange in the letters pages of the English journal Nature concerning the mathematical description of the meanderings of a hypothetical drunkard.34 Most early studies of economic data had been a search not for drunken meanderings but for recognizable patterns and, not surprisingly, many were found. The purported link between the British business cycle and sunspots was one. Another famous example came in the mid-1920s when the young founder of Moscow’s Business Cycle Institute, Nikolai Kondratiev, proposed that economic activity moved in half-century-long “waves.”35 As the study of statistics progressed and the mathematics of random processes such as Brownian motion became more widely understood, those on the frontier of this work began to question these apparent cycles.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

3D printing, 90 percent rule, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business cycle, business process, butterfly effect, carbon credits, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, different worldview, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, Glass-Steagall Act, happiness index / gross national happiness, holacracy, job satisfaction, John Perry Barlow, liberation theology, low interest rates, Marshall McLuhan, microcredit, mobile money, Money creation, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, systems thinking, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

THE PROCYCLICAL MONEY CREATION PROCESS The economy grows or contracts in a series of repetitive expansions (booms) and contractions (busts). Referred to as the business cycle, this pattern comprises an interlude of escalation of above-average economic growth, reaching a peak, followed by a contraction to below-average economic growth, potentially all the way to a depression at the low point. Then a new business cycle begins with a new swell of growth, and the pattern repeats itself. While business cycles are recurrent, each is unique in longevity, depth of dip, and height of peak. 52 SCARCITY The way money is created, by bank debt, tends to amplify both the ups and the downs of the business cycle. Banks tend to have a herd instinct when making credit available or restricting it for particular countries or industries.

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See also Terra Trade Reference Currency Beauty, 152, 201, 223 Bell Telephone, 96 BerkShares, 75, 89– 91, 90 Bezant, 24, 65, 227n2, 230n9 251 252 INDEX Bike repair, 84 Biology, 32 Biomimicry, 102 Bioregion, 86 Biowaste, 142 Blaengarw, 159–161, 161 Blame, 216 BONUS, 170–171 Boom. See Business cycle Boulder Gaian, 113 Brazilian Network of Community Development Banks (CDB), 107 Bridge financing, 121 Bristol Credit Union, 114 Bristol Pound (BP), 114–115 Brixton pound, 75 Brünningsche Notverordnungen, 179 Bubble, 33 Bullion, 27, 113. See also Gold standard Burden of expectations, 19 Bureaucracy, 108, 126–127 Burnout, 194 Business cycle, 51; bank debt amplifying, 52; Terra and, 134 Business-to-business system, 5 Bust. See Business cycle Bus token, 141–143 Butterfly effect, 31 Capitalism, 4, 22. See also Competition Capivari, 109 Carbon-backed currency, 116, 137, 201 Carbon premium exchange (CPX), 116–117 Carebank, 84– 85 Cash crunch, 148–149 Cell phone.

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The counteractions, however, usually are not very effective. Furthermore, the capacity of central banks to intervene in monetary markets has been significantly reduced in deregulated financial markets. Consequently, despite their efforts, the collective actions of the banking system tend to exacerbate the business cycle in both boom and bust directions. WHAT’S THE BOTTOM LINE? Interest is having a devastating impact on life as we know it. For example, there’s the Depression of the late 1930s; Japan since 1990; and the developments in the United States leading to the 2008 financial crisis.20 They were all generated by asset bubbles, and when those asset priced bubbles popped, huge numbers of businesses and banks failed.

Guide to business modelling by John Tennent, Graham Friend, Economist Group

book value, business cycle, correlation coefficient, discounted cash flows, double entry bookkeeping, G4S, Herman Kahn, intangible asset, iterative process, low interest rates, price elasticity of demand, purchasing power parity, RAND corporation, risk free rate, shareholder value, the market place, time value of money

However, Gross domestic product 71 many years of observation have revealed that gdp growth rates do not change dramatically from year to year and that they generally follow a cyclical pattern – sometimes described as the business cycle. These two observations can be used to produce a simple forecast for gdp growth and gdp. The approach used assumes an average underlying gdp growth rate that has a linear trend in either a positive or a negative direction. The actual rate of growth in any one year, however, will depend on the position within the business cycle. The business cycle is modelled as a sine curve where assumptions entered by the user determine the length and amplitude of the business cycle. The use of a sine curve represents a simplifying assumption, as business cycles do not usually exhibit a constant cyclical pattern.

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In this example it is assumed that no alternative forecasts are available and that the modeller must forecast the behaviour of gdp for every year. The expected behaviour of gdp growth is modelled as a sine curve and is defined by the user inputs below. This example assumes a five-year business cycle. The number of years for a complete business cycle (cell E5). The stage of the business cycle for the current level of gdp, that is, 23,000 (cell E6). A figure of 25% indicates a start point at the top of the cycle; a figure of 75% implies a start point at the bottom of the cycle. It is assumed that gdp of 23,000 is at the top of the cycle, which is represented by an assumption of 25%.

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The workings have been broken down into a number of stages: Rows 4, 5 and 6 are intermediate steps in producing the gdp growth rate that is calculated in row 8. Row 4 determines the stage of the business cycle that will help determine the gdp growth rate. Row 5 divides the full amplitude of the business cycle in half. Row 6 adjusts the average growth rate for the trend in the average growth rate using a compounding calculation. Rows 4 to 6 are combined in row 8 to produce the gdp growth rate. The adjusted growth rate of row 6 is altered up or down by the multiplication of the position within the business cycle (row 4) and half of the amplitude (row 5). The resulting gdp growth rate is then used to generate the final result for gdp in absolute terms in row 9.

The Acquirer's Multiple: How the Billionaire Contrarians of Deep Value Beat the Market by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, book value, business cycle, Carl Icahn, cognitive dissonance, corporate governance, corporate raider, Jeff Bezos, Mark Spitznagel, Market Wizards by Jack D. Schwager, Paul Graham, Peter Thiel, Richard Thaler, shareholder value, stock buybacks, tail risk, Tim Cook: Apple

In our earlier example, the market required 10 percent. For most businesses, high profits aren’t sustainable because they attract competitors. While they may earn more over a short time, most businesses will only earn a market return—say 10 percent—on average over the full business cycle. Recall our earlier drawing of the business cycle: Business Cycle: High Returns Mean Revert Down This, says Buffett, is why the moat is so important to the business:32 A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.

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Because the markets are ruled by a powerful force known as mean reversion: the idea that things go back toward normal. Mean reversion pushes up undervalued stocks. And it pulls down expensive stocks. It pulls down fast-growing, profitable businesses, and it pushes up shrinking loss-makers. It works on stock markets, industries, and whole economies. It is the business cycle: the boom after the bust and the bust after the boom. The best investors know this. They expect the turn in a stock’s fortunes. While the crowd imagines the trend continues forever, deep-value investors and contrarians zig before it turns. Mean reversion has two important consequences for investors: 1.Undervalued, out-of-favor stocks tend to beat the market.

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Mean Reversion: Things Go Back Toward Normal Mean reversion pushes up the prices of undervalued stocks, and it pulls down the prices of expensive stocks. It returns fast-growing and high-profit businesses to earth, and it points business with falling earnings or growing losses back to the heavens. It works on stock markets, industries, and whole economies. We know it as the booms and busts of the business cycle or the peaks and troughs of the stock market. Extrapolation: We Find the Trend and Extrapolate It Mean reversion is the expected outcome. But we don’t expect mean reversion. Instead, our instinct is to find a trend and extrapolate it. We think it will always be winter for some stocks and summer for others.

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, antiwork, Asian financial crisis, bank run, banking crisis, basic income, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, bitcoin, blockchain, bond market vigilante , Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, carbon tax, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, fake news, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, green new deal, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, low interest rates, market bubble, market clearing, market fundamentalism, means of production, Modern Monetary Theory, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Ponzi scheme, post-truth, price stability, public intellectual, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, secular stagnation, Seymour Hersh, stock buybacks, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, We are all Keynesians now, working-age population

And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he argued, would just add to the confusion. By the 1980s, however, even this severely limited acceptance of the idea that recessions are bad things had been rejected by many freshwater economists. Instead, the new leaders of the movement, especially Edward Prescott, who was then at the University of Minnesota (you can see where the freshwater moniker comes from), argued that price fluctuations and changes in demand actually had nothing to do with the business cycle. Rather, the business cycle reflects fluctuations in the rate of technological progress, which are amplified by the rational response of workers, who voluntarily work more when the environment is favorable and less when it’s unfavorable.

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Moreover, recessions and recoveries depend far more on the Federal Reserve than on the administration in power, and happen to Republicans and Democrats alike. That is why a sensible assessment of economic trends involves comparing business cycle peaks or, even better, asking what has happened to the level of income associated with any given unemployment rate. It is therefore ironic that supply-side ideologues, who originally crusaded against the traditional Keynesian focus on the business cycle, now rest their claims for success entirely on the business cycle recovery from 1982 to 1989. But of course they must, for their program failed to produce any acceleration in long-term growth. The rise in median income from 1982 to 1989, Robert Bartley’s “seven fat years,” represented almost entirely a transitory business cycle recovery, which reached its inevitable limit at a level only 4 percent above the 1979 peak.

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Look again at Figure 3. It is clear that from the recession year of 1982 to the business cycle peak in 1989, median income rose substantially (12.5 percent, versus 16.8 percent for average income). If you use these years as the basis of comparison, the lag of median behind average income doesn’t look very important. The question is whether these are really the right years to compare. If there is one really solid contribution of macroeconomic theory to human knowledge, it is the distinction between the business cycle and long-term growth. Long-term growth is achieved by expanding the economy’s productive capacity; recessions and recoveries represent fluctuations in the degree to which that capacity is being utilized.

Anatomy of the Bear: Lessons From Wall Street's Four Great Bottoms by Russell Napier

Alan Greenspan, Albert Einstein, asset allocation, banking crisis, Bear Stearns, behavioural economics, book value, Bretton Woods, business cycle, buy and hold, collective bargaining, Columbine, cuban missile crisis, desegregation, diversified portfolio, fake news, financial engineering, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, global macro, hindsight bias, Kickstarter, Long Term Capital Management, low interest rates, market bubble, Michael Milken, military-industrial complex, Money creation, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, price stability, reserve currency, risk free rate, Robert Gordon, Robert Shiller, Ronald Reagan, short selling, stocks for the long run, yield curve, Yogi Berra

One would expect adjustments in internal pricing to play a more important role in periods when the exchange rate is fixed. In this environment, internal price adjustments, given the restriction on exchange-rate adjustments, play a crucial role in driving the business cycle. Similarly, one would expect internal price alterations to be less important in the business cycle as the US moved towards the freely flexible currency. Whatever the truth of this for the economy, price changes still imparted important information for the equity investor in 1982, despite the change in the monetary framework. Despite the removal of the external anchor for monetary policy, the lessons from 1921, 1932 and 1949 remain valid in this one area where they are most likely to have been undermined by structural change.

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From November 2005 to the peak of the US equity market in October 2007 inflation did rise, if not by much, but the price of the 10-year US government bond declined and the yield rose from 4.5% to 5.3%. The Fed Funds rate, the policy interest rate set by the US Federal reserve, rose steadily from 4.0% in November 2005 to 5.25% by September 2007. The first cut in the Fed Funds rate came in September 2007 and the business cycle peaked in December 2007. So, as forecast in the 2005 edition, the bear market did commence when inflation and bond yields had risen, the Fed had begun to cut interest rates and a recession had begun. This had all happened by the end of 2007 and a vicious bear market developed that was not to end until March 2009.

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[12] Price stability & the bear A phrase began to beat in my ears with a sort of heady excitement: ‘There are only the pursued, the pursuing, the busy, and the tired.’ F Scott Fitzgerald, The Great Gatsby In the summer of 1921 bullish forecasts by the WSJ, businessmen and government officials proved accurate. So what was the secret of success for those who proclaimed the bottom of the business cycle and the end of the bear market in stocks. One recurring piece of evidence cited by these commentators augured well for the end of the business contraction - the increasing stability of prices. Some of their more bullish declarations were: ‘The accumulated evidences of stabilisation at lower levels of such things as copper, cotton, wool, silk, hides and grain.’

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Big Tech, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, democratizing finance, Donald Trump, emotional labour, eurozone crisis, Extinction Rebellion, extractivism, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, green new deal, Greenspan put, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Jeremy Corbyn, job polarisation, junk bonds, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low interest rates, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Phillips curve, Ponzi scheme, Post-Keynesian economics, post-war consensus, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, Robert Solow, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

If, on the other hand, businesses are investing too much, leading to inflation, the state can cut spending or raise interest rates to mute the upward swing of the business cycle. Managing the business cycle also required reining in the influence of finance, because lending and investment are also pro-cyclical: they rise during the good times and fall during the bad times. If the role of government was to lessen the ups and downs of the business cycle, it must properly regulate finance, which so often exacerbated these ups and downs. This kind of Keynesian economic management had a significant influence on economic policy in the post-war period.

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Falling pay, rising inequality, and low investment threatened to recreate the conditions that preceded the Great Depression. Keynes and others argued that the best way to combat the low-wage, low-investment, low-demand doom-loop was for the government to intervene at strategic points to curb the twists and turns of the business cycle. They would signal their willingness to do this by committing to maintaining full employment, whatever the stage of the business cycle. If unemployment was rising, the state would step in to pick up the slack — either by directing increasing spending or cutting interest rates to boost investment in the private sector. The problem, as outlined in Chapter one, was that this model of growth gave workers more power.

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If businesses’ confidence about the future turns, then they are likely to stop investing. These lower levels of investment will result in lower revenues for suppliers, who may have to lay people off, who will reduce their spending, leading to a fall in economic activity. This kind of self-reinforcing cycle of expectations is what gives rise to the business cycle: the ups and downs of the economy through time. It also shows why, over the short term, Say’s law doesn’t hold — if businesses lack confidence in future economic growth, they may choose not to spend even if they can afford to do so. And as Keynes famously stated, “in the long run we are all dead”.

Money and Government: The Past and Future of Economics by Robert Skidelsky

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

All monetary investigations, he wrote, ‘are ultimately concerned with creating and maintaining a monetary system which is reliable and elastic, in other words a medium of exchange whose purchasing power in relation to commodities changes either not at all or only very slowly in either direction’.16 Wicksell also identified himself as a quantity theorist, and agreed with Fisher about the QTM as applied to a purely cash economy – one where the only money in circulation is notes and coins. However, money in an economy with a developed banking system is mainly created by the banks, and it is disturbances to the credit system – to the supply of, and demand for, loans – not exogenous money shocks, which give rise to the business cycle. The business cycle is a ‘credit cycle’. The banks have a double role in Wicksell’s model. On the one hand they are loan intermediaries between the savings of households and the investments of business. But they also supply credit to the business sector. The ‘circular flow’ thus consists of savings and credit, both flowing in and out of the banks.

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As Thomas Sargent quipped: ‘All agents inside the model, the econometrician, and God share the same model.’65 Dynamic Stochastic General Equilibrium models (DSGE) Like rational expectations, DSGE modelling takes root in New Classical economics, where the works of Lucas (1975), Kydland and Prescott (1982), and Long and Plosser (1983) were most prominent. The earlier DSGE models were pure Real Business Cycle (RBC) models, i.e. models that attempted to explain business cycles in terms of real productivity or consumption shocks, abstracting from money. The logic behind RBC models is clear. If money cannot affect real variables (because of QTM and rational expectations), the source of any disturbance to the real economy must be non-monetary; that is, business fluctuations must be caused by ‘real’ unanticipated shocks.

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One may feel that insistence on the need for short-run pain (e.g. austerity) for the sake of long-run gain, when the short-run can last decades and the long-run may never happen, testifies to a refined intellectual sadism. I V. C u r r e nc y Sc hool v e r sus Ba n k i ng Sc hool The second of the grand monetary discussions of the 1800s was really a continuation of the first, but this time in the context of the restored gold standard and a business cycle connected with railway speculation. The Currency School, led by Lord Overstone, George Norman and Robert Torrens, expanded on the arguments of the Bullionists. While the Bullionists regarded convertibility into gold as a sufficient safeguard against the over-issue of notes, the Currency School argued that the drain of gold from the central bank wouldn’t immediately curtail issue of credit by the country banks, who were not subject to specie reserve requirements. 25 The Bank of England had to have control over the whole note issue in order for domestic currency to behave like a metallic currency.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

Monetary policy and the economy are my favorite topics, and there was always someone at the Fed to talk about this with.”18 From Economics to Investments Although trained as an economist, Siegel also had a strong interest in investments. His particular niche was applying academic economic concepts to the area of investments. One of his earliest ventures was investigating the relationship between the stock market and business cycles.19 The concept of the business cycle sometimes causes confusion, perhaps because its name suggests a regular, periodic motion. But the business cycle is no such thing. Business cycles capture changes in overall economic activity, as measured by the gross domestic product (GDP) of the country, and the occurrence of these changes is quite unpredictable. There are four key drivers of economic activity: consumption, including goods we buy and the services we pay for; business investment, such as capital expenditures made by corporations; government spending; and net exports, or a country’s exports less imports.

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Of course, it’s much easier said than done to categorize an environment as either expansionary or recessionary, as it often takes economists six months or more after the start or end of a recession to make such a categorization. However, Siegel’s research shows us that if we can predict business cycle turning points and invest more heavily in stocks before the trough in the business cycle and then switch out of stocks before the peak of the business cycle, investors can outperform a buy-and-hold equity strategy—again, much easier said than done.3 You may want to rely on professionals such as economists, who in turn often rely on business cycle models, to answer this question about where we are in the current environment. FIGURE 12.1: Determine which of sixteen investor types fits you best based on four key characteristics: (1) risk aversion (Hawk or Dove), (2) income level (Midas or Penia), (3) spending needs (Scrooge or Gatsby), and (4) economic environment (expansion or recession).

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According to Cochrane, the profession has now come to accept that the main reason stock prices are so volatile relative to dividends is because investors vary their expected returns, unlike the simple models that suggest investors have constant expectations. What is still up for debate, particularly between Shiller and Fama, is the nature of those time-varying expected returns. “To Fama, it is a business cycle–related risk premium. He (with Ken French again) notices that low prices and high expected returns come in bad macroeconomic times and vice versa.… To Shiller, no. The variation in risk premiums is too big, according to him, to be explained by variation in risk premiums across the business cycle. He sees irrational optimism and pessimism in [investors’s] heads.” The notion of “irrational optimism” (or exuberance) would play a major part in forever tying Shiller to the Federal Reserve’s most famous chairman, Alan Greenspan.

Common Stocks and Uncommon Profits and Other Writings by Philip A. Fisher

book value, business climate, business cycle, buy and hold, data science, El Camino Real, estate planning, fixed income, index fund, low interest rates, market bubble, market fundamentalism, profit motive, RAND corporation, Salesforce, the market place, transaction costs, vertical integration

Does this mean that if a person has some money to invest he should completely ignore what the future trend of the business cycle may be and invest 100 per cent of this fund the moment he has found the right stocks, as defined in Chapter Three, and located a good buying point, as indicated in this chapter? A depression might strike right after he has made his investment. Since a decline of 40 to 50 per cent from its peak is not at all uncommon for even the best stock in a normal business depression, is not completely ignoring the business cycle rather a risky policy? I think this risk may be taken in stride by the investor who, for a considerable period of time, has already had the bulk of his stocks placed in well-chosen situations.

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In the event that such a record had not been attained, at least all of an investor's assets would not be committed before he had had a warning signal to revise his investment technique or to get someone else to handle such matters for him. All types of common stock investors might well keep one basic thought in mind; otherwise the financial community's constant worry about and preoccupation with the danger of downswings in the business cycle will paralyze much worthwhile investment action. This thought is that here in the mid-twentieth century the current phase of the business cycle is but one of at least five powerful forces. All of these forces, either by influencing mass psychology or by direct economic operation, can have an extremely powerful influence on the general level of stock prices. The other four influences are the trend of interest rates, the over-all governmental attitude toward investment and private enterprise, the long-range trend to more and more inflation, and—possibly most powerful of all—new inventions and techniques as they affect old industries.

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Even a casual glance at American stock mar-ket history will show that two very different methods have been used to amass spectacular fortunes. In the nineteenth century and in the early part of the twentieth century, a number of big fortunes and many small ones were made largely by betting on the business cycle. In a period when an unstable banking system caused recurring boom and bust, buying stocks in bad times and selling them in good had strong elements of value. This was particularly true for those with good financial connections who might have some advance information about when the bank-ing system was becoming a bit strained.

Milton Friedman: A Biography by Lanny Ebenstein

Abraham Wald, affirmative action, Alan Greenspan, banking crisis, Berlin Wall, Bretton Woods, business cycle, classic study, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Arrow, Lao Tzu, liquidity trap, means of production, Modern Monetary Theory, Mont Pelerin Society, Myron Scholes, Pareto efficiency, Paul Samuelson, Phillips curve, Ponzi scheme, price stability, public intellectual, rent control, road to serfdom, Robert Bork, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thorstein Veblen, zero-sum game

Research for A Monetary History began in 1948 as a three-year study for the National Bureau of Economic Research to investigate the “role of monetary and banking phenomena in producing cyclical fluctuations, intensifying or mitigating their severity, or determining their character,”2 Friedman wrote at the time. He does not now believe that there is a business cycle, in the sense of regular, recurrent ups and downs in economic activity: “I really don’t believe that there is a business cycle.... The notion of a business cycle is something of a regularly recurring phenomenon that is internally driven by the mechanics of the system. I don’t believe there is a business cycle in that sense. I believe that there is a system that has certain response mechanisms and that system is subject over time to external random forces.”3 He is thus a follower of Eugen Slutzky’s idea of random causes as the source of economic fluctuations.

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There was some falling-out, or at least decline, in his relationship and that of his allies at Chicago generally with Koopmans and the Cowles Commission after Koopmans harshly criticized Arthur Burns and Wesley Mitchell’s 1946 National Bureau of Economic Research work, Measuring Business Cycles. Koopmans’s criticism, “Measurement Without Theory,” appeared in a prominent August 1947 review in the Review of Economic Statistics, six months after Friedman’s letter of recommendation on Koopmans’s behalf. In the review, Koopmans argued that because Burns and Mitchell had no theory of a business cycle, they had no determinate idea of what data to gather or hypotheses to test. In a contemporary conference comment, Friedman made reference to the “desultory skirmishing between what have been loosely designated as the National Bureau and the Cowles Commission techniques of investigating business cycles.”8 Robert Solow, who received the Nobel Prize in Economics in 1987, relates an anecdote about the response to Cowles Commission member Lawrence Klein’s Economic Fluctuations in the United States (1950) at a Cowles seminar, which gives an idea of relations between Friedman and the commission: “There was formal discussion.

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Friedman also now writes of his “skepticism about whether there is indeed an economic phenomenon justifying the designation ‘cycle,’ or whether the economic fluctuations glorified by that title are not merely reactions to a series of random shocks, along the lines of a famous 1927 article by Eugen Slutzky.”4 Economic fluctuations do not a business cycle make. Early in his career, Friedman did not possess a particularly monetarist perspective of economic activity. Although Mints, from whom he learned monetary theory, possessed a Fisherian, quantity theory of money perspective, he was not empirical or statistical, and monetary theory was not Friedman’s focus until the 1948 National Bureau study. When he taught a course on business cycles at the University of Wisconsin in 1940, he called them an “unsolved problem.”5 In a final exam question, he did not indicate that monetary explanations for economic fluctuations were his preferred method of analysis, as they later become—indeed, his focus appears to have been fiscal policy.

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

accounting loophole / creative accounting, Alan Greenspan, banking crisis, banks create money, barriers to entry, behavioural economics, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, book value, business cycle, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, Greenspan put, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, Kickstarter, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, Money creation, money market fund, open economy, Pareto efficiency, Paul Samuelson, Phillips curve, place-making, Ponzi scheme, Post-Keynesian economics, power law, profit maximization, quantitative easing, RAND corporation, random walk, risk free rate, risk tolerance, risk/return, Robert Shiller, Robert Solow, Ronald Coase, Savings and loan crisis, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

More than forty years ago, I […] worked out […] neoclassical growth theory […] [I]t was clear from the beginning what I thought it did not apply to, namely short-run fluctuations in aggregate output and employment […] the business cycle […] [N]ow […] if you pick up an article today with the words ‘business cycle’ in the title, there is a fairly high probability that its basic theoretical orientation will be what is called ‘real business cycle theory’ and the underlying model will be […] a slightly dressed up version of the neoclasssical growth model. The question I want to circle around is: how did that happen? (Solow 2001: 19) Solow inadvertently provided one answer to his own question when he discussed the preceding IS-LM model: For a while the dominant framework for thinking about the short run was roughly ‘Keynesian.’

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Consider these statements by the doyen of the freshwater or ‘New Classical’ faction of neoclassical macroeconomists, Nobel laureate Edward Prescott: the key to defining and explaining the Great Depression is the behavior of market hours worked per adult […] there must have been a fundamental change in labor market institutions and industrial policies that lowered steady-state, or normal, market hours […] [T]he economy is continually hit by shocks, and what economists observe in business cycles is the effects of past and current shocks. A bust occurs if a number of negative shocks are bunched in time. A boom occurs if a number of positive shocks are bunched in time. Business cycles are, in the language of Slutzky, the ‘sum of random causes.’ The fundamental difference between the Great Depression and business cycles is that market hours did not return to normal during the Great Depression. Rather, market hours fell and stayed low. In the 1930s, labor market institutions and industrial policy actions changed normal market hours.

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Any reduction in working hours is a voluntary act, so the representative agent is never involuntarily unemployed, he’s just taking more leisure. And there are no banks, no debt, and indeed no money in this model. You think I’m joking? I wish I was. Here’s Robert Solow’s own summary of these models – initially called ‘real business cycle’ models, though over time they morphed into what are now called ‘Dynamic Stochastic General Equilibrium’ models: The prototypical real-business-cycle model goes like this. There is a single, immortal household – a representative consumer – that earns wages from supplying labor. It also owns the single price-taking firm, so the household receives the net income of the firm.

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Alan Greenspan, Albert Einstein, algorithmic trading, Andrei Shleifer, autism spectrum disorder, autonomous vehicles, bank run, banking crisis, basic income, behavioural economics, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, digital divide, disintermediation, Donald Trump, driverless car, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fake news, financial engineering, Ford Model T, full employment, George Akerlof, germ theory of disease, German hyperinflation, Great Leap Forward, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, initial coin offering, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, low interest rates, machine translation, market bubble, Modern Monetary Theory, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Ponzi scheme, public intellectual, publish or perish, random walk, Richard Thaler, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

In addition, narrative epidemics are more similar in countries that share a language or borders. The examples in this book come mostly from the United States, the country in which I have lived my life and the country about which I have the best intuition and knowledge. Also, the United States has long documented its business cycle history. The National Bureau of Economic Research (NBER) maintains a chronicle of business cycle expansions and contractions back to the year 1854. Some critics might argue that institutional changes in the United States have been so profound and transformative that there is practically nothing useful to be learned from distant history. However, the events and reactions of 50, 100, and 150 years ago are surprisingly similar to what we see and experience today.

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A constellation of narratives is now built around it, such as the story that Mark Twain, born in a Halley’s comet year, predicted his own death 75 years later when Halley’s comet returned again. The earliest ProQuest News & Newspapers mention of the business cycle came during the depression of 1858, and it appeared alongside a reference to weather: Some, claiming to be learned in meteorology, say the seasons ran in decades: it seems also that there is a sort of business cycle of the same length of time; and it happens very fortunately that the decimal panic comes at the same time with the mildest winter. Whether this is a coincidence or a providence, or whether it is a fact at all, I leave for others to decide.9 The idea that business fluctuations are a repetitive cyclical event with a wavelength of a decade, or any other identifiable fixed interval, has become less popular with economists, but the narrative that recessions and drops in confidence are somewhat periodic and forecastable remains entrenched in popular thinking.

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New York: National Bureau of Economic Research, 1938, https://www.nber.org/chapters/c4251.pdf. Reprinted in Geoffrey Moore, Business Cycle Indicators. Princeton, NJ: Princeton University Press, 1961. Mokyr, Joel. 2013. “Culture, Institutions, and Modern Growth.” In Sebastian Galiani and Itai Sened, eds., Institutions, Property Rights, and Economic Growth: The Legacy of Douglass North. Cambridge: Cambridge University Press. ________. 2016. Culture and Growth: The Origins of the Modern Economy. Princeton, NJ: Princeton University Press. Moore, Geoffrey H. 1983. “The Forty-Second Anniversary of the Leading Indicators.” In Geoffrey Moore, ed., Business Cycles, Inflation and Forecasting. 2nd ed.

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

"World Economic Forum" Davos, Airbnb, Alan Greenspan, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, Charles Babbage, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Elisha Otis, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, global reserve currency, high net worth, initial coin offering, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, low interest rates, market bubble, market clearing, means of production, military-industrial complex, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, quantum cryptography, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, scientific management, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, We are all Keynesians now, zero-sum game

Only with an understanding of the capital structure and how interest rate manipulation destroys the incentive for capital accumulation can one understand the causes of recessions and the swings of the business cycle. The business cycle is the natural result of the manipulation of the interest rate distorting the market for capital by making investors imagine they can attain more capital than is available with the unsound money they have been given by the banks. Contrary to Keynesian animist mythology, business cycles are not mystic phenomena caused by flagging “animal spirits” whose cause is to be ignored as central bankers seek to try to engineer recovery8.

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For Austrians, on the other hand, the fact that governments have to resort to coercive measures of banning gold as money and enforcing payment in fiat currencies is at once testament to the inferiority of fiat money and its inability to succeed in a free market. It is also the root cause of all business cycles' booms and busts. While the Keynesian economists have no explanation for why recessions happen other than invoking “animal spirits,” Austrian school economists have developed the only coherent theory that explains the cause of business cycles: the Austrian Theory of the Business Cycle.11 Unsound Money and Perpetual War As discussed in Chapter 4 on the history of money, it was no coincidence that the era of central bank‐controlled money was inaugurated with the first world war in human history.

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When the central bank manipulates the interest rate lower than the market clearing price by directing banks to create more money by lending, they are at once reducing the amount of savings available in society and increasing the quantity demanded by borrowers while also directing the borrowed capital toward projects which cannot be completed. Hence, the more unsound the form of money, and the easier it is for central banks to manipulate interest rates, the more severe the business cycles are. Monetary history testifies to how much more severe business cycles and recessions are when the money supply is manipulated than when it isn't. While most people imagine that socialist societies are a thing of the past and that market systems rule capitalist economies, the reality is that a capitalist system cannot function without a free market in capital, where the price of capital emerges through the interaction of supply and demand and the decisions of capitalists are driven by accurate price signals.

Deep Value by Tobias E. Carlisle

activist fund / activist shareholder / activist investor, Andrei Shleifer, availability heuristic, backtesting, behavioural economics, book value, business cycle, buy and hold, Carl Icahn, corporate governance, corporate raider, creative destruction, Daniel Kahneman / Amos Tversky, discounted cash flows, financial engineering, fixed income, Henry Singleton, intangible asset, John Bogle, joint-stock company, low interest rates, margin call, passive investing, principal–agent problem, Richard Thaler, risk free rate, riskless arbitrage, Robert Shiller, Rory Sutherland, shareholder value, Sharpe ratio, South Sea Bubble, statistical model, Teledyne, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tim Cook: Apple

The longer the good business can maintain a high return on invested capital, the more valuable the business. What then distinguishes the first-class business from the ordinary business? The differentiator is not simply high returns on capital, which, as Graham pointed out, even an ordinary business will earn at some point in the business cycle, but sustainable high returns on capital throughout successive business cycles. The sustainability of high returns depends on the business possessing good economics protected by an enduring competitive advantage, or what Buffett describes as “economic castles protected by unbreachable ‘moats.’”39 First-Class Businesses A business’s intrinsic value turns on its ability to sustain high returns on invested capital and resist reversion to the mean.

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The so-called economic franchise is therefore a special business with unusual, naturally occurring economics that allow it to earn a naturally high return on invested capital over the course of the business cycle and to sustain that return despite the incursions of competitors. Where competition causes the return of the average business—one with a weak or no competitive advantage—to revert to the mean, franchises and first-class businesses resist mean reversion. Most businesses over the course of a full business cycle will do no ­better than earn their required return. In peak earnings years they will appear to be good businesses earning a return exceeding the required return, but in trough earnings years they will look like bad businesses generating subnormal returns.

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Reinvestment will appear most attractive in peak years, and folly in trough years, but the reverse is usually the case because trough earnings follow peak earnings, and vice versa. Capital reinvested in peak years earns sub-normal returns as the business cycle moves toward a trough, and so is typically more valuable in shareholders’ hands. Capital reinvested in trough years has the opportunity to earn super-normal returns as the business cycle moves toward a peak, but often little incremental capital can be harvested organically because earnings are in a trough. In another cruel irony, businesses find capital in abundance—both from retained earnings and outside investors—when they need it least and scarce when they need it most.

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

Alan Greenspan, asset allocation, banking crisis, banks create money, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, book value, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, data science, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, equity risk premium, Fall of the Berlin Wall, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, forward guidance, Francis Fukuyama: the end of history, general purpose technology, gentrification, geopolitical risk, George Akerlof, Glass-Steagall Act, household responsibility system, housing crisis, index fund, invention of the printing press, inverted yield curve, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kickstarter, Kondratiev cycle, liberal capitalism, light touch regulation, liquidity trap, Live Aid, low interest rates, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Phillips curve, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Shenzhen special economic zone , Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, tail risk, Tax Reform Act of 1986, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

The idea that there are cycles in financial markets in general, and in equity markets in particular, has been with us for a very long time. Fisher (1933) and Keynes (1936) both examined the interaction between the real economy and the financial sector in the Great Depression. Burns and Mitchell found evidence of the business cycle in 1946 and later academics argued that the financial cycle was a part of the business cycle, and that financial conditions and private sector balance sheet health are both important triggers of the cycle and factors that can amplify cycles (Eckstein and Sinai 1986). Other research has demonstrated that waves of global liquidity can interact with domestic financial cycles, thereby creating excessive financial conditions in some cases (Bruno and Shin 2015).5 More recent studies suggest that measures of slack in the economy (or output gaps – the growth rate versus potential output) can be explained partly by financial factors (Boria, Piti and Juselius 2013) that play a large part in explaining fluctuations in economic output and potential growth, as well as ‘determining which output trajectories are sustainable and which are not’,6 thereby implying a close link and feedback loop between financial and economic cycles.

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The impact of investor psychology on stock markets: Evidence from France. Journal of Academic Research in Economics, 5(1), 35–59. Dice, C. A. (1931). New levels in the stock market. Journal of Political Economy, 39(4), 551–554. Eckstein, O., and Sinai, A. (1986). The mechanisms of the business cycle in the postwar era. In R. Gorden (Ed.), The American business cycle: Continuity and change (pp. 39–122). Cambridge, MA: National Bureau of Economic Research. The end of the Bretton Woods System. IMF [online]. Available at https://www.imf.org/external/about/histend.htm Evans, R. (2014). How (not) to invest like Sir Isaac Newton.

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Description: Chichester, West Sussex, United Kingdom : John Wiley & Sons, 2020. | Includes bibliographical references and index. Identifiers: LCCN 2020001577 (print) | LCCN 2020001578 (ebook) | ISBN 9781119688976 (cloth) | ISBN 9781119688983 (adobe pdf) | ISBN 9781119689003 (epub) Subjects: LCSH: Business cycles. | Investments. | Finance. Classification: LCC HB3720 .O67 2020 (print) | LCC HB3720 (ebook) | DDC 338.5/42—dc23 LC record available at https://lccn.loc.gov/2020001577 LC ebook record available at https://lccn.loc.gov/2020001578 Cover Design: Wiley Cover Image: JDawnInk/DigitalVision Vectors/Getty Images To Joanna, Jake and Mia Acknowledgements This book is about economic and financial market cycles and the factors that affect them.

10% Less Democracy: Why You Should Trust Elites a Little More and the Masses a Little Less by Garett Jones

Andrei Shleifer, Asian financial crisis, Brexit referendum, business cycle, central bank independence, clean water, corporate governance, correlation does not imply causation, creative destruction, Edward Glaeser, fake news, financial independence, game design, German hyperinflation, hive mind, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jean Tirole, Kenneth Rogoff, low interest rates, Mark Zuckerberg, mass incarceration, military-industrial complex, minimum wage unemployment, Mohammed Bouazizi, Neil Armstrong, open economy, Pareto efficiency, Paul Samuelson, price stability, rent control, Robert Solow, The Wealth of Nations by Adam Smith, trade liberalization, Tyler Cowen

And I mean someone who really doesn’t care about creating a boom. Someone who cares only about low and stable inflation. That might be a Wall Street– or London–, or Hong Kong–based banker, someone who has spent his career worrying that high surprise inflation might crush the value of his bond portfolio. Or it could be someone trained in real business cycle (RBC) theory, the Nobel-winning theory that modern boom-bust cycles are mostly caused by oil price changes, regulatory and tax changes, and other supply-side forces that have nothing to do with central banks and money. In its most extreme form, RBC theory means that monetary policy is irrelevant to the real economy.

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RBC theory doesn’t prove that money doesn’t matter, but it gives economists another set of explanations, alternative hypotheses, to explain why the economy grows faster some years than others. This seems to matter in real life. I mentioned that one past Federal Reserve Bank president coauthored a key RBC paper—indeed, the very paper that coined the name “real business cycles.” This skepticism about the power of the central bank and the all-powerful role of economic demand shows up throughout the central banking world. I’ve known a few economists who have worked at central banks, and one of my favorite questions to ask them goes like this: Why do booms and busts happen?

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Kenneth Rogoff, “The Optimal Degree of Commitment to an Intermediate Monetary Target,” Quarterly Journal of Economics 100, no. 4 (1985): 1169–1189. 11. Finn E. Kydland and Edward C. Prescott, “Time to Build and Aggregate Fluctuations,” Econometrica (1982): 1345–1370. Also see John B. Long Jr. and Charles I. Plosser, “Real Business Cycles,” Journal of Political Economy 91, no. 1 (1983): 39–69. 12. Orson Scott Card, Ender’s Game (New York: Tor Books, 1985). 13. Jeroen Klomp and Jakob De Haan, “Central Bank Independence and Financial Instability,” Journal of Financial Stability 5, no. 4 (2009): 321–338. 14. Alberto Alesina and Andrea Stella, “The Politics of Monetary Policy,” in Handbook of Monetary Economics, vol. 3, ed.

World Economy Since the Wars: A Personal View by John Kenneth Galbraith

business cycle, central bank independence, classic study, flying shuttle, full employment, income inequality, James Hargreaves, James Watt: steam engine, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, low interest rates, means of production, planned obsolescence, price discrimination, price stability, road to serfdom, Ronald Reagan, spinning jenny, The Wealth of Nations by Adam Smith, Thorstein Veblen, union organizing, War on Poverty

Was it not a fair conclusion that by whatever means they were predestined to poverty? Nothing in the history of social ideas is more interesting than the treatment of the so-called business cycle in the central tradition of economic thought. Its study was isolated in a separate compartment until very recent times. Prices, wages, rents and interest, all of which were profoundly affected by depressions, were studied very largely on the assumption that depressions did not occur. Normal conditions were assumed; normal meant stable prosperity. In the separate study of the business cycle, emphasis was placed on the peculiar and nonrecurring conditions which lay back of each depression—the retirement of the greenbacks prior to 1873, the readjustments following World War I, the breakdown of international trade and capital movements and the collapse of the stock market in 1929.

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But this term eventually acquired a foreboding quality and a recession in 1953–1954 was widely characterized as a rolling readjustment. By the time of the Nixon administration, the innovative phrase "growth recession" was brought into use. To view the business cycle as a normal rhythm was to regard it as self-correcting. Hence, nothing needed to be done about it. Remedies are unnecessary if the patient is certain to recover, and they are also unwise. Writing in 1934, Joseph A. Schumpeter, then with Wesley C. Mitchell one of the world's two most eminent authorities on the business cycle, surveyed the experience of the preceding century and concluded, "In all cases ... recovery came of itself... But this is not all: our analysis leads us to believe that recovery is sound only if it does come of itself.

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To increase output by increasing the rate of capital formation or by expanding the total labor force or by a serious effort to increase the rate of technological innovation was not part of his concern.4 Most important of all, the loss of production as the result of depressions was not peculiarly a liberal concern. No one was deeply committed politically on this problem; conservatives had an equal interest with liberals in "smoothing out" the business cycle. During the decade of the twenties, the political leadership in discussion of possible means to mitigate the business cycle was assumed by Herbert Hoover. The classical program of American liberals, until the decade of the thirties, sought the redistribution of the existing income, greater economic security and the protection of the liberties and immunities of individuals and organizations in face of the highly unequal distribution of economic power.

Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma

"World Economic Forum" Davos, 3D printing, affirmative action, Alan Greenspan, Albert Einstein, American energy revolution, anti-communist, Asian financial crisis, banking crisis, Berlin Wall, book value, BRICs, British Empire, business climate, business cycle, business process, business process outsourcing, call centre, capital controls, Carmen Reinhart, central bank independence, centre right, cloud computing, collective bargaining, colonial rule, commodity super cycle, corporate governance, creative destruction, crony capitalism, deindustrialization, demographic dividend, Deng Xiaoping, eurozone crisis, financial engineering, Gini coefficient, global macro, global supply chain, Goodhart's law, high-speed rail, housing crisis, income inequality, indoor plumbing, inflation targeting, informal economy, junk bonds, Kenneth Rogoff, knowledge economy, labor-force participation, land reform, low interest rates, M-Pesa, Mahatma Gandhi, Marc Andreessen, market bubble, Masayoshi Son, mass immigration, megacity, Mexican peso crisis / tequila crisis, middle-income trap, Nelson Mandela, new economy, no-fly zone, oil shale / tar sands, oil shock, open economy, Peter Thiel, planetary scale, public intellectual, quantitative easing, reserve currency, Robert Gordon, rolling blackouts, Shenzhen was a fishing village, Silicon Valley, software is eating the world, sovereign wealth fund, The Great Moderation, Thomas L Friedman, trade liberalization, Tyler Cowen, Watson beat the top human players on Jeopardy!, working-age population, zero-sum game

The easy money flows from a sea change in the way the United States sees hard times. The old view was that recessions were a natural phase in the business cycle, unpleasant but unavoidable. A new view started to emerge in the Goldilocks economy of the 1990s, when after many straight years of solid growth, people started to say that the Federal Reserve had beaten back the business cycle. Under Alan Greenspan and his successor, Ben Bernanke, the Fed shifted focus from fighting inflation and smoothing the business cycle to engineering growth. Low U.S. interest rates and rising debt increasingly became the bedrock of American growth, and the increases in total U.S. debt started to dwarf the increases in total U.S.

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Forecasts are valuable, indeed unavoidable for planning purposes, but it doesn’t make much sense to talk about the future beyond five years, maybe ten at the most. The longest period that reveals clear patterns in the global economic cycle is also around a decade. The typical business cycle lasts about five years, from the bottom of one downturn to the bottom of the next, and the perspective of most practical people is limited to one or two business cycles. Beyond that, forecasts are often rendered obsolete by the appearance of new competitors (China in the early 1980s) or new technologies (the Internet in the early 1990s) or new leaders (the typical election cycle is also about five years).

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In a period of impending change, like this one, with the painful ending of a golden age of easy money and easy growth, it is typical for people to cling to dated ideas and rules for too long, particularly notions that minimize or explain away potential risks. The most dramatic recent example is the idea that the basic tools of economic stimulus—lowering interest rates and raising public spending—can end a business cycle, not only in the United States but also in the developing world. In the emerging markets, there has long been a disturbing tendency among leaders to take credit for boom times and blame bad times on the West: that phenomenon was widespread in late 2011, as many leaders attributed any slowdown in emerging markets to contagion from Europe, forgetting that lending from European banks was a key driver of the boom in the first place.

Universal Basic Income and the Reshaping of Democracy: Towards a Citizens’ Stipend in a New Political Order by Burkhard Wehner

basic income, business cycle, full employment, universal basic income

It would serve this purpose best if it was not financed by government debts, but rather by interest-free central bank loans to the welfare state.1 Moreover, such a stabilization allowance would be beyond suspicion of leading to unwanted side effects on the distribution of income and wealth, as is the case with most conventional measures of business cycle policy. An economic stimulus by means of a supplement to the citizens’ stipend would thus be far superior to conventional policy measures for this purpose. As with all business cycle stimuli, such stabilizations allowances would also require provisions to ensure that the stimulus does not induce unsustainable claims against the welfare state. For this purpose, these allowances could be declared as advance payments of citizens’ stipend.

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References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... .... 3 3 .... .... 5 10 . . . . . . . . 11 11 13 13 ................... ................... ................... 14 15 18 3 A Long-Term Vision . . . . . . . . . . . . . . . . . . 3.1 Maximal Market Transparency . . . . . . . 3.2 Maximal Transparency in Redistribution 3.3 Basic Income and Social Security . . . . . 3.4 Basic Income, Minimum Wage and Full Employment Guarantee . . . . . . . . . . . . . 3.5 Optimization, Not Maximization . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Basic Income in Other Policy Areas . . . . . . . 4.1 Basic Income and Business Cycle Policy . 4.2 Basic Income and Demographic Policy . . 4.3 Basic Income for Nations in Need . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19 20 21 23 5 Common Objections to Basic Income 5.1 Tax Burden and Work Incentives 5.2 Further Objections . . . . . . . . . . .

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A constitutional right to system transparency could thus be a Trojan Horse that would inadvertently open the way for basic income into a formerly rigid political and social order. 18 3 A Long-Term Vision References Wehner B (1992) Der Neue Sozialstaat: Vollbeschäftigung, Einkommensgerechtigkeit und Staatsentschuldung (The new social state: full employment, fair income distribution and the redemption of public debt). Westdeutscher Verlag, Opladen Wehner B (1997) Der Neue Sozialstaat: Entwurf einer neuen Wirtschafts- und Sozialordnung (The new social state. Outline of a new social and political order). Westdeutscher Verlag, Opladen Chapter 4 Basic Income in Other Policy Areas 4.1 Basic Income and Business Cycle Policy A citizens’ stipend system of the type proposed here would thus bring about a broad spectrum of positive changes without risking serious transitional problems. Such a system would be administratively easy to handle, it would be transparent, it would be fair, it would make the economy and working life more creative and innovative, and it would lead to full employment by reshaping the wage structure and economic risk sharing.

The Great Crash 1929 by John Kenneth Galbraith

Alan Greenspan, Bernie Madoff, business cycle, Everybody Ought to Be Rich, Ford Model T, full employment, Glass-Steagall Act, housing crisis, invention of the wheel, joint-stock company, low interest rates, margin call, market fundamentalism, short selling, South Sea Bubble, the market place

[back] *** 2 New Levels in the Stock Market, p. 257. [back] *** 3 Walter Bagehot, Lombard Street, p. 130. The quotation from Macaulay. above, is cited by Bagehot, p. 128. [back] *** 4 "At present it is less likely that the existence of business cycles will be denied than that their regularity will be exaggerated." Wesley Clair Mitchell, Business Cycles and Unemployment (New York: McGraw-Hill, 1923), p. 6. [back] *** 5 Geoffrey H. Moore, Statistical Indications of Cyclical Revivals and Recessions, Occasional Paper 31, National Bureau of Economic Research, Inc. (New York. 1950). [back] *** 6 H.

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Neither did any of the other public figures who then, as since, made similar statements. These are not forecasts; it is not to be supposed that the men who make them are privileged to look farther into the future than the rest. Mr. Mellon was participating in a ritual which, in our society, is thought to be of great value for influencing the course of the business cycle. By affirming solemnly that prosperity will continue, it is believed, one can help insure that prosperity will in fact continue. Especially among businessmen the faith in the efficiency of such incantation is very great. VI Hoover was elected in a landslide. This, were the speculators privy to Mr.

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There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country's businesses and banks. This inventory—it should perhaps be called the bezzle—amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed.

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, Alan Greenspan, Anthropocene, Apollo 11, back-to-the-land, banking crisis, banks create money, Bear Stearns, biodiversity loss, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, degrowth, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, global village, green transition, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, intentional community, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Jevons paradox, Kenneth Rogoff, late fees, liberal capitalism, low interest rates, mega-rich, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, rolling blackouts, Ronald Reagan, short selling, special drawing rights, systems thinking, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, world market for maybe five computers, zero-sum game

Unfortunately, people tend to act (to some degree, at least) the way they are expected and conditioned to act; thus Homo economicus becomes a self-confirming prediction. Business Cycles, Interest Rates, and Central Banks We have just reviewed a minimalist history of human economies and the economic theories that have been invented to explain and manage them. But there is a lot of detail to be filled in if we are to understand what’s happening in the world economy today. And much of that detail has to do with the spectacular growth of debt — in obvious and subtle forms — that has occurred during the past few decades. The modern debt phenomenon in turn must be seen in light of recurring business cycles that characterize economic activity in modern industrial societies, and the central banks that have been set up to manage them.

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Critics describe the system as a military-industrial “welfare state for corporations.”15 The upsides and downsides of the business cycle are reflected in higher or lower levels of inflation. Inflation is often defined in terms of higher wages and prices, but (as Austrian School economists have persuasively argued) wage and price inflation is actually just the symptom of an increase in the money supply relative to the amounts of goods and services being traded, which in turn is typically the result of exuberant borrowing and spending. Inflation causes each unit of currency to lose value. The downside of the business cycle, in the worst instance, can produce the opposite of inflation, or deflation.

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— Paul Krugman (economist) The conventional wisdom on the state of the economy — that the financial crisis that started in 2008 was caused by bad real estate loans and that eventually, when the kinks are worked out, the nation will be back to business as usual — is tragically wrong. Our real situation is far more unsettling, our problems have much deeper roots, and an adequate response will require far more from us than just waiting for the business cycle to come back around to the “growth” setting. In reality, our economic system is set for a dramatic, and for all practical purposes permanent, reset to a much lower level of function. Civilization is about to be downsized. Why have the vast majority of pundits missed this story? Partly because they rely on economic experts with a tunnel vision that ignores the physical limits of planet Earth — the context in which economies operate.

Social Democratic America by Lane Kenworthy

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, barriers to entry, basic income, benefit corporation, business cycle, carbon tax, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, endogenous growth, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, Kenneth Arrow, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, off-the-grid, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

However, none of these is related to economic growth in their analyses. A fourth is the average growth rate among the group of countries as a whole weighted by the degree of trade openness in each nation. In an analysis with yearly data, this is useful to control for business cycle effects, but it is unnecessary in an analysis that covers one or more complete business cycles. I estimated a series of regressions with various combinations of three other controls: education (average years of schooling completed), real interest rates, tax revenues (as a share of GDP). This did not yield a positive association between institutional coherence and economic growth. 30.

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As our evidence base grows, and particularly as we learn more about best practice in other nations, there is reason for optimism about the quality of future social policy. Can We Afford It? For the past half century, our government has taxed and spent a smaller portion of the country’s economic output than have most other affluent nations. In 2007, the peak year of the pre-crash business cycle, government expenditures totaled 37 percent of GDP in the United States. As figure 1.1 shows, in most other rich nations the share was well above 40 percent, and in some it was above 50 percent. The added cost of the new programs and expansions I recommend plus our existing commitments to Social Security and Medicare is likely to be in the neighborhood of 10 percent of GDP.22 If that sounds massive, keep in mind two things.

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Adding a national consumption tax could get us halfway there, and an assortment of relatively minor additions and adjustments would take us the rest of the way.23 FIGURE 1.1 Government expenditures as a share of GDP Includes government at all levels: national, regional, local. 2007 is the most recent business cycle peak year. Data sources: OECD, stats.oecd.org; Vito Tanzi, Governments versus Markets, Cambridge University Press, 2011, table 1. US 47 percent in 2060 is my projection. Since 1980, much of America’s left has thought about taxation in terms of its impact on the distribution of income, putting tax progressivity front and center.

Beyond Diversification: What Every Investor Needs to Know About Asset Allocation by Sebastien Page

Andrei Shleifer, asset allocation, backtesting, Bernie Madoff, bitcoin, Black Swan, Bob Litterman, book value, business cycle, buy and hold, Cal Newport, capital asset pricing model, commodity super cycle, coronavirus, corporate governance, COVID-19, cryptocurrency, currency risk, discounted cash flows, diversification, diversified portfolio, en.wikipedia.org, equity risk premium, Eugene Fama: efficient market hypothesis, fixed income, future of work, Future Shock, G4S, global macro, implied volatility, index fund, information asymmetry, iterative process, loss aversion, low interest rates, market friction, mental accounting, merger arbitrage, oil shock, passive investing, prediction markets, publication bias, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Feynman, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, robo advisor, seminal paper, shareholder value, Sharpe ratio, sovereign wealth fund, stochastic process, stochastic volatility, stocks for the long run, systematic bias, systematic trading, tail risk, transaction costs, TSMC, value at risk, yield curve, zero-coupon bond, zero-sum game

If we add inflation to the real return estimate, we get an expected nominal equity return of 7% (5% + 2%). Not bad. On the other hand, Robert Shiller, Yale professor and Nobel laureate, uses a P/E ratio that normalizes earnings over the last 10 years and adjusts for inflation (the cyclically adjusted price-earnings ratio, or CAPE). The 10-year period is meant to represent a full business cycle. His approach yields a meager 1% expected real return for US stocks, or 3% nominal if we assume 2% inflation.6 The CAPE is higher than the current P/E in part because earnings have increased significantly over the last 10 years. Another reason for Shiller’s ultralow forecast may be that he doesn’t simply invert the ratio—he adjusts the estimate based on a regression model.

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The lesson is that relative valuation signals work better in fixed income markets than in equity markets. There might be ways to improve on simple yield ratio signals. In the monograph I coauthored with my former PIMCO colleagues Vasant Naik, Mukundan Devarajan, Andrew Nowobilski, and Niels Pedersen (2016), titled “Factor Investing and Asset Allocation: A Business Cycle Perspective,” we use a definition of carry that includes roll down, based on the difference between spot and 12-month forward swap rates. My coauthors simulated a tactical strategy that ranks carry across six countries: United States, Germany, Japan, the United Kingdom, Australia, and Canada.

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Instead, macro factors are often used to confirm relative valuation signals. For example, if non-US equities are cheap relative to US equities based on valuation metrics (P/E and other such metrics) and if macro factors indicate non-US equities should outperform (weakening USD, non-US central bank stimulus, earlier stage in the business cycle versus that in the United States, potential GDP growth surprise, and so forth), then a tactical asset allocator may take a larger position in ACWI ex-US equities than if valuation and macro data don’t agree. Another caveat is that we don’t model expectations directly. In theory, we should run our scenarios against the expectations that are priced into the market.

The Price of Time: The Real Story of Interest by Edward Chancellor

"World Economic Forum" Davos, 3D printing, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, asset allocation, asset-backed security, assortative mating, autonomous vehicles, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, bitcoin, blockchain, bond market vigilante , bonus culture, book value, Bretton Woods, BRICs, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cashless society, cloud computing, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, commodity super cycle, computer age, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cryptocurrency, currency peg, currency risk, David Graeber, debt deflation, deglobalization, delayed gratification, Deng Xiaoping, Detroit bankruptcy, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, double entry bookkeeping, Elon Musk, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, everywhere but in the productivity statistics, Extinction Rebellion, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, full employment, gig economy, Gini coefficient, Glass-Steagall Act, global reserve currency, global supply chain, Goodhart's law, Great Leap Forward, green new deal, Greenspan put, high net worth, high-speed rail, housing crisis, Hyman Minsky, implied volatility, income inequality, income per capita, inflation targeting, initial coin offering, intangible asset, Internet of things, inventory management, invisible hand, Japanese asset price bubble, Jean Tirole, Jeff Bezos, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Rogoff, land bank, large denomination, Les Trente Glorieuses, liquidity trap, lockdown, Long Term Capital Management, low interest rates, Lyft, manufacturing employment, margin call, Mark Spitznagel, market bubble, market clearing, market fundamentalism, Martin Wolf, mega-rich, megaproject, meme stock, Michael Milken, Minsky moment, Modern Monetary Theory, Mohammed Bouazizi, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, Northern Rock, offshore financial centre, operational security, Panopticon Jeremy Bentham, Paul Samuelson, payday loans, peer-to-peer lending, pensions crisis, Peter Thiel, Philip Mirowski, plutocrats, Ponzi scheme, price mechanism, price stability, quantitative easing, railway mania, reality distortion field, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk free rate, risk tolerance, risk/return, road to serfdom, Robert Gordon, Robinhood: mobile stock trading app, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, Second Machine Age, secular stagnation, self-driving car, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, Stanford marshmallow experiment, Steve Jobs, stock buybacks, subprime mortgage crisis, Suez canal 1869, tech billionaire, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tim Haywood, time value of money, too big to fail, total factor productivity, trickle-down economics, tulip mania, Tyler Cowen, Uber and Lyft, Uber for X, uber lyft, Walter Mischel, WeWork, When a measure becomes a target, yield curve

Besides, Strong feared, employing a similar argument to that used by modern central bankers, that raising interest rates to curtail margin loans would produce collateral damage: I think the conclusion is inescapable, that any policy directed solely to forcing liquidation in the stock loan account and concurrently in the prices of securities will be found to have a widespread and somewhat similar effect in other directions, mostly to the detriment of the healthy prosperity of this country.21 The Swedish economist Gustav Cassel endorsed Strong’s view that it was the business of central bankers to maintain price stability and not to concern themselves with the stock market.22 One of the aims of US monetary policy in the 1920s was to dampen the seasonal fluctuations of interest rates caused by the agricultural cycle, which led to money being tight at certain times of the year. The Fed was so successful in this respect that Treasury Secretary Andrew Mellon went so far as to hail an end to the cycle of boom and bust. ‘We are no longer the victims of the vagaries of business cycles. The Federal Reserve System is the antidote for money contraction and credit shortage,’ Mellon declared a year after the Long Island meeting.23 By taming the business cycle, however, the Fed inadvertently encouraged speculative behaviour. As economist Perry Mehrling writes: ‘Intervention to stabilize seasonal and cyclical fluctuations produced low and stable money rates of interest, which supported the investment boom that fueled the Roaring Twenties but also produced an unsustainable asset price bubble.’24 The absolute level of interest rates played a key but less obvious role in fostering Wall Street’s boom.

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None of Kohn’s colleagues who were present at the meeting, including Greenspan and Bernanke, dissented from this opinion.fn4 A couple of months later, the President of the Dallas Federal Reserve, Robert McTeer, was asked whether central bankers were able to prolong the business cycle indefinitely. McTeer replied that: the business cycle is being dealt with much better than it used to be. Policy makers are smarter. They’ve got a lot of mistakes that they can learn from … In the early ’30s when that episode started, there were a lot of bank failures that wiped out a lot of money … Today, every time we have a major emergency, you know, the first thing we do is get on the microphone and open up – you open up a spigot.30 PRICE STABILITY IS NOT ENOUGH Not everyone was convinced that the Greenspan Federal Reserve’s policy of focusing on consumer prices and ignoring other financial imbalances was quite the trick.

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Most monetary theorists seem to have failed utterly to apprehend correctly the nature of the forces operative in America before the coming of depression, thinking apparently that the relative stability of the price level indicated a state of affairs necessarily free from injurious monetary influences.’ 60. Gottfried Haberler, ‘Money and the business cycle’, in The Austrian Theory of the Trade Cycle and Other Essays (Auburn, Ala., 1997), p. 19. 61. See F. A. Hayek, ‘The “Paradox” of Saving’, Economica, 32, May 1931. 62. Phillips et al., Banking and the Business Cycle, p. 201. ‘A policy which seeks to direct credit influences at any single index, whether it be of prices, either wholesale or retail, or production, or incomes, in the interests of stabilization, will result in unexpected and unforeseen repercussions which may be expected to prove disastrous in the long run.’ 63.

GDP: A Brief but Affectionate History by Diane Coyle

Alan Greenspan, Asian financial crisis, Berlin Wall, big-box store, Bletchley Park, Bretton Woods, BRICs, business cycle, clean water, computer age, conceptual framework, crowdsourcing, Diane Coyle, double entry bookkeeping, driverless car, en.wikipedia.org, endogenous growth, Erik Brynjolfsson, Fall of the Berlin Wall, falling living standards, financial intermediation, global supply chain, happiness index / gross national happiness, hedonic treadmill, income inequality, income per capita, informal economy, Johannes Kepler, John von Neumann, Kevin Kelly, Les Trente Glorieuses, Long Term Capital Management, Mahbub ul Haq, mutually assured destruction, Nathan Meyer Rothschild: antibiotics, new economy, Occupy movement, Phillips curve, purchasing power parity, Robert Shiller, Robert Solow, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thorstein Veblen, University of East Anglia, working-age population

There is always pressure on the statisticians to produce timely data, so early estimates of the previous quarter’s GDP will almost always be revised subsequently as more of the component sources of data become available. These revisions can be significant, which makes life frustrating for policymakers trying to figure out what, if anything, they need to do to respond to the business cycle. Although the notion of “fine-tuning” the economy by adjusting tax and spending or interest rates has been pretty much discredited among economists, thanks to the terrible experience of this approach going wrong in the 1970s, there is still immense pressure on politicians and central bankers to try to boost the growth of GDP during a recession.

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Table 2: Real Annual GDP Growth Rates (Percent) Country 1950–1973 1973–1998 United States 3.93 2.99 United Kingdom 2.93 2.00 France 5.05 2.10 Germany 5.68 1.76 Japan 4.61 4.96 Source: Angus Maddison, The World Economy: A Millennial Perspective (Paris: Organization for Economic Cooperation and Development, 2000). Even though the business cycle—the periodic downs and ups of the economy as a whole—returned, GDP growth continued above its earlier rates during the 1950s, 1960s, and early 1970s. In the United States, GDP growth averaged nearly 4 percent a year from 1950 to 1973, compared with less than 3 percent a year between the two world wars.

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So what was going wrong by the late 1960s, a decade that ended with students in the streets throwing stones and crude Molotov cocktails at the police, workers on strike, power cuts, and citizens hoarding food? As so often in life, the roots of failure lay in the nature of success. There was, in a way, too much growth. The tools of demand management proved too tempting and were used to boost the economy whenever there was a business cycle downturn. Both lower interest rates and extra government spending (or tax cuts) were generally used to try to limit downturns and keep the level of employment high. Politicians and other officials had in mind the model of the economy as a machine, just like the mechanical Phillips Machine that gave physical form to the circular flow of income in the national accounts (see chapter 1).

Money: 5,000 Years of Debt and Power by Michel Aglietta

accelerated depreciation, Alan Greenspan, bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, circular economy, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, Suez crisis 1956, the payments system, the scientific method, tontine, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

At the end of the eighteenth century it had embarked upon the Industrial Revolution, and thus enjoyed comparative advantages in profiting from the revival of trade in Europe. Up until 1848, it was able to limit deflation to low, albeit persistent, rates. It took no less than forty years to bring the public debt back down to 100 percent of GDP. From the 1840s onwards, the business cycles of industrial capitalism set the rhythm of financial crises. Each turnaround in the business cycle after its peak degenerated into a financial crisis. These panics were triggered by the collapse of some important financial institution, precipitating the demand for gold conversion in all banks. Constrained by convertibility, the Bank of England sought to protect its own reserves, in turn worsening the panic.

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These imbalances affect credit flows in both bearish and bullish phases of the financial cycle.20 Figure 7.3 portrays the financial cycles and short-term business cycles in the main Western countries in which finance is entirely liberalised. These series are logarithms presented in real terms, deflated by the consumer price index. Only credit as a share of GDP is expressed as a percentage. The financial cycle corresponds to the average of these three standardised and filtered series. Figure 7.3 Business cycles and financial cycles (1976 Q1–2014 Q3) Sources: IBS and OECD. Calculations by Thomas Brand for Aglietta and Brand, ‘La stagnation séculaire dans les cycles financiers de longue période’ (2015).

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The former offloads the burden of adjustment onto these countries, in particular if they are in deficit. This privileged situation puts the issuing country into the position of a business-cycle maker and generator of global shocks (for economic activity, raw materials prices, exchange rates, and so on). Conversely, the peripheral countries have to take on the burden of an asymmetrical adjustment. Their position as a business-cycle taker makes them vulnerable to exogenous shocks that they have to absorb. Here, too, they are incentivised to accumulate surplus foreign currency reserves as a precaution, and to implement restrictive neo-mercantilist policies focused on export-led growth.37 Finally, there is a profound asymmetry in terms of the autonomy of different countries’ economic policy.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt by Russell Napier

Alan Greenspan, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Berlin Wall, book value, Bretton Woods, business cycle, Buy land – they’re not making it any more, capital controls, central bank independence, colonial rule, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, Deng Xiaoping, desegregation, discounted cash flows, diversification, Donald Trump, equity risk premium, financial engineering, financial innovation, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, hindsight bias, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, if you build it, they will come, impact investing, inflation targeting, interest rate swap, invisible hand, Japanese asset price bubble, Jeff Bezos, junk bonds, Kickstarter, laissez-faire capitalism, lateral thinking, Long Term Capital Management, low interest rates, market bubble, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, Michael Milken, Money creation, moral hazard, Myron Scholes, negative equity, offshore financial centre, open borders, open economy, Pearl River Delta, price mechanism, profit motive, quantitative easing, Ralph Waldo Emerson, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, savings glut, Scramble for Africa, short selling, social distancing, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, yield curve

The assets traders and the bankers have seen their profits boom, far outstripping gains that could be made from general economic development. The ascendancy of the asset traders and their financiers is a feature of liquidity-driven markets throughout history. History also teaches that successful asset traders need more than a ruler, a pencil and a grasp of extrapolation to gain acceptable returns on capital throughout the business cycle. In short, as liquidity dries up, those that were first shall be last. The profits to be made in asset trading in Asia, much of it financed by debt, had become so attractive as to divert capital from productive activities. Arriving into this great liquidity-driven party, it was striking how this was all taken as normal.

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It is always tempting at the end of a bear market to proclaim that the bad news came as a surprise and nobody could have foreseen it coming. The complete meltdown of the Thai credit system was very apparent at least eight months before the authorities were forced to devalue the Thai baht exchange rate and almost two years before the price of Thai equities stopped falling. This of course was no ordinary business cycle or credit cycle. But that it was to be something that challenged the very solvency of the financial system was already fairly evident by the second half of 1996. I had attended the presentation in Edinburgh for the IPO for Somprasong Land just a few years before. We received a detailed list of the property the company owned and some delightful artist’s impressions, they always are, of the buildings they would build there.

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Investors in any stock market with the wrong monetary policy structure have to assess when the country is politically ready to make such a major choice for change and what its implications might be. While Greece did not ultimately make the choice to adopt a new monetary structure, by May 1997 Thailand was just a month away from such a momentous decision. Perhaps if all Thailand faced in May 1997 was a normal business cycle, the low market capitalisation of its local stock market might have indicated that good long-term returns would follow. However, as Thailand faced a major structural adjustment that unveiled the excesses wrought by the wrong monetary policy, the small stock market capitalisation said little about the level of likely future returns.

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, Greenspan put, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, National Debt Clock, new economy, Northern Rock, Own Your Own Home, precautionary principle, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

And even though the current crisis began in the United States, it remains a fact that countries with sophisticated financial markets have fewer financial crises than others.' One reason the peaks and troughs of the business cycle are evened out in developed countries is that people there can take out loans when times are bad. Before They Knew the Answers We cannot do without the confidence and cooperation that financial markets embody. But we have also seen how easy it is to develop confidence in the wrong people or business concepts. Toward the end of 2008, the worst financial storms had abated, at least for now, but this is also when the long and deep trough of the business cycle begins to make itself felt in earnest. As banks reduce their indebtedness and leverage, and as institutions that previously threw capital in all directions are wound down, companies, households, and in some cases even entire nations will be unable to borrow enough to cover their running expenses.

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The gigantic public works programs are being justified by reference to Keynes's teachings that the government can stimulate demand. In the absence of private demand, public spending is to fill the void and get the business cycle moving upward. But Keynes developed his ideas during the Great Depression and saw them as a way to get a completely stationary economy moving again. He was much more skeptical about whether public works could be used to control the business cycle. In 1942, he warned, "They are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date)."35 In fact, the delayed impact may reinforce the subsequent upturn, leading to overheating and a new crisis.

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He isn't a monetarist. He isn't a supplysider. If he's anything, he's a pragmatist, and as such, he is somewhat unpredictable? But regardless of what theory Greenspan's actions built on, they caused him to be declared a genius in some circles, where he was viewed as a magician who had lifted growth and tamed the business cycle. Journalist Bob Woodward, of Watergate fame, chose the title Maestro for his book about Greenspan, who is there credited with orchestrating the 1990s boom in the United States. During the 2000 presidential election, the Republican primary candidate John McCain joked that he would reappoint the then 76-year-old Fed chairman-even if he were to die: "I'd prop him up and put a pair of dark glasses on him and keep him as long as we could."3 An Inflationary Boom of Some Sort After September 11, 2001, the world once more looked to Alan Greenspan, the Fed chairman who, like Archimedes, got his best ideas in his bath.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

Manias generally have occurred during the expansion phase of the business cycle, in part because the euphoria associated with the mania leads to increases in spending. During the mania the increases in the prices of real estate or stocks or in one or several commodities contribute to increases in consumption and investment spending that in turn lead to quickening of economic growth. Seers in the economy forecast perpetual economic growth and some venturesome ones even proclaim an end to recessions and declare that traditional business cycles have become obsolete. The more rapid growth induces investors and lenders to become more optimistic, and asset prices increase more rapidly.

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An epilogue summarizes some of the proposals for reform of the US financial system and asks whether the bubble and crisis of 2002–08 would have been significantly different if the legislation adopted in 2010 had been adopted in 2000. 2 The Anatomy of a Typical Crisis History vs economics Historians view each event as unique. In contrast economists search for the patterns in the data, and the systematic relationships between an event and its antecedents. History is particular; economics is general. The business cycle is a standard feature of market economies; increases in investment spending lead to increases in household income and in GDP growth. Macroeconomics focuses on the explanations for the cyclical variations in the growth of GDP relative to its long-run trend. An economic model of a general financial crisis is presented in this chapter, while the various phases of the speculative manias that lead to crises are illustrated in the following chapters.

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Theories based on uncertainty of the market, on speculation in commodities, on ‘overtrading,’ on the excesses of bank credit, on the psychology of traders and merchants, did indeed reasonably fit the early ‘mercantile’ or commercial phase of modern capitalism. But as the nineteenth century wore on, captains of industry ... became the main outlets for funds seeking a profitable return through savings and investments.7 Hansen – who was a foremost expositor of the Keynesian model of the business cycle and especially of persistent high levels of unemployment – wanted to downplay the significance of alternative explanations for declines in economic activity other than a high level of saving. Hansen’s emphasis on the importance of the relation between savings and investment does not require the rejection of the view that changes in the supply of credit can have important impacts on the prices of securities and economic activity.

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, book value, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, foreign exchange controls, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land bank, land reform, land tenure, land value tax, Landlord’s Game, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, Minsky moment, Money creation, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, Post-Keynesian economics, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Robert Solow, Second Machine Age, secular stagnation, shareholder value, subprime mortgage crisis, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

NBER Working Paper Series, No. 7559. Bernanke, Ben, Mark Gertler, and Simon Gilchrist. 1999. ‘The Financial Accelerator in a Quantitative Business Cycle Framework’. Handbook of Macroeconomics 1: 1341–93. Berry, Sian. 2016. ‘Why a London Renters Union Stands In a Proud Tradition’. The Huffington Post. http://www.huffingtonpost.co.uk/sian-berry/london-housing_b_9090016.html. Bertay, Ata Can, Asli Demirgüç-Kunt, and Harry Huizinga. 2015. ‘Bank Ownership and Credit over the Business Cycle: Is Lending by State Banks Less Procyclical?’ Journal of Banking and Finance 50: 326–39. Bezemer, Dirk. 2009. ‘No One Saw This Coming: Understanding Financial Crisis Through Accounting Models’.

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While there is a strong theoretical case for allowing land to be used as a form of collateral from an economic development perspective (De Soto, 2000), there is also strong evidence that rapid rises in real estate credit increase financial fragility and are strong predictors of financial crises and long-lasting recessions. More generally, a number of economists now argue that capitalist economies are characterized by a land–credit ‘cycle’, which may be longer and deeper that the standard economics textbook ‘business cycle’ (Aikman et al., 2014; Borio, 2014). Figure 1.1 shows how house and land prices have developed over time in the UK over the last sixty years. We can see that since the 1960s land prices have become highly volatile, with three huge boom–bust cycles, corresponding to expansions in bank credit in the 1970s, late 1980s and 2000s.

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Eventually, a tipping point is reached, leading to the collapse of enterprises at the margin that can no longer afford to pay their staff and this may lead to a more widespread economic downturn with rising unemployment, banking crises and foreclosures. This natural tendency of economic rent to crowd out productive investment is, according to some, the true cause of the businesses cycles that plague advanced economies (Anderson, 2009; George, [1879] 1979, pp. 102–110).6 The solution, for George, was a comprehensive ‘single tax’, a land value tax (LVT), levied annually on the value of land held as private property. It would be high enough to end other taxes, especially upon labour and production, and would finance beneficial public investment in transport and provide improved social services, including a basic income for every citizen as a form of comprehensive welfare provision (see for example Van Parijs, 1992; Reed, 2016).

The American Dream Is Not Dead: (But Populism Could Kill It) by Michael R. Strain

Bernie Sanders, business cycle, centre right, creative destruction, deindustrialization, Donald Trump, feminist movement, full employment, gig economy, Gini coefficient, income inequality, job automation, labor-force participation, market clearing, market fundamentalism, new economy, opioid epidemic / opioid crisis, public intellectual, Robert Gordon, Ronald Reagan, social intelligence, Steven Pinker, The Rise and Fall of American Growth, Tyler Cowen, upwardly mobile, working poor

The base-year selection is always somewhat arbitrary, of course, but we still need to pick one. I like to use July 1990, for a few reasons. Wage growth typically responds to the business cycle. To make comparisons of wage growth between two periods, then, it is important to try to find periods that are at a similar point in the business cycle. For example, comparing wage growth during a recession to wage growth during an expansion might bias the calculation to show stronger growth than may exist in the underlying trend. July 1990 was a business-cycle peak, making it a good month to compare to today’s economy. (If anything, this date introduces a slight bias in favor of finding relatively weaker wage growth.)

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It looks as if wage growth can be broken into three periods: robust growth following the end of World War II, followed by a period of stagnant—or even declining—growth from the mid-1970s through the mid-1990s, followed again by a period of solid growth. So another reason to make comparisons to the summer of 1990 is that this was the business-cycle peak prior to the “structural break” that seems to have occurred in the mid-1990s. FIGURE 7. AVERAGE REAL WAGE FOR PRODUCTION AND NONSUPERVISORY EMPLOYEES. July 1990 is also roughly 30 years ago, which reflects the current narrative. You often hear that wages have been stagnant “for several decades,” which many take to mean 30 years.

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Stansbury and Summers have a straightforward empirical design. They calculate the three-year moving average of the change in real compensation and the three-year moving average of the change in labor productivity. They then correlate these smooth, short-run measures of compensation growth and productivity growth, holding constant effects from the business cycle. Their main results analyze the period from 1975 through 2015. The economists find that a 1-percentage-point increase in productivity growth predicts a 0.73-percentage point increase in median compensation growth, a 0.53-percentage-point increase in compensation growth for nonsupervisory employees, and a 0.74-percentage-point increase in average compensation growth.

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

Alan Greenspan, bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Greenspan put, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land bank, land reform, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, Post-Keynesian economics, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, Savings and loan crisis, seigniorage, shareholder value, short selling, South Sea Bubble, technological determinism, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Belief in a ‘great moderation’ – that improvements in understanding the economy led to greater control of the business cycle through monetary policy – were endorsed by a wide range of economists including Ben Bernanke, Governor of the Federal Reserve (Bernanke, 2004). This behaviour is not surprising – psychologists have shown that success boosts confidence (Shiller, 1999). Thus extended periods of stability lead economic agents to revise what they believe to be ‘safe’ debt-equity ratios, spurred on by the proclamations of ‘experts’ (who believe themselves to have tamed the business cycle). One cause of over-optimism as to the future state of the economy is ‘disaster myopia’.

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Using the same 14 country 140 year dataset as Schularick and Taylor (2009), Jordà, Schularick and Taylor (2012) show “that throughout a century or more of modern economic history in advanced countries a close relationship has existed between the build-up of credit during an expansion and the severity of the subsequent recession.” As Taylor (2012) explains in a subsequent paper: “…that credit booms matter as a financial crisis risk factor is a rather narrow conclusion, and that a more general and worrying correlation is evident. During any business cycle, whether ending in a financial crisis recession or just a normal recession, there is a very strong relationship between the growth of credit (relative to GDP) on the upswing, and the depth of the subsequent collapse in GDP on the downswing.” Essentially, excess credit creation by the banking sector increases the severity of any subsequent downturn, whether it results in a financial crisis or just a normal ‘garden variety’ recession.

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Needless to say, these are not trivial sums. 5.4 Environmental impacts The following section looks at how the monetary system impacts on the environment as a consequence of the government’s response to the boom bust cycle, the funding of businesses, and the effect of the monetary system on growth.4 Government responses to the boom bust cycle As outlined in Chapter 4, the current monetary system creates an inbuilt tendency for the economy to experience temporary booms followed by recessions. This may also be followed by financial crisis when the burden of debt becomes too large to service. While the business cycle itself has a relatively neutral effect on the environment (excluding the mal-investment effect on resource use) the same cannot be said of the government’s response to these cycles, which tends to involve removing environmental regulations and reducing spending, as outlined below. Environmental regulation in economic downturns In a recession it is common to hear the argument that the costs of businesses are too high due to regulations which are represented as onerous, and that the relaxation of these regulations would allow businesses to hire, resulting in reduced unemployment and increased output.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

addicted to oil, air freight, airline deregulation, Alan Greenspan, Albert Einstein, asset-backed security, bank run, Berlin Wall, Black Monday: stock market crash in 1987, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon tax, central bank independence, collateralized debt obligation, collective bargaining, compensation consultant, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, cotton gin, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, currency risk, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Glass-Steagall Act, Hernando de Soto, income inequality, income per capita, information security, invisible hand, Joseph Schumpeter, junk bonds, labor-force participation, laissez-faire capitalism, land reform, Long Term Capital Management, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, open immigration, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, Reminiscences of a Stock Operator, reserve currency, Right to Buy, risk tolerance, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, special economic zone, stock buybacks, stocks for the long run, Suez crisis 1956, the payments system, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, Tipper Gore, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, We are all Keynesians now, working-age population, Y2K, zero-sum game

When America mobilized for the war, the system helped planners set goals for military production and gauge how much rationing would be needed on the home front to support the war effort. The NBER is also the authority on the ups and downs of the business cycle; its analysts to this day determine the official beginning and ending dates of recessions. Arthur Burns was an avuncular, pipe-smoking scholar. He had a profound impact on business-cycle research—his 1946 book, written with Wesley Clair Mitchell, was the seminal analysis of U.S. business cycles from 1854 to 1938. His devotion to empirical evidence and deductive logic put him at odds with the economics mainstream. Burns loved to provoke disagreements among his graduate students.

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On Christmas Eve, the policy group wrote a memorandum warning him to expect more unemployment and the deepest recession since World War II. It was not a nice present. Worse, we had to tell him we didn't know how bad the recession would be. Recessions are like hurricanes—they range from ordinary to catastrophic. The ordinary ones are part of the business cycle: they happen when business inventories exceed demand, and companies cut production sharply until the excess inventory gets sold. The Category 5 kind happens when demand itself collapses—when consumers stop spending and businesses stop investing. As we talked through the possibilities, President Ford worried that America would find itself trapped in a vicious circle of falling demand, layoffs, and gloom.

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"In the medium and long term it will be a very good thing for the economy," he added. W hen George Bush won that fall, I hoped the Fed and his administra- tion would get along. Everybody knew that whoever came in after Reagan would face big economic challenges: not just an eventual downturn in the business cycle, but whopping deficits and the rapidly mounting national debt. I thought Bush had upped the ante substantially when he'd declared in his acceptance speech at the Republican convention: "Read my lips: no new taxes." It was a memorable line, but at some point he was going to have to tackle the deficit—and he'd tied one hand behind his back.

The Investment Checklist: The Art of In-Depth Research by Michael Shearn

accelerated depreciation, AOL-Time Warner, Asian financial crisis, barriers to entry, Bear Stearns, book value, business cycle, call centre, Carl Icahn, Clayton Christensen, collective bargaining, commoditize, compensation consultant, compound rate of return, Credit Default Swap, currency risk, do what you love, electricity market, estate planning, financial engineering, Henry Singleton, intangible asset, Jeff Bezos, Larry Ellison, London Interbank Offered Rate, margin call, Mark Zuckerberg, money market fund, Network effects, PalmPilot, pink-collar, risk tolerance, shareholder value, six sigma, Skype, Steve Jobs, stock buybacks, subscription business, supply-chain management, technology bubble, Teledyne, time value of money, transaction costs, urban planning, women in the workforce, young professional

Be certain to distinguish between this kind of long-term growth and shorter-term cyclical changes. These short-term changes are also called business cycle changes: these are the ups and downs that are associated with growth and contraction in the wider economy. The earnings of a cyclical business, such as a steel manufacturer, are especially sensitive to business cycles, and change with swings in the economy. (Non-cyclical businesses don’t tend to go up and down with the economy.) If a business benefits from a secular growth trend, its growth is longer lasting than a single business cycle. Secular growth continues through a business cycle. In fact, earnings-per-share of businesses riding secular growth trends tend to peak at each succeeding major business cycle.

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To further protect itself, Brookfield will only borrow the amount that it would typically be able to pay back in one business cycle. Brookfield also staggers the maturity of its debt repayments so that they don’t all come due at the same time, thus decreasing refinancing risk. Brookfield will typically finance assets that generate predictable long-term cash flows with long-term fixed-rate debt, instead of variable-rate debt, in order to provide stability in cash flows and protect returns in the event of changes in interest rates. It also maintains access to a broad range of financing markets, such as equity and debt markets, so that it can facilitate access to capital throughout the business cycle. This way, it is not dependent on any particular segment of the capital markets to finance its operations.7 Determining How Much a Business Can Borrow You need to determine how much a business can borrow.

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Do not make the assumption that a discretionary business or industry will always lose sales in tough times, however. For example, many luxury retailers—such as Louis Vuitton Moët Hennessy or Compagnie Financière Richemont SA, which owns Cartier, Montblanc, Alfred Dunhill, and Van Cleef & Arpels—were thought to be sensitive to business cycles, and their stock prices fell when the recession began in 2007. However, the stock prices of these two companies quickly rebounded as their core customers, who are ultra-wealthy, continued their spending habits, and sales did not drop as much as was anticipated. 14. If the business disappeared tomorrow, what impact would this have on the customer base?

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

airline deregulation, airport security, Alan Greenspan, Alvin Toffler, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, bond market vigilante , book value, Bretton Woods, business cycle, central bank independence, centralized clearinghouse, classic study, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Dr. Strangelove, energy security, equity premium, fiat currency, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, Future Shock, Glass-Steagall Act, Greenspan put, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Lewis Mumford, Long Term Capital Management, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, Neil Armstrong, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Phillips curve, plutocrats, popular capitalism, price stability, RAND corporation, Reminiscences of a Stock Operator, rent-seeking, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, stock buybacks, subprime mortgage crisis, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tipper Gore, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, We are all Keynesians now, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

Anticipating the objection that “the people” in question had voted for liberals, Spahr lectured his audience that “the last popular vote for Hitler was nearly 100% of the total vote cast.”14 Evidently, in those years when peace was new, the relics of the prewar economics lived on in the NYU faculty. The question is how far any of this made a difference to the young Greenspan. Toward the end of his undergraduate career, he took Spahr’s class on understanding business cycles. Ironically, Spahr’s views on this subject anticipated the lectures and articles that Greenspan would produce in his thirties and early forties. In Spahr’s opinion, Keynes and his disciples had business cycles backward: they favored budget deficits and money printing to battle recessions, but Spahr fervently believed that such activism would serve only to exacerbate swings in the economy. Yet if this was Spahr’s opinion, he was ineffective at communicating it.

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Keynes had taught how to combat economic slowdowns by running a government budget deficit, and neo-Keynesians had grasped how slumps could be averted by the central bank as well: low interest rates, hitherto regarded principally as a means of helping the government to borrow, were now understood as a tool of economic management.2 “The supply of money, its availability to investor borrowers, and the interest cost of such borrowings can have important effects on [GNP],” Paul Samuelson instructed in the 1961 edition of his bestselling textbook, revising the dismissal of monetary policy in his 1948 edition.3 “The worst consequences of the business cycle . . . are probably a thing of the past,” Samuelson wrote confidently, and conservative economists agreed.4 At the end of 1959, Greenspan’s mentor Arthur Burns proclaimed, “The business cycle is unlikely to be as disturbing or troublesome to our children as it was to us and our fathers.”5 It was not just that economists understood how to prevent recessions. Thanks to new computer models, they believed they understood the relationships between growth, inflation, and employment so precisely that they could “fine-tune” the economy to deliver the ideal combination.

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Now if you have a manic depressive and you kick him, he will go into a deeper manic depression. This assumption that is taken as a given, that you have to ‘spark’ the economy, is an incredible hypothesis. It’s just false! There is no evidence that ‘sparking’ an economy actually turns it on. . . . We’ve had centuries of business cycles which go up and which go down. There hasn’t been a single business cycle which has not recovered on its own.” Alan Greenspan, interview by the author, October 29, 2010. 6. While Friedman expected the Fed to succumb to political pressure, others thought the central bank was powerless because rational individuals would adjust their behavior in an offsetting direction.

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

As with any futures based investment, returns are determined by both the expected returns on the deliverable and the expected cost of carry returns, as well as other storage and deliverable options. For example, as expected, Fama and French (1988) and Schneeweis, Spurgin, and Georgiev (2000) identified a strong business cycle component in industrial metals based futures contracts, a finding that is consistent with the business cycle variation of spot and futures prices of industrial metals.3 Commodity based index returns can also benefit from multiple sources of returns, many of which tend not to be correlated. These can include spot,4 roll,5 beta, momentum, rebalancing, and Treasury Bill, returns.

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The entire area of monitoring and evaluating fund risk is constantly evolving, and readers are directed to articles in academic (The Journal of Alternative Investments) and practitioner press to track changes and advances in the field. APPENDIX Risk and Return of Asset Classes and Risk Factors Through Business Cycles This appendix presents graphs of risks and returns of major asset classes through time. The goal is to familiarize readers with the behavior of these variables as the economy goes through various stages of the business cycle. Our other goal is to show that return and, especially, risk characteristics of asset classes do change through time and some of these changes will be quite dramatic during periods of economic stress.

