Analyzing Economic & Business Cycles

What are Economic Cycles?

In general, economic cycles are the time periods between growth (economic expansion) and recession (economic contraction). The duration of each economic cycle is determined by key macroeconomic factors such as GDP growth, National Income, Inflation, Consumption, and last but not least, the level of Employment. The debt cycle is the key to each economic cycle.

 

The Role of Central Banks to the Duration of each Economic Cycle

What matters the most for a central bank is to have high employment and sustainable growth by controlling inflation.

In developed countries, the monetary authority (Central Bank) is capable of controlling the money flows into the economy. The main tool for the implementation of a monetary policy is interest rates. The central bank can increase or decrease the liquidity of the whole system by adjusting the level of interest rates. What matters the most for a central bank is to have sustainable growth and unemployment by controlling inflation.

• The economic transition from Growth to Recession is highly determined by the level of inflation and employment
• Adjusting the level of interest rates is the easiest way for a central bank to control market liquidity
• Central banks can intervene in the market by purchasing assets from commercial banks, thus increasing the liquidity and the ability of commercial banks to lend money to the economy, and boost growth
• Central banks can use additional measures to boost exports and economic growth such as the slow devaluation of the domestic currency

(i) Growth Cycle: Dealing with High Inflation

During periods when the economy is growing too fast, the central bank has to deal with inflation. As inflationary concerns grow, the central bank increases the level of interest rates, thus reducing the money supply. The reduction of the total money supply leads to lower consumption and reducing inflation. This is a sign that the growth cycle is coming to an end.

(ii) Recession Cycle: Dealing with High Unemployment

When a recession hits the economy, the central bank has to deal with low growth and high unemployment. This means the monetary authority aims now to increase the money supply. The higher the liquidity of the system the higher the consumer spending. The main tool for increasing the money supply is the reduction of the level of interest rates. As money becomes cheaper, investment and consumption become easier and that means the start of a new growth cycle.

 

Production, Growth, and Debt Growth

Ray Dalio, the manager of the world's largest hedge fund, Bridgewater Associates, argues that there are three main variables forming the duration of each cycle:

◘ The Production Curve

◘ The Short-Term Debt Curve

◘ The Long-Term Debt Curve

According to Ray Dalio, the following template can show in detail the start and the end of each economic cycle.

Graph: The Economic Cycle (based on the correlation between Productivity, Debt, and Growth)

There are two main economic cycles containing 3 main periods:

(1) Leveraging Period (Growth) –Duration 50-80 years

(2) Depression Period –Duration 2-3 years

(3) Reflation Period –Duration 7-10 years

Graph: The Duration of Economic Cycles

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US Historical Business Cycles

The following table presents the historical expansions and contractions of US businesses. The source is the NBER (US National Bureau of Economic Research).

Table: Historical expansions and contractions of US businesses

BUSINESS CYCLE DATES		CYCLE DURATION (MONTHS)
Peak	Trough	Contraction	Expansion	Cycle
Quarterly dates are in parentheses		Peak to Trough	Previous trough to this peak	Trough from Previous Trough	Peak from Previous Peak
-- June 1857(II) October 1860(III) April 1865(I) June 1869(II) October 1873(III) March 1882(I) March 1887(II) July 1890(III) January 1893(I) December 1895(IV) June 1899(III) September 1902(IV) May 1907(II) January 1910(I) January 1913(I) August 1918(III) January 1920(I) May 1923(II) October 1926(III) August 1929(III) May 1937(II) February 1945(I) November 1948(IV) July 1953(II) August 1957(III) April 1960(II) December 1969(IV) November 1973(IV) January 1980(I) July 1981(III) July 1990(III) March 2001(I) December 2007 (IV) February 2020	December 1854 (IV) December 1858 (IV) June 1861 (III) December 1867 (I) December 1870 (IV) March 1879 (I) May 1885 (II) April 1888 (I) May 1891 (II) June 1894 (II) June 1897 (II) December 1900 (IV) August 1904 (III) June 1908 (II) January 1912 (IV) December 1914 (IV) March 1919 (I) July 1921 (III) July 1924 (III) November 1927 (IV) March 1933 (I) June 1938 (II) October 1945 (IV) October 1949 (IV) May 1954 (II) April 1958 (II) February 1961 (I) November 1970 (IV) March 1975 (I) July 1980 (III) November 1982 (IV) March 1991(I) November 2001 (IV) June 2009 (II) April 2020	-- 18 8 32 18 65 38 13 10 17 18 18 23 13 24 23 7 18 14 13 43 13 8 11 10 8 10 11 16 6 16 8 8 18 2	-- 30 22 46 18 34 36 22 27 20 18 24 21 33 19 12 44 10 22 27 21 50 80 37 45 39 24 106 36 58 12 92 120 73 128	-- 48 30 78 36 99 74 35 37 37 36 42 44 46 43 35 51 28 36 40 64 63 88 48 55 47 34 117 52 64 28 100 128 91 130	-- -- 40 54 50 52 101 60 40 30 35 42 39 56 32 36 67 17 40 41 34 93 93 45 56 49 32 116 47 74 18 108 128 81 146
AVERAGE (ALL CYCLES)		Peak to Trough	Previous trough to this peak	Trough from Previous Trough	Peak from Previous Peak
1854-2009 (33 cycles) 1854-1919 (16 cycles) 1919-1945 (6 cycles) 1945-2009 (11 cycles)		17.5 21.6 18.2 11.1	38.7 26.6 35.0 58.4	56.2 48.2 53.2 69.5	56.4 48.9 53.0 68.5

Source: NBER (US National Bureau of Economic Research)

 

◘ Economic & Business Cycles

G.P. for TradingCenter.org (c)