IT PAYS TO KNOW: What is an economic cycle?

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By JUDD MATSUNAGA, Esq.

For many Rafu Shimpo readers, their minds are ‘closed’ when economic news comes in, eg ‘interest rate hikes’,’ rising job demands’, ‘Federal Reserve meetings’,’ consumers need to change “, Etc. etc. However, understanding the different phases of an economic cycle can help us make important decisions in life.

Think of economic cycles like the tides to an ocean: a natural, endless ebb and flow from high tide to low tide. And in the same way that waves can suddenly appear to be going up even when the tide is going down or appearing low when the tide is going up, there can be bumps in between and opposite – up or down – in the middle of a particular phase. .

All business cycles end with a period of sustained economic growth, followed by a prolonged period of economic decline. Throughout its life, an economic cycle, also called the economic cycle, goes through four identifiable stages, called phases: expansion, peak, contraction and trough.

(1) Expansion: In the expansion phase, the economy is growing for two consecutive quarters or more. Expansion, seen as the most desirable state of the economy, is a “high” period. During expansion, firms and firms steadily increase output and profits, unemployment remains low, and the stock market is doing well.

Typically, interest rates are lower, employment rates are rising, and consumer confidence is building. Expansion refers to the increase in economic factors such as income, supply and demand. During this stage, there is an increase in consumer confidence. As a result, people spend more money and pay their debts more comfortably. Many businesses are growing and thriving at this stage.

(2) Culminate: The peak phase occurs when the economy has reached its maximum productive output, signaling the end of the expansion. The peak phase follows the expansion of an economic cycle. The peak of the business cycle comes just before major economic indicators start to decline.

The peak marks the culmination of all this feverish activity. It occurs when the expansion has come to an end and indicates that production and prices have reached their limit. Right now, prices are at an all-time high and the economy can “overheat,” which means businesses can no longer meet consumer demands.

This is the turning point: without room for growth, there is nowhere to go but down. Once these numbers start to rise outside their traditional bands, the economy is seen growing out of control. Businesses can grow recklessly. Investors are overconfident, buy back assets and dramatically increase their prices. Everything is starting to cost too much. A contraction is coming.

(3) Contraction: The contraction phase follows the peak phase. A contraction spans the time between peak and trough. This is the period when economic activity is on the decline. During a contraction, unemployment numbers usually rise, stocks enter a bear market, and GDP growth is below 2%, indicating that companies have downsized.

After this point, once the number of jobs and housing starts start to decline, a phase of contraction begins. The contraction phase of the economic cycle results from the downturn and regulation of companies compared to the previous peak. During this stage, business owners focus on finding ways to improve their financial situation, such as how they can save money or become more competitive.

(4) Hollow: As the peak is the high point of the cycle, the trough is its low point. It happens when the recession, or the contraction phase, hits a low and begins to rebound in an expansion phase – and the business cycle begins all over again. The rebound is not always rapid, nor linear, on the path to full economic recovery.

The lowest point in the business cycle is a trough, characterized by higher unemