Economic Cycle
Categories: Econ, Investing, Managed Funds
The economy goes up and down (think: 2008 crash). This is known as the economic cycle. We can think of the economic cycle as having four stages.
Starting at the top, immediately before tumbling downward with the economy falling flat on its face, we have the beginning of a recession. That means GDP goes down, interest rates are down (because the government wants people and businesses to borrow money), and consumers are singing the blues. Worry, worry, and more worry.
Once we hit the bottom of the curve, we’re in the early recovery stage. GDP goes up, consumers start to see the light, and businesses pick up the pace. Interest rates stay down, hoping that it will help boost the economy as it nurses its broken bones and wounds.
Then there’s late recovery, when people are starting to get off the high of early recovery. Interest rates go back up, businesses are stable rather than booming, and consumers sober up. It’s been a while since the economy tumbled down a staircase...too long, perhaps...
Ready for the drop again? In the early recession stage, consumers start to get worried, businesses have a tough time, and interest rates are at an all-time high. Uh-oh.
Through this up-and-down cycle, the economy expands and contracts over and over again. There are many economic theories and opinions as to why this happens, and what to do about it. If you have a lot of money in the stock market...keep an eye on it.
Related or Semi-related Video
Finance: What is economic cyclicality ("...13778 Views
Finance allah shmoop What is economic cyclicality All right Well
if you looked at the history of growth and decline
in the u s economy you think it was run
by a bunch of knuckleheads Meat would poop and poop
all in congress Now surprisingly o r maybe not In
fact economic cyclicality is a reflection of resource glut and
then scarcity and the willingness of buyers Teo you know
buy stuff that is when times were good consumers and
businesses by things hire workers consume commodities at office space
and factories until there is a shift in tastes and
sentiment You know like the horse industry before henry ford
came along anyway Sometimes the shift that triggers an economic
cycle comes from the government like when times air too
good there's usually rampant inflation People in companies will simply
choose to just pay up the extra two bucks a
foot to a rent office space The company can pass
on that extra cost by raising its prices to customers
from eighty dollars a year to ninety dollars and nobody
will notice until they do Yeah the government wanted desperately
to cool inflation in the nineteen seventies so the fed
raised short term borrowing rate costs dramatically from somewhere in
the three to four percent range to closer to like
ten percent And the cost of renting money became so
expensive And because companies were highly leveraged borrowing money to
build factories and hire workers and expand that well then
everything contracted with leverage right So they had all this
debt and revenues went down They still to pay the
dead and well that was a bad scene So inflation
was contained at the cost of a vastly cooler economy
So things contract then like a scared turtle or a
you know like when it do jumps in a cold
ocean and all right But then eventually one brave alligator
emerges to see if it concrete's back up under the
top of the food chain and eat some chickens or
dear Whatever alligators eat what do they eat anyway And
the consumer starts buying things adding risk rever been reducing
it and the cycle takes off again gets picture You
know it's the circle the circle of life round and
round It goes where it stops Well actually we do 00:02:15.523 --> [endTime] know Circle of economy