The Business Cycle

The business cycle is a phenomenon that has plagued our society ever since the advent of modern banking, and even before then in times of unhinged deficit spending and money debasement. The Romans saw it on multiple occasions. However, not until the advent of fractional reserve banking has the phenomenon become so common that it has become viewed as just another side of capitalism.

The cycle has two sides to it. There's an expansion of economic activity, followed by a contraction. We've been seeing this on multiple occasions this century:

1. The dot com bubble of 2001
2. The housing bubble of 2008
3. The everything bubble of 2020 (yet to complete)

Famous examples from the 20th century are:

1. The Weimar bubble of 1920
2. The US bubble of 1929

Farther back in time we have two bubbles in France:

1. The Mississippi bubble of 1720
2. The everything bubble of the first republic

Smaller, less dramatic bubbles have come and gone, many of which all but forgotten. However, they all share a common underlying structure:

1. There is an expansion of the money supply, usually through the issuing of cheap credit.
2. Financial assets go up in price.
3. Raw materials and wages go up in price.
4. Projects have to be stopped or scrapped due to higher than expected costs.
5. Prices of everything, relative to gold, go down.

Once the money supply has been increased, the above cycle must inevitably follow because an increase in the money supply will always end up sending prices of certain assets, goods or services higher. There is no way of avoiding some sort of crash at the end of the cycle. Either, the currency gets destroyed or the financial bubble gets pricked by a contraction of the money supply. In both cases, gold will serve as a safe haven and appreciate against all assets.

With this in mind, we see that we're currently inside a massive bubble, furiously stoked by cheap credit issued in response to the plague of 2019. There's also tell tale signs of strain. I see housing projects stopped or delayed, probably due to high cost of raw materials and labour. The price of financial assets also appear to have peaked. We're entering the late stage of the bubble, and there's only two ways out of it. Either, there will be a spectacular crash, or the currency will be destroyed. Relative to gold, everything will be cheaper going forward.

This in turn ties up to my investment plan. I will roll out of gold and into land, real-estate and productive assets. With a bit of luck, there will be real bargains for those with gold savings, and I intend to take full advantage of any opportunity that comes my way.

This may sound like wishful thinking, but the logic is simple. Let's say we were to buy a forest of cork trees today. The price would reflect a 5% return on investment, according to my friend in the business. However, this is based on the current price of cork, which is likely inflated. When things sour, there may be a year or two with very little demand for cork. It may be close to impossible to sell more than one fifth of the amount currently sold. With prices unchanged, the return on the forest is no longer 5% but 1%. But prices will go down as well. Maybe as much as one fifth, in which the return is a mere 0.2%. Anyone with a 4% loan on their forest will be facing huge losses.

This is how forced selling comes about. Desperate to cover debt, assets are forced into a market with hardly any buyers. The buyers can then demand a return on their investment at maybe 10%, which would mean that the forced seller will have to accept a price that's one tenth of what is today considered fair price. The ones who can afford to wait a few years to see prices go up again can accumulate land at bargain basement prices. When prices subsequently rise to more normal levels, and volumes pick up as well, the 10% return we were getting while in the midst of the depression swells to a mind boggling 50% or more, in real terms. The gold invested during the depth of depression can be recuperated in the space of a few years, and there will be a handsome fixed income for years to come as a bonus.

The wealth transfer that's going to take place during this coming depression will be truly astonishing.

Reflection in a soap bubble

By Brocken Inaglory. The image was edited by user:Alvesgaspar - Own work, CC BY-SA 3.0, Link