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Notes CHAPTER 5 Strategic, Tactical, and Dynamic Asset Allocation Asset Allocation Optimization Models Strategic Asset Allocation Tactical Asset Allocation Dynamic Asset Allocation Notes CHAPTER 6 Core and Satellite Investment: Market/Manager Based Alternatives Determining the Appropriate Benchmarks and Groupings Sample Allocations Core Allocation Satellite Investment Algorithmic and Discretionary Aspects of Core/Satellite Exposure Replication Based Indices Peer Group Creation—Style Purity Notes 58 59 61 66 70 71 74 82 84 88 91 92 99 101 107 109 110 111 117 119 120 120 122 126 132 Contents CHAPTER 7 Sources of Risk and Return in Alternative Investments Asset Class Performance Hedge Funds Managed Futures (Commodity Trading Advisors) Private Equity Real Estate Commodities Notes CHAPTER 8 Return and Risk Differences among Similar Asset Class Benchmarks Making Sense Out of Traditional Stock and Bond Indices Private Equity Real Estate Alternative REIT Investments Indices Commodity Investment Hedge Funds Investable Manager Based Hedge Fund Indices CTA Investment Index versus Fund Investment: A Hedge Fund Example Notes CHAPTER 9 Risk Budgeting and Asset Allocation Process of Risk Management: Multi-Factor Approach Process of Risk Management: Volatility Target Risk Decomposition of Portfolio Risk Management Using Futures Risk Management Using Options Covered Call Long Collar Notes CHAPTER 10 Myths of Asset Allocation Investor Attitudes, Not Economic Information, Drive Asset Values Diversification Across Domestic or International Equity Securities Is Sufficient vii 134 135 139 143 148 153 160 166 167 168 170 173 179 179 185 185 189 189 194 195 195 200 202 203 206 206 208 210 212 213 214 viii CONTENTS Historical Security and Index Performance Provides a Simple Means to Forecast Future Excess Risk-Adjusted Returns Recent Manager Fund Return Performance Provides the Best Forecast of Future Return Superior Managers or Superior Investment Ideas Do Not Exist Performance Analytics Provide a Complete Means to Determine Better Performing Managers Traditional Assets Reflect “Actual Values” Better Than Alternative Investments Stock and Bond Investment Means Investors Have No Derivatives Exposure Stock and Bond Investment Removes Investor Concerns as to Leverage Given the Efficiency of the Stock and Bond Markets, Managers Provide No Useful Service Investors Can Rely on Academics and Investment Professionals to Provide Current Investment Models and Theories Alternative Assets Are Riskier Than Equity and Fixed Income Securities Alternative Assets Such as Hedge Funds Are Absolute Return Vehicles Alternative Investments Such as Hedge Funds Are Unique in Their Investment Strategies Hedge Funds Are Black Box Trading Systems Unintelligible to Investors Hedge Funds Are Traders, Not Investment Managers Alternative Investment Strategies Are So Unique That They Cannot Be Replicated It Makes Little Difference Which Traditional or Alternative Indices Are Used in an Asset Allocation Model Modern Portfolio Theory Is Too Simplistic to Deal with Private Equity, Real Estate, and Hedge Funds Notes CHAPTER 11 The Importance of Discretion in Asset Allocation Decisions The Why and Wherefore of Asset Allocation Models Value of Manager Discretion 215 215 216 216 217 217 218 218 218 219 220 221 222 222 223 223 223 225 226 226 230 Contents Manager Evaluation and Review: The Due Diligence Process Madoff: Due Diligence Gone Wrong or Never Conducted Notes CHAPTER 12 Asset Allocation: Where Is It Headed? An Uncertain Future What Is the Definition of Order? Costs and Benefits Today’s Issue Possible Governmental and Private Fund Responses to Current Market Concerns Note ix 232 233 239 240 241 243 246 246 247 249 Appendix: Risk and Return of Asset Classes and Risk Factors Through Business Cycles 251 Glossary: Asset Class Benchmarks 271 Bibliography 279 About the Authors 285 Index 287 Preface ithout reservation, everything we believe about asset allocation and the perceived science surrounding its application is not necessarily true. The corollary to this statement is that a complete understanding of asset allocation is impossible.

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader by Colin Lancaster

"World Economic Forum" Davos, Adam Neumann (WeWork), Airbnb, Alan Greenspan, always be closing, asset-backed security, beat the dealer, Ben Bernanke: helicopter money, Bernie Sanders, Big Tech, Black Monday: stock market crash in 1987, bond market vigilante , Bonfire of the Vanities, Boris Johnson, Bretton Woods, business cycle, buy the rumour, sell the news, Carmen Reinhart, Chuck Templeton: OpenTable:, collateralized debt obligation, coronavirus, COVID-19, creative destruction, credit crunch, currency manipulation / currency intervention, deal flow, Donald Trump, Edward Thorp, family office, fear index, fiat currency, fixed income, Flash crash, George Floyd, global macro, global pandemic, global supply chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Growth in a Time of Debt, housing crisis, index arbitrage, inverted yield curve, Jeff Bezos, Jim Simons, junk bonds, Kenneth Rogoff, liquidity trap, lockdown, Long Term Capital Management, low interest rates, low skilled workers, margin call, market bubble, Masayoshi Son, Michael Milken, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, moral hazard, National Debt Clock, Nixon triggered the end of the Bretton Woods system, Northern Rock, oil shock, pets.com, Ponzi scheme, price stability, proprietary trading, quantitative easing, Reminiscences of a Stock Operator, reserve currency, Ronald Reagan, Ronald Reagan: Tear down this wall, Sharpe ratio, short selling, short squeeze, social distancing, SoftBank, statistical arbitrage, stock buybacks, The Great Moderation, TikTok, too big to fail, trickle-down economics, two and twenty, value at risk, Vision Fund, WeWork, yield curve, zero-sum game

At its simplest, global macro investing can be boiled down to investing in assets on the basis of changes in the fundamental landscape: the ups and downs in growth and inflation and interest rates. It’s understanding business cycles and how government spending and central bank policies will impact those cycles. As George Soros pointed out in his book The Alchemy of Finance, monetary policy and normal business cycles impact each other. Furthermore, variables such as credit, housing, employment, inflation, and consumption all flow into this analysis. Equity experts will do a tremendous amount of work in understanding how a company operates.

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As I settle into my seat, I keep thinking about the markets and the policies that are creating these problems. I used to love this stuff. In fact, that’s why I started doing it. Macro guys are different from other investors. We really get to think about the world and how government policies impact business cycles and real people. I used to love all of that learning. I’m not sure what changed, why I became so sour. As these thoughts are going through my head, I drift off to sleep. * I land in London early Saturday morning. I meet my driver and hop in the car. The radio is on and I hear “Orrrrrderrrrrrr.

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Whenever I speak with analysts on their first day, I avoid these sorts of wide-eyed musings and opt to give them the dry version of macro instead. It’s probably better to set the bar appropriately low. At its most mechanical level, macro is about investing in assets on the basis of changes in the fundamental landscape: the ups and downs in growth and inflation and interest rates. It’s about understanding business cycles, and how government spending and central bank policies will impact those cycles. We analyze an enormous amount of macroeconomic data and spend hours focused on central banks, attempting to predict both fiscal and monetary decisions and the impact of those decisions on financial markets, ranging from bonds to currencies to equities and commodities.

Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy by Erik Brynjolfsson

Abraham Maslow, Amazon Mechanical Turk, Any sufficiently advanced technology is indistinguishable from magic, autonomous vehicles, business cycle, business process, call centre, combinatorial explosion, corporate governance, creative destruction, crowdsourcing, David Ricardo: comparative advantage, driverless car, easy for humans, difficult for computers, Erik Brynjolfsson, factory automation, first square of the chessboard, first square of the chessboard / second half of the chessboard, Frank Levy and Richard Murnane: The New Division of Labor, general purpose technology, hiring and firing, income inequality, intangible asset, job automation, John Markoff, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Khan Academy, Kickstarter, knowledge worker, Loebner Prize, low skilled workers, machine translation, minimum wage unemployment, patent troll, pattern recognition, Paul Samuelson, Ray Kurzweil, rising living standards, Robert Gordon, Robert Solow, self-driving car, shareholder value, Skype, the long tail, too big to fail, Turing test, Tyler Cowen, Tyler Cowen: Great Stagnation, Watson beat the top human players on Jeopardy!, wealth creators, winner-take-all economy, zero-sum game

Former Office of Management and Budget director Peter Orszag agrees, writing that “the fundamental impediment to getting jobless Americans back to work is weak growth.” In the cyclical explanation, an especially deep drop in demand like the Great Recession is bound to be followed by a long and frustratingly slow recovery. What America has been experiencing since 2007, in short, is another case of the business cycle in action, albeit a particularly painful one. A second explanation for current hard times sees stagnation, not cyclicality, in action. Stagnation in this context means a long-term decline in America’s ability to innovate and increase productivity. Economist Tyler Cowen articulates this view in his 2010 book, The Great Stagnation: We are failing to understand why we are failing.

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Their incomes and jobs are being destroyed, leaving them worse off in absolute purchasing power than before the digital revolution. While the foundation of our economic system presumes a strong link between value creation and job creation, the Great Recession reveals the weakening or breakage of that link. This is not merely an artifact of the business cycle but rather a symptom of a deeper structural change in the nature of production. As technology accelerates on the second half of the chessboard, so will the economic mismatches, undermining our social contract and ultimately hurting both rich and poor, not just the first waves of unemployed. The economics of technology, productivity, and employment are increasingly fodder for debate and seemingly filled with paradoxes.

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The gradual demand collapse that might have been spread over decades was compressed into a much shorter period, making it harder for workers to change their skills, entrepreneurs to invent new business models, and managers to make the necessary adjustments equally quickly. The result has been a dysfunctional series of crises. Certainly, much of the recent unemployment is, as past business cycles, simply due to weak demand in the overall economy, reflecting an extremely severe downturn. However, this does not negate the important structural component to the falling levels of employment, and it is plausible that the Great Recession itself may, in part, reflect a delayed response to these deeper structural issues.

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities by Mancur Olson

barriers to entry, British Empire, business cycle, California gold rush, collective bargaining, correlation coefficient, David Ricardo: comparative advantage, full employment, income per capita, Kenneth Arrow, market clearing, Norman Macrae, Pareto efficiency, Phillips curve, price discrimination, profit maximization, rent-seeking, Robert Solow, Sam Peltzman, search costs, selection bias, Simon Kuznets, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, urban decay, working poor

Mancur Olson For Ellika, Mancur Severin, and Sander Preface 1. The Questions, and the Standards a Satisfactory Answer Must Meet 2. The Logic 3. The Implications 4. The Developed Democracies Since World War 11 5. Jurisdictional Integration and Foreign Trade 6. Inequality, Discrimination, and Development 7. Stagflation, Unemployment, and Business Cycles: An Evolutionary Approach to Macroeconomics Acknowledgments Notes Index It may seem strange, at a time when so many find fault with economics, that an economist should claim to extend existing economic theory in a way that not only explains the "stagflation" and declining growth rates that have given rise to the recent complaints, but also provides a partial explanation of a variety of problems usually reserved for other fieldsthe "ungovernability" of some modern societies, the British class structure and the Indian caste system, the exceptionally unequal distribution of power and income in many developing countries, and even the rise of Western Europe from relative backwardness in the early Middle Ages to dominance of the whole world by the late nineteenth century.

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VI We must now develop a point that may at first seem unimportant, and that in any case is obvious to anyone who has endured a committee meeting where it took a long time to make (or fail to make) a decision. The point is that special-interest organizations and collusions tend to make decisions more slowly than the firms or individuals of which they are composed. We shall see later that this trait is crucial to understanding phenomena as important as the business cycle and the rate of adoption of new technologies, and that the reasons for this slowness of decision-making are also very much worthy of our attention. The two main reasons why special-interest groups make decisions more slowly than the individuals or firms of which they are constituted is that they must use either consensual bargaining or constitutional procedures, or both of these methods, to make decisions.

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Not all the definitions of rational expectations are exactly the same, but for present purposes it is best interpreted as the notion that people making decisions take into account all available information that is worth taking into account; economically rational expectations in this sense has all along been the usual implicit assumption in microeconomic theorizing. Equilibrium theorists explain obvious variations in the rate of unemployment over the business cycle primarily in terms of voluntary choices concerning when appears to be the most advantageous time to take leisure or education or to forgo gainful employment in order to spend full time seeking a better job. Their arguments are too complicated to summarize without violating the general constraints that govern the exposition in this volume.

Radical Uncertainty: Decision-Making for an Unknowable Future by Mervyn King, John Kay

Airbus A320, Alan Greenspan, Albert Einstein, Albert Michelson, algorithmic trading, anti-fragile, Antoine Gombaud: Chevalier de Méré, Arthur Eddington, autonomous vehicles, availability heuristic, banking crisis, Barry Marshall: ulcers, battle of ideas, Bear Stearns, behavioural economics, Benoit Mandelbrot, bitcoin, Black Swan, Boeing 737 MAX, Bonfire of the Vanities, Brexit referendum, Brownian motion, business cycle, business process, capital asset pricing model, central bank independence, collapse of Lehman Brothers, correlation does not imply causation, credit crunch, cryptocurrency, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, DeepMind, demographic transition, discounted cash flows, disruptive innovation, diversification, diversified portfolio, Donald Trump, Dutch auction, easy for humans, difficult for computers, eat what you kill, Eddington experiment, Edmond Halley, Edward Lloyd's coffeehouse, Edward Thorp, Elon Musk, Ethereum, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, fear of failure, feminist movement, financial deregulation, George Akerlof, germ theory of disease, Goodhart's law, Hans Rosling, Helicobacter pylori, high-speed rail, Ignaz Semmelweis: hand washing, income per capita, incomplete markets, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Jeff Bezos, Jim Simons, Johannes Kepler, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Snow's cholera map, John von Neumann, Kenneth Arrow, Kōnosuke Matsushita, Linda problem, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, market bubble, market fundamentalism, military-industrial complex, Money creation, Moneyball by Michael Lewis explains big data, Monty Hall problem, Nash equilibrium, Nate Silver, new economy, Nick Leeson, Northern Rock, nudge theory, oil shock, PalmPilot, Paul Samuelson, peak oil, Peter Thiel, Philip Mirowski, Phillips curve, Pierre-Simon Laplace, popular electronics, power law, price mechanism, probability theory / Blaise Pascal / Pierre de Fermat, quantitative trading / quantitative finance, railway mania, RAND corporation, reality distortion field, rent-seeking, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Coase, sealed-bid auction, shareholder value, Silicon Valley, Simon Kuznets, Socratic dialogue, South Sea Bubble, spectrum auction, Steve Ballmer, Steve Jobs, Steve Wozniak, Suez crisis 1956, Tacoma Narrows Bridge, Thales and the olive presses, Thales of Miletus, The Chicago School, the map is not the territory, The Market for Lemons, The Nature of the Firm, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Davenport, Thomas Malthus, Toyota Production System, transaction costs, ultimatum game, urban planning, value at risk, world market for maybe five computers, World Values Survey, Yom Kippur War, zero-sum game

One of the authors was, as Deputy Governor of the Bank of England, asked to give evidence before the House of Commons Select Committee on Education and Employment on the subject of whether Britain should join the European Monetary Union. How, the MPs asked, could we know when the UK business cycle had converged with that on the Continent? The answer was that since business cycles are of the order of ten years in duration, and at least twenty or thirty observations would be needed to assess the issue, it would be two hundred years or more before we would know. Underlying the question was the assumption that the process driving business cycles was stationary, and that over time we could learn enough about that process to provide an answer. But it would be absurd to claim that economic cycles had been unchanging since the beginning of the Industrial Revolution.

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To go further we have to be able to gain insight into the origins of the shocks, and perhaps be able to formulate some probability distribution or narrative account of their occurrence. The nineteenth-century economist W. S. Jevons propounded a similar thesis. 19 His argument, not then entirely without empirical justification, was that business cycles were the result of fluctuations in nature. In particular, variations in sunspot activity influenced climatic conditions, which in turn affected the prices and volumes of agricultural products, which had consequential effects in other sectors of the economy. Jevons’ narrative identified the sources of the shocks, and described the ways in which they gave rise to economic cycles.

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But the programme of model-building which searches for a stable underlying set of structural relationships could be made consistent with observations of the economy only by the introduction of the shocks and shifts about which nothing could usefully be said. The result was that phenomena such as the financial crisis or the Great Depression could be explained only in terms of unanticipated developments in technology or a sudden preference for leisure rather than work. Such so-called ‘real business cycle’ models have generated few persuasive explanations of large movements in the economy. 22 And the presence in such models of ‘frictions’ – the complexity of the world of millions of individuals learning and adapting to changes in the structure of the economy – meant that forecasts were reasonably accurate only when nothing much was happening, and were wildly inaccurate in the face of any significant event, such as the financial crisis.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Alan Greenspan, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, business cycle, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, Ford Model T, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, junk bonds, knowledge economy, late capitalism, market fundamentalism, military-industrial complex, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Sand Hill Road, satellite internet, scientific management, Silicon Valley, Simon Kuznets, South Sea Bubble, Suez canal 1869, technological determinism, The Theory of the Leisure Class by Thorstein Veblen, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, vertical integration, Washington Consensus

In this book, she makes an even more original and seminal contribution. She examines the interaction between that part of the economy commonly known as financial capital and the upsurge of new technologies from their first beginnings to the time when they predominate in the structure and behavior of the economy. In his major work, Business Cycles (1939), Joseph Schumpeter, whilst interpreting the major waves of economic growth and technological transformation as ‘successive industrial revolutions’, insisted that these clusters of radical innovations also depended on financial capital. In fact, more space is devoted to finance in his book than to technology but, rather strangely, his followers – often known as ‘neo-Schumpeterians’ – neglected this aspect of his work.

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This may very well be so and is wholly within the logic of the present model. For the previous paradigm, John Maynard Keynes developed a new economics, providing both a different understanding and a whole new set of policy tools. Although the debate still rages,228 these policies, where applied, pretty much achieved their purpose of tempering the business cycle and supporting smooth growth, full employment and consistent investment, for the duration of the deployment period of the fourth great surge. That set of policies and that vision of economics lost effectiveness when the economy of the mass-production revolution, for which it was designed, became exhausted at the end of the 1960s.

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If we look back into recent history we can have a measure of the amount of audacity required to visualize the future, even a decade or two ahead. How easy do we think it may have been for people in the depression of the 1930s to conceive the possibility of effective policies for full employment and for the control of business cycles? How many would have believed in the early 1940s, when empire building was still on the agenda, that most developing countries would soon gain independence? Or, in the mid1920s, how realistic would proposals have seemed for strict regulation of financial capital and for the official recognition of labor unions?

Irrational Exuberance: With a New Preface by the Author by Robert J. Shiller

Alan Greenspan, Andrei Shleifer, asset allocation, banking crisis, benefit corporation, Benoit Mandelbrot, book value, business cycle, buy and hold, computer age, correlation does not imply causation, Daniel Kahneman / Amos Tversky, demographic transition, diversification, diversified portfolio, equity premium, Everybody Ought to Be Rich, experimental subject, hindsight bias, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Joseph Schumpeter, Long Term Capital Management, loss aversion, Mahbub ul Haq, mandelbrot fractal, market bubble, market design, market fundamentalism, Mexican peso crisis / tequila crisis, Milgram experiment, money market fund, moral hazard, new economy, open economy, pattern recognition, Phillips curve, Ponzi scheme, price anchoring, random walk, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Small Order Execution System, spice trade, statistical model, stocks for the long run, Suez crisis 1956, survivorship bias, the market place, Tobin tax, transaction costs, tulip mania, uptick rule, urban decay, Y2K

Now, Bootle declared, we are entering the “zero era,” brought on N E W E RA E CO N O MIC TH INKING 113 by global capitalism, privatization, and the decline of labor unions, all of which make it impossible for prices to be decided by committee.31 Steven Weber, with his 1997 article “The End of the Business Cycle” in the public policy journal Foreign Affairs, argued that macroeconomic risks are lower now: “Changes in technology, ideology, employment and finance, along with the globalization of production and consumption, have reduced the volatility of economic activity in the industrialized world. For both empirical and theoretical reasons in advanced industrial economies the waves of the business cycle may be becoming more like ripples.” Weber presented a number of reasonable-sounding arguments. For instance, he noted that the economy has come to be dominated by the service sector in a way that it was not thirty years ago, and he pointed out that service employment has always been more stable than industrial production.32 Downsizing and restructuring—terms describing so-called managerial revolutions in the 1980s—were thought then to be important reasons for the growth of profits since 1982.

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I use the ten-year average of real earnings for the denominator, along lines proposed by Benjamin Graham and David Dodd in 1934. The ten-year average smooths out such events as the temporary burst of earnings during World War I, the temporary decline in earnings during World War II, or the frequent boosts and declines that we see due to the business cycle.4 Note again that there is an enormous spike after 8 TH E S TOC K MAR KET LEVEL IN HIST OR IC AL PER SPEC T IVE Price-earnings ratio Figure 1.2 Price-Earnings Ratio, 1881–2000 Price-earnings ratio, monthly, January 1881 to January 2000. Numerator: real (inflation-corrected) S&P Composite Stock Price Index, January.

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If stock prices are supposed to be an optimal predictor of the dividend present value, then they should not jump around erratically when the true fundamental value is growing along a smooth trend. We learn by considering Figure 9.1 that the common interpretation given in the media for stock market fluctuations in terms of the outlook for the short-run business cycle is generally misguided. The prospect that a temporary recession is on the horizon should have virtually no impact on stock prices, if the efficient markets theory is correct. Fluctuations in stock prices, if they are to be interpretable in terms of the efficient markets theory, must instead be due to new information about the long-run outlook for real dividends.

Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs, Arthur A. Ekirch, Jr.

Alistair Cooke, American ideology, business cycle, clean water, collective bargaining, creative destruction, credit crunch, declining real wages, endowment effect, fiat currency, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, guns versus butter model, hiring and firing, Ida Tarbell, income per capita, Jones Act, Joseph Schumpeter, laissez-faire capitalism, land bank, manufacturing employment, means of production, military-industrial complex, minimum wage unemployment, plutocrats, post-industrial society, power law, price discrimination, profit motive, rent control, rent-seeking, Richard Thaler, road to serfdom, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Simon Kuznets, strikebreaker, The Wealth of Nations by Adam Smith, total factor productivity, transaction costs, transcontinental railway, union organizing, Upton Sinclair, War on Poverty, Works Progress Administration

Under such unstable dynamic conditions, business planning could be little more than guesswork, and many workers lost their jobs unexpectedly from time to time. As the relative shift of labor out of agriculture and into the urban-industrial sectors continued apace, the volatility of the economy's performance affected more immediately a growing proportion of the population. Even in the mostly prosperous Progressive Era the problem of the business cycle ranked high as an economic and hence a political concern. Probably because in those days a financial panic usually accompanied the onset of a business depression, many people subscribed to monetary theories of the economic cycle. During the depression that followed the financial panic of 1907, Congress created a National Monetary Commission to investigate the monetary and banking systems and make recommendations for remedial legislation.

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With only a vague notion of how the Fed would operate, the public expected that it would somehow smooth out the fluctuations in the nation's economic growth. The Fed's officers, uncertain of their own capabilities and authority, had scarcely settled into their new offices when the Great War began and the government thrust upon them even more pressing obligations. Attempts to tame the business cycle would have to wait. As troublesome as the problem of economic fluctuations was the problem of labor relations. After suffering crushing setbacks in the depressed 1890s, labor unions expanded their membership severalfold during the economic boom at the turn of the century. Total union membership surged from less than half a million in 1897 to about two million in 1904, then stabilized for several years before resuming a slow increase after 1909.

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No limitation was imposed until 1917, when Congress enacted a literacy requirement expected to bear disproportionately on the unpopular groups. Not until the 1920s were effective legal barriers raised. The onset of the war, however, squeezed the torrent of immigration to a trickle during 1915-1920. While problems of money, banking and the business cycle, labor relations, and immigration attracted widespread public concern, none of them could rival "the trust problem." The question of what to do about big business was without doubt the preeminent public policy issue of the Progressive Era. It was, of course, connected with all the others. One could not talk about banking without considering Morgan and Rockefeller's financial empires and their many links with the great industrial and railroad corporations.

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

Bradford de Long and Lawrence H. Summers, ‘Fiscal Policy in a Depressed Economy’, Brookings Papers on Economic Activity (Spring 2012), pp. 233–97. 15. The most prominent economists to believe that recessions are due entirely to real phenomena are those who believe in ‘real business cycles’. See http://en.wikipedia.org/wiki/Real_business_cycle_theory. 16. Alberto Alesina and Silvia Ardagna, ‘Large Changes in Fiscal Policy: Taxes versus Spending’, Tax Policy and the Economy, vol. 24, ed. Jeffrey R. Brown (Cambridge, MA: National Bureau of Economic Research). 17. http://krugman.blogs.nytimes.com/2013/03/19/cogan-taylor-and-the-confidence-fairy/. 18.

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The late and, until recently, disregarded Hyman Minsky, with whom this book began, described the broad features of such booms and busts.18 ‘A fundamental characteristic of our economy,’ wrote Minsky, ‘is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.’19 Minsky identified five stages in a bubble: ‘displacement’ – a trigger event, such as a new technology or falling interest rates; ‘boom’ – when asset prices start rising; ‘euphoria’ – when investors’ caution is thrown to the wind; ‘profit-taking’ – when intelligent investors start taking profits; and ‘panic’ – a period of collapsing asset prices and mass bankruptcy.20 Displacement is an event that raises optimism, such as an innovation, access to new economic resources, or maybe a decline in the cost of funds.

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Indeed any artificial rise in aggregate demand will severely distort the productive structure and can only generate unstable employment.’36 In later years, Hayek devoted his attention to the idea of privately issued money, rather than the 100 per cent reserve-backed money of von Mises. In the debates of the 1930s, the Austrians lost the public argument on business-cycle theory to the Keynesians and, subsequently, the monetarists. They ceased to have much influence on ideas about macroeconomic policy for a long time. Both economics and politics explain this failure. The economic explanation was the scale of the slump. It was impossible to argue that no more was involved than the reversal of the malinvestment during the 1920s.

Animal Spirits by Jackson Lears

1960s counterculture, Alan Greenspan, bank run, banking crisis, behavioural economics, business cycle, buy and hold, California gold rush, clockwork universe, conceptual framework, Cornelius Vanderbilt, creative destruction, cuban missile crisis, dark matter, Doomsday Clock, double entry bookkeeping, epigenetics, escalation ladder, feminist movement, financial innovation, Frederick Winslow Taylor, George Akerlof, George Santayana, heat death of the universe, Herbert Marcuse, Herman Kahn, Ida Tarbell, invisible hand, Isaac Newton, joint-stock company, Joseph Schumpeter, Lewis Mumford, lifelogging, market bubble, market fundamentalism, Mikhail Gorbachev, moral hazard, Norman Mailer, plutocrats, prosperity theology / prosperity gospel / gospel of success, Ralph Waldo Emerson, RAND corporation, Robert Shiller, Ronald Reagan, scientific management, Scientific racism, short selling, Shoshana Zuboff, Silicon Valley, source of truth, South Sea Bubble, Stanislav Petrov, Steven Pinker, Stewart Brand, Strategic Defense Initiative, surveillance capitalism, the market place, the scientific method, The Soul of a New Machine, The Wealth of Nations by Adam Smith, transcontinental railway, W. E. B. Du Bois, Whole Earth Catalog, zero-sum game

To be sure, there were other sorts of capitalists at work in the early modern world as well, notably the sort devoted to calculation, efficiency, double-entry bookkeeping, and disciplined achievement as a way of life—Weber’s ideal type of early modern man, whose Protestant ethic was turning into a spirit of capitalism. Some finance capitalists undoubtedly resembled the Weberian type in certain ways, but many cultivated a more emotionally charged ethos, one more attuned to the fluctuations of the emerging business cycle. While the notion of animal spirits captured the emotional turbulence at the core of capitalism, it also illuminated alternative visions of universal animacy—some rooted in sacramental tradition, others resonating with newer forms of enchantment. The English Reformation was a time (and place) of religious searching, along and outside the borders of orthodoxy.

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Animal spirits were a force for health and well-being, for entertainment, pleasure, and beauty—but they were sometimes just a force, one that needed to be tamed. This view reflected growing concerns with hooliganism and mob violence in cities. The mushrooming of urban populations, the proliferation of (actual or imagined) hard-drinking immigrants in street-corner saloons, the rise of mass politics, the lurches and shudders of a business cycle increasingly based on “trading in the air”—all these developments intensified the ambiguous potential of animal spirits, as both threat and promise. Animal spirits fostered essential vitality but also hovered behind the visions that increasingly haunted the respectable American’s imagination—in politics, a mobocracy manipulated by demagogic animal magnetizers; in commerce, a swarm of traders enveloped in oscillations of elation and panic.

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The flood of emotional force drained away into trade was intensified by the ubiquity, uncertainty, and invisibility of forces promoting rise or ruin. As the Wall Street wag Frederick Jackson put it, panics called to mind the old riddle about smoke—“a houseful, a hole full, and you cannot gather a bowlful.” For good or ill, there was no such thing as an economics profession, and no understanding or expectations of a business cycle. Yet by the 1830s, it was beginning to be clear that lurches from boom to bust were accompanied by comparable swerves in the public mood from overweening confidence to crippling anxiety. A few observers suspected that the economic developments were preceded, even triggered, by the emotional developments.

An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy by Marc Levinson

affirmative action, airline deregulation, Alan Greenspan, banking crisis, Big bang: deregulation of the City of London, Boycotts of Israel, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, car-free, Carmen Reinhart, central bank independence, centre right, clean water, deindustrialization, endogenous growth, falling living standards, financial deregulation, flag carrier, floating exchange rates, full employment, George Gilder, Gini coefficient, global supply chain, Great Leap Forward, guns versus butter model, high-speed rail, income inequality, income per capita, indoor plumbing, informal economy, intermodal, inverted yield curve, invisible hand, It's morning again in America, Kenneth Rogoff, knowledge economy, late capitalism, Les Trente Glorieuses, linear programming, low interest rates, manufacturing employment, Multi Fibre Arrangement, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, North Sea oil, oil shock, Paul Samuelson, pension reform, Phillips curve, price stability, purchasing power parity, refrigerator car, Right to Buy, rising living standards, Robert Gordon, rolodex, Ronald Coase, Ronald Reagan, Simon Kuznets, statistical model, strikebreaker, structural adjustment programs, The Rise and Fall of American Growth, Thomas Malthus, total factor productivity, unorthodox policies, upwardly mobile, War on Poverty, Washington Consensus, Winter of Discontent, Wolfgang Streeck, women in the workforce, working-age population, yield curve, Yom Kippur War, zero-sum game

Born into a Jewish family that had fled the Austro-Hungarian Empire at the start of the First World War, Burns grew up in Bayonne, New Jersey, where his father earned a living painting houses. The precocious young man won a scholarship to Columbia University in New York, where he discovered economics. When he returned to Columbia for doctoral study, Burns became the protégé of Wesley Mitchell, a prominent professor who had pioneered the study of business cycles—the economy’s irregular ups and downs. In the late 1930s Burns himself became a Columbia professor and later succeeded Mitchell as head of the National Bureau of Economic Research, the foremost institution for the study of the US economy. In 1953, he signed on to head the Council of Economic Advisers under President Dwight Eisenhower.

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Upon his inauguration, Nixon brought Burns into the White House as counselor to the president with cabinet rank. The fact that his favorite economist was a Democrat bothered the Republican president not at all.1 The new counselor’s academic expertise was in US economic policy—inflation, unemployment, and efforts to steady growth by smoothing the business cycle. But Nixon had other economists for that. Burns was instead given charge of a ragbag of domestic issues, from antipoverty programs to tax reform to oil import quotas. His main role, though, was professorial. With his white hair neatly parted in the middle, his rimless glasses, and his ever-present pipe, he became a familiar figure on the evening news.

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Burns dreamed of becoming secretary of the Treasury, but in October 1969 he was offered a job that would prove far more consequential. Nixon named Burns chairman of the Federal Reserve Board of Governors. Burns was the first professional economist ever to take the helm of the central bank. His expertise in business cycles was sorely needed. In the mid-1960s, Nixon’s predecessor, Lyndon Johnson, had offered America “guns and butter,” building up military forces in Vietnam without raising taxes or curtailing social programs. The Fed had loyally supported Johnson’s policies by making sure that short-term interest rates stayed low so that the government could borrow cheaply to fund the war.

End This Depression Now! by Paul Krugman

airline deregulation, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, bond market vigilante , Bretton Woods, business cycle, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Glass-Steagall Act, Gordon Gekko, high-speed rail, Hyman Minsky, income inequality, inflation targeting, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Joseph Schumpeter, junk bonds, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Mark Zuckerberg, Minsky moment, Money creation, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Savings and loan crisis, Upton Sinclair, We are all Keynesians now, We are the 99%, working poor, Works Progress Administration

Much of the academic side of macroeconomics is now dominated by “real business cycle” theory, which says that recessions are the rational, indeed efficient, response to adverse technological shocks, which are themselves left unexplained—and that the reduction in employment that takes place during a recession is a voluntary decision by workers to take time off until conditions improve. If this sounds absurd, that’s because it is. But it’s a theory that lends itself to fancy mathematical modeling, which made real business cycle papers a good route to promotion and tenure. And the real business cycle theorists eventually had enough clout that to this day it’s very difficult for young economists propounding a different view to get jobs at many major universities.

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In the 1970s the leading freshwater macroeconomist, the Nobel laureate Robert Lucas, argued that recessions were caused by temporary confusion: workers and companies had trouble distinguishing overall changes in the level of prices because of inflation from changes in their own particular business situation. And Lucas warned that any attempt to fight the business cycle would be counterproductive: activist policies, he held, would just add to the confusion. I was a graduate student at the time this work was being done, and I remember how exciting it seemed—and how attractive its mathematical rigor, in particular, was to many young economists. Yet the “Lucas project,” as it was widely called, went quickly off the rails.

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., 57 liquidity traps, 135–36, 137, 138, 143, 144 in depression of 2008–, 32–34, 38, 51, 136, 155, 163 money supply and, 152, 155 unemployment and, 33, 51, 152 Lizza, Ryan, 125 Long Term Capital Management (LTCM) failure, 69 Lucas, Robert, 91–92, 102, 107 Lucas project, 102, 103 macroeconomics, 91–92, 227, 231 “dark age” of, 92 “freshwater,” 101–3, 110–11 “real business cycle” theory in, 103 “saltwater,” 101, 103–4 magneto trouble, Keynes’s analogy of, 22, 23, 35–36 Mankiw, N. Gregory, 227 manufacturing capacity, 16 marginal product, 78 markets: “efficient” hypothesis of, 97–99, 100, 101, 103–4 inflation and, 202 investor rationality and, 97, 101, 103–4 Keynes on, 97, 98 1987 crash in, 98 panic in, 4 speculative excess in, 97, 98 in 2008 financial crisis, 117 McCain, John, 113 McConnell, Mitch, 109 McCulley, Paul, 48 McDonald’s, 6, 7 Medicaid, 120, 120, 121 Medicare, 18, 172 Meltzer, Allan, 151–52 Mencken, H.

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, behavioural economics, Ben Bernanke: helicopter money, break the buck, business cycle, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Solow, school choice, seminal paper, shareholder value, subprime mortgage crisis, the payments system, the scientific method, tulip mania, young professional, zero-sum game

Hal Varian interviews from two sources: Holly Finn, “Lunch with Hal,” Google Think Quarterly, March 2011, http://www.thinkwithgoogle.co.uk/quarterly/data/hal-varian-treating-data-obesity.html; and McKinsey & Company, “Hal Varian on How the Web Challenges Managers,” McKinsey Quarterly, January 2009, http://www.mckinsey.com/insights/innovation/hal_varian_on_how_the_web_challenges_managers. 2. Macroeconomists refer to this fundamentals-based theory as real business cycle theory, because fluctuations are driven by “real” shocks—that is, shocks to the productive capacity of the economy. The classic citation is Edward C. Prescott, “Theory Ahead of Business Cycle Measurement,” Federal Reserve Bank of Minneapolis Quarterly Review 10, no. 4 (1986): 9–21. 3. Robert Barro uses this example in chapter 2 of his textbook Macroeconomics, 5th ed. (Cambridge, MA: MIT Press, 1997). 4.

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For home owners with a mortgage, for example, we will demonstrate how home equity is much riskier than the mortgage held by the bank, something many home owners realize only when house prices collapse. But it’s not all bad news. If we are correct that excessive reliance on debt is in fact our culprit, it is a problem that potentially can be fixed. We don’t need to view severe recessions and mass unemployment as an inevitable part of the business cycle. We can determine our own economic fate. We hope that the end result of this book is that it will provide an intellectual framework, strongly supported by evidence, that can help us respond to future recessions—and even prevent them. We understand this is an ambitious goal. But we must pursue it.

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: An International Historical Comparison,” American Economic Review 98 (2008): 339–44. 18. Carmen Reinhart and Kenneth Rogoff, This Time Is Different (Princeton, NJ: Princeton University Press, 2009). 19. Oscar Jorda, Moritz Schularick, and Alan M. Taylor, “When Credit Bites Back: Leverage, Business Cycles, and Crisis” (working paper no. 17621, NBER, 2011). 20. The IMF study also confirms this. They show that elevated household debt leads to more severe recession, even in the absence of a banking crisis. IMF, “Chapter 3: Dealing with Household Debt.” 21. Jorda, Schularick, and Taylor, “When Credit Bites Back,” 5. 22.

Panderer to Power by Frederick Sheehan

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, book value, Bretton Woods, British Empire, business cycle, buy and hold, California energy crisis, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, Glass-Steagall Act, Greenspan put, guns versus butter model, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, McMansion, Menlo Park, Michael Milken, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, Robert Solow, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stock buybacks, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

The pipe-smoking Burns enlightened the class: “Excess government spending causes inflation.”15 Greenspan did not entirely agree with Arthur Burns’s economic beliefs, but he did the important thing: he took up the pipe—Burns’s trademark. Arthur Burns’s own political aptitude was of the first order. 13 Ibid., p. 27. 14Burns was coauthor of Measuring Business Cycles (New York: National Bureau of Economic Research, 1946) with Wesley C. Mitchell. Mitchell also wrote Business Cycles (1913), which was highly regarded. 15 Martin, Greenspan, p. 29. The professor moved to Washington to head President Eisenhower’s Council of Economic Advisers in 1953. Burns was later appointed chairman of the Federal Reserve Board under Richard Nixon.

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They bred and nurtured younger seedlings, who also blessed government policies and programs that were too entrenched to reform. The younger generation would mature and grow old, calculating ever more fantastic rationalizations of the impossible. Columbia was only a subway ride uptown from NYU. Arthur Burns was the most prominent member of the Columbia economics faculty. Burns was coauthor of Measuring Business Cycles (1946), a respected text.14 On the first day of Alan Greenspan’s doctoral training, the professor asked his students, “What causes inflation?” Silence followed. This seems to have often been the case in Burns’s presence. The pipe-smoking Burns enlightened the class: “Excess government spending causes inflation.”15 Greenspan did not entirely agree with Arthur Burns’s economic beliefs, but he did the important thing: he took up the pipe—Burns’s trademark.

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Lever Brothers Chairman Charles Luckman explained: “New York is the inevitable answer to our major problem—selling.”20 By 1960, more than 25 percent of the nation’s 500 largest corporations had headquarters in New York City.21 Populism Defeats William McChesney Martin’s Battle against Inflation Martin fought a valiant battle against inflation, although he was stymied by Congress. The Employment Act of 1946 committed the Fed to seek healthy economic growth—in addition to its responsibility for stable money. When the economy turns down, it does not grow. It contracts. Insolvencies and recessions are instrumental to the business cycle. Martin stood his ground before the Senate: “We are dealing with waste and extravagance, incompetency and inefficiency, the only way we have in a free society is to take losses from time to time. This is the loss economy as well as the profit economy.”22 Washington, of course, did not want to hear this.

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace by Matthew C. Klein

Alan Greenspan, Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, Berlin Wall, Bernie Sanders, Branko Milanovic, Bretton Woods, British Empire, business climate, business cycle, capital controls, centre right, collective bargaining, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, deglobalization, deindustrialization, Deng Xiaoping, Donald Trump, Double Irish / Dutch Sandwich, Fall of the Berlin Wall, falling living standards, financial innovation, financial repression, fixed income, full employment, George Akerlof, global supply chain, global value chain, Great Leap Forward, high-speed rail, illegal immigration, income inequality, intangible asset, invention of the telegraph, joint-stock company, land reform, Long Term Capital Management, low interest rates, Malcom McLean invented shipping containers, manufacturing employment, Martin Wolf, mass immigration, Mikhail Gorbachev, Money creation, money market fund, mortgage debt, New Urbanism, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, open economy, paradox of thrift, passive income, reserve currency, rising living standards, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, sovereign wealth fund, stock buybacks, subprime mortgage crisis, The Nature of the Firm, The Wealth of Nations by Adam Smith, Tim Cook: Apple, trade liberalization, Wolfgang Streeck

See employment rate unions: in China, 112 in Germany, 142–43, 148–49, 157–58 and transportation costs, 24, 25–26 in United States, 177 United Kingdom: Bank Act of 1826, 52 banking industry in, 41 business cycles in, 43 colonial territories of, 6, 17 credit supply in, 41 exchange rate regime in, 196, 218–19 and global credit boom (1820s), 46–51, 64 and global credit boom (1830s), 52–55 and global financial crisis (1873), 57, 58 and gold standard, 186, 187, 188 savings and investment in, 69–70, 76 tariffs in, 16–17 U.S. corporation income in, 37. See also Bank of England United States, 174–220 bilateral trade imbalances in, 97–100 and Bretton Woods, 189–91 and Bretton Woods II, 195–201 business cycles in, 43 class warfare in, 212–13 colonial territories of, 18 corporate tax avoidance in, 30–39, 36f, 39f credit supply in, 201–5, 204f current account balance in, 87, 96, 97–100, 176–79, 180–84, 182f, 210, 213–18, 214–15f, 221–22 and dollar’s rise as global reserve asset, 189–95, 212f employment rate in, 174, 190, 194, 210–11, 214–16, 219, 227 entrepreneurship in, 13, 25 and European banking glut, 63–64 and exchange rate regimes, 20, 189–201 fiscal policy in, 180–85, 182f, 210 and global credit boom (1830s), 52–55 and global financial crisis (1873), 55, 57 and global financial crisis (2008), 201–13 and global value chains, 27, 29 and gold standard, 185–89 and Hamilton’s “Report on the Subject of Manufactures,” 11–17 inequality in, 177, 210, 226 inflation in, 194, 210 infrastructure in, 184, 202, 217, 226, 227 interest rates in, 176, 178, 196–97, 198, 199, 201, 206 manufacturing in, 14–15, 23, 178–79, 210–11, 212–13, 214, 227 missing surplus mystery in, 176–79 policy choices for, 226–28 productivity in, 210–11 reserve assets in, 185–89 safe asset shortage in, 201–5, 204f savings and investment in, 70, 77–78, 77f, 83, 84, 178, 208 subprime mortgage crisis in, 205–13, 209f subsidies in, 78, 227 tariffs in, 20, 222–23 taxes in, 177, 181, 212 trade dispute with China, 2–3, 222–23 unions in, 177 in World War I, 19–20.

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After all, every country is unique and investors should be able to evaluate the effects of local political conditions, technological innovations, changes in demand or supply of an important locally produced commodity, and demographic shifts. Yet the history of the past several hundred years is replete with synchronized credit cycles. This pattern is clearly visible in the relation between Great Britain and the United States during the eighteenth and nineteenth centuries, when the two economies had tightly linked business cycles. Part of the connection can be explained by fundamental ties: the United States was a major source of cotton for British textile mills and a major market for British manufactured goods, so what drove underlying economic growth in one often drove underlying economic growth in the other. More significant, however, is that these cycles were even more highly correlated with financial conditions in Great Britain.

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At its peak in March 2000, the companies listed on the Neuer Markt were worth nearly €234 billion—tiny by American standards but large relative to the size of the total German stock market. The bubble burst shortly thereafter thanks to scandals (including insider trading, stock-price manipulation, and falsified earnings), fundamental overvaluation, and the turn in the business cycle. By 2002, companies listed on the Neuer Markt had collectively lost 95 percent of their value. Deutsche Börse announced that it would shut down the exchange that September.19 A borrowing binge had magnified the nonsense in the stock markets. Debt owed by German nonfinancial corporations rose by 25 percent between the start of 1997 and the end of 2001.

The-General-Theory-of-Employment-Interest-and-Money by John Maynard Keynes

bank run, behavioural economics, business cycle, collective bargaining, declining real wages, delayed gratification, full employment, invisible hand, laissez-faire capitalism, low interest rates, marginal employment, means of production, moral hazard, Paul Samuelson, price stability, profit motive, quantitative easing, secular stagnation, The Wealth of Nations by Adam Smith, We are all Keynesians now, working-age population

So Keynes actually chose to answer a more limited question than most people writing about business cycles at the time. Indeed, most of Book II of The General Theory is a manifesto on behalf of Keynes’s strategic decision to limit the question. Where pre-Keynesian business cycle theory told complex, confusing stories about disequilibrium, Chap. 5 makes the case for thinking of an underemployed economy as being in a sort of equilibrium in which short-term expectations about sales are, in fact, fulfilled. Chapters 6 and 7 argue for replacing all the talk of forced savings, excess savings, and so on that was prevalent in pre-Keynesian business cycle theory—talk that stressed, in a confused way, the idea of disequilibrium in the economy—with the simple accounting identity that savings equal investment.

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Introduction by Paul Krugman    xxxiii nomic theorists before Keynes, Haberler believed that the crucial thing was to explain the economy’s dynamics, to explain why booms are followed by busts, rather than to explain how mass unemployment is possible in the first place. And Haberler’s book, like much business cycle writing at the time, seems more preoccupied with the excesses of the boom than with the mechanics of the bust. Although Keynes speculated about the causes of the business cycle in Chap. 22 of The General Theory, those speculations were peripheral to his argument. Instead, Keynes saw it as his job to explain why the economy sometimes operates far below full employment. That is, The General Theory for the most part offers a static model, not a dynamic model—a picture of an economy stuck in depression, not a story about how it got there.

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And Keynes’s limitation of the question was powerfully liberating. Rather than getting bogged down in an attempt to explain the dynamics of the business cycle—a subject that remains contentious to this day— Keynes focused on a question that could be answered. And that was also the question that most needed an answer: given that overall demand is depressed—never mind why—how can we create more employment? A side benefit of this simplification was that it freed Keynes and the rest of us from the seductive but surely false notion of the business cycle as morality play, of an economic slump as a necessary purgative after the excesses of a boom. By analysing how the economy stays depressed, rather than trying to explain how it became depressed in the first place, Keynes xxxiv Introduction by Paul Krugman helped bury the notion that there is something redemptive about economic suffering.

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

There is no question that some speculative excess spills over into the equity and real estate markets in 77 Flat-Earth Economics 6 1870–1890 Real GDP Growth (%) 5 1940–1970 4 1890–1913 1913–1929 3 f(x) 5.58E2*^3 1.08E0*^2 6.12E0* 5.88E0 R^2 8.77E1 corr(^3,y) 1.31E1, corr(^2,y) 9.79E3, corr(^1,y) 2.09E1 1970–2008 2 1929–1940 1 0 0 Figure 4.1 1 2 3 4 5 6 7 Money Supply Growth (%) 8 9 Money Supply & Real Economic Growth Sources: Historical Statistics of the United States; Federal Reserve System Data. periods of moderate money growth. Consumer prices may rise somewhat more than moderately, but the reason may be shortages caused by the business cycle, or in the case of 1940-1970, the rebuilding of Europe and the fiscal policy of the Johnson administration. Granted, this attribution is overly simple, and one might legitimately assert that the meltdown of the early 1970s would have been averted with better policies, both fiscal and monetary, than those in force during the 1960s.

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Is it any wonder that the savings rate is chronically low, debt has risen to record levels compared to income, and wealth has been compelled to reside in risky assets? It may sound flippant, but the bedrock of today’s monetary policy is the rapid expansion of monetary aggregates at all points in the business cycle. The broadest measure of money supply (M3) was over $14 trillion in the United States as of December 2008, at which point its year-over-year growth rate was almost 11 percent.5 The power of compounding is remarkable. No one notices that prices in the United States increased 400 percent from 1940 to 1980.

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It is a bit like celebrating the genius of those who strung power lines instead of acknowledging Thomas Edison for inventing the light bulb, Anyos Jedlik the dynamo, or Michael Faraday the alternator. Although the transmission mechanism was also described by Fisher in the 1930s, the first economists to trumpet this new thesis in recent times were Ehsan Choudhri and Levis Kochin in their paper: The Exchange Rate and the International Transmission of Flat-Earth Economics 95 Business Cycle Disturbances.20 In this article, regressions show what Bernanke states in his speech and has echoed in his academic work, that nations remaining on the gold standard were worse off, and those that recovered sooner had abandoned gold earlier. Regressions by scholars such as Choudhri, Kochin, and the parade of others who have reprocessed the data first observed by Fisher undeniably establish the case.

Not Working: Where Have All the Good Jobs Gone? by David G. Blanchflower

90 percent rule, active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Lives Matter, Black Swan, Boris Johnson, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, driverless car, estate planning, fake news, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, high-speed rail, illegal immigration, income inequality, independent contractor, indoor plumbing, inflation targeting, Jeremy Corbyn, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, opioid epidemic / opioid crisis, Own Your Own Home, p-value, Panamax, pension reform, Phillips curve, plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

The simple answer is labor demand has been too low. At the time of writing it is eleven years since the United States entered recession in December 2007. It took until December 2008, a year after the recession started, for the National Bureau of Economic Research Business Cycle Dating Committee, which maintains a chronology of the U.S. business cycle, to work that out.1 In September 2010 they concluded that the recession had ended in June 2009. In most other advanced countries, including the UK, France, Japan, and Italy, it started a few months later, around the second quarter of 2008. Almost all of the major advanced countries had two successive quarters of negative growth in 2008, which meets the usual definition of recession.

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There are obvious biases apparent from table 5.1 in excluding voluntary part-timers and full-timers from any calculation of underemployment in a country. The U7 is a downward-biased estimator of the extent of labor market slack in the period after the Great Recession. The extent of the bias will move over the business cycle and remains uncertain; the United States does not have such data, but it does seem there are consistent time-series patterns across countries. The Eurostat measure is a halfway house and less biased as it uses data from all part-timers but still excludes full-timers. As the recession hit all three groups of workers, involuntary and voluntary part-timers were more likely to say they would like more hours.

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Table 5.3 decomposes the net variation in aggregate desired hours between countries into components from voluntary and involuntary part-timers, and full-timers. It is clear that U7 is a biased estimator of the extent of labor market slack in the period after the Great Recession. The extent of the bias will move over the business cycle and remains uncertain—the United States does not have such data, but it does seem there are consistent time-series patterns across countries. As the recession hit all three groups of workers, involuntary and voluntary part-timers were more likely to say they would like more hours. In the UK, Germany, France, and Ireland, for example, in 2016, involuntary part-time employment accounted for only around a third of excess hours.

Does Capitalism Have a Future? by Immanuel Wallerstein, Randall Collins, Michael Mann, Georgi Derluguian, Craig Calhoun, Stephen Hoye, Audible Studios

affirmative action, blood diamond, Bretton Woods, BRICs, British Empire, business cycle, butterfly effect, company town, creative destruction, deindustrialization, demographic transition, Deng Xiaoping, discovery of the americas, distributed generation, Dr. Strangelove, eurozone crisis, fiat currency, financial engineering, full employment, gentrification, Gini coefficient, global village, hydraulic fracturing, income inequality, Isaac Newton, job automation, joint-stock company, Joseph Schumpeter, junk bonds, land tenure, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, loose coupling, low skilled workers, market bubble, market fundamentalism, mass immigration, means of production, mega-rich, Mikhail Gorbachev, military-industrial complex, mutually assured destruction, offshore financial centre, oil shale / tar sands, Ponzi scheme, postindustrial economy, reserve currency, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, Suez crisis 1956, too big to fail, transaction costs, vertical integration, Washington Consensus, WikiLeaks