Trade Cycles

Should we fear them or love them?

Many years ago I used to read about the biblical accounts of the seven fat years followed by seven lean years, and I assumed that the causes of these were surely natural factors such as weather cycles, crop rotation schedules and the life cycles of insects and other pests. It was not until I grew up and entered the world of commerce that I realised that the guys who wrote the chapters which made up the Bible may well have been referring to trade cycles.

So how does a trade cycle work? People start off in business doing anything from growing wheat on a patch of barren land to selling poisonous financial derivatives to each other. At first business is hard, because the potential consumers cannot afford the products and they are difficult to produce but bit by bit the system becomes more and more efficient, costs start to fall which means that more people can afford them, the population as a whole is also in business and becoming more affluent so trade is good. More and more people jump on the bandwagon growing ever cheaper wheat and manufacturing more and more poisonous financial derivatives, so bit by bit the original entrepreneurs start to feel the strain of competing for every deal and confidence in the future starts to fall as competition squeezes profit margins. One fine day our hard working heroes find that owing to excessive competition and inadequate profit margins there is no longer any profit to be made in the chosen trade and so the company cuts back on expenditure and has to let some of the workers go. Since everyone else is doing exactly the same thing the level of wealth in the community drops substantially because the workers have no work and the bosses have no profits! Result; there is a big financial crash and all the companies go broke.

Perhaps not all of them though. One or two companies, either because they are more efficient than the rest or because they had the foresight to put away more of their assets during the fat years, not only survive but start to grow because there is lots of business available owing to the fact that all the competitors have gone out of business! After a short period of time more of the people realise that there is good money to be made in wheat or derivatives so they jump on the bandwagon and -- guess what -- they have just gone through a complete trade cycle.

The moral of this is that what is happening to economies worldwide at the moment is nothing new and anyone who had any knowledge whatsoever of world economic history could have predicted it without any difficulty. This current financial crisis is nothing new, the world economy will get through it and emerge stronger than it was before, and then there will be another boom -- until the next crash, which will probably come round and about seven years after!

Another natural phenomenon is cheap car insurance, and then there is shop insurance too!