CB -
I think the belief in historical cycles is an artifact of the drive to make the study of mankind into a hard science. To make it work you have to use the Procrustian method - cut off the bits that don't fit.
The better information a business has about future demand for its products, the less likely it is to build up excess capacity or excess inventory. Further, the better a cushion of cash reserves a business has, the better able it is to weather out periods of slack demand.
Speculative bubbles are caused by bad information and buying on margin.
I have no more faith in cycles than you do. From any historical data, any number of patterns can be mined, only a small number of which have real causes or any significance.
You are the one who made the connection between boom/busts and cycles, and I would need more evidence to accept that.
A business cannot have information on the future demand for its products. What it can have is projections of future demand that depend on a large number of assumptions about the unknowable future.
The credit expansion and interest rate driven boom is the result of ever more marginal investments being made. The problem is that the 'go/no go' decisions are not normally distributed, but are biased to 'go' by artificially low interest rates and by more than normal credit availability.
The problem is not usually the individual investment decisions themselves, but rather the fact that they are synchronized in time by the interest rate and credit environment. As the investments proceed, there is simply too much competition for resources and not enough overall demand when the investments bring products to market. At this point, it becomes obvious that a massive simultaneous liquidation is necessary.
Regards, Don |
