When the economy is booming along, we occasionally hear people theorize that business cycles have lost their significance. Usually, this prophecy is based upon the idea that the Government and the Fed have gotten so good at managing the money supply, only small amounts of inflation and deflation are needed to keep everything on course. The current recession makes this idea look kind of silly, but we will get through this and sooner or later the theory will resurface.
Capitalism has proven to be a great motivator and in conjunction with open markets it has been the proven model for producing economic efficiency. However, it does have at least two forms of instability built into the system that will always be a part of it.
- Old ways of doing business are constantly being challenged by people with new ideas in the hopes that their concepts will make them wealthy. A certain number of times they succeed which puts the old businesses out of business.
- Business owners are incurable optimists about the demand for their products and services, otherwise why would they be in the business. This optimism drives them to over inventory which inevitably produces an oversupply and eventually a slowdown as they try to get those inventory levels back under control.
Recognizing that business cycles are an inevitable and natural part of life can greatly improve your business and investment planning. The tendency for most of us is to think that the next day, month, quarter or year will be a lot like yesterday. It is a mistake to think this way. Better to recognize that we are somewhere around the bottom of a recession and that sooner or later the recovery is going to happen. It’s not hard for me to picture a few years in the future wishing I had bought a lot of Ford stock when it was $2 a share.
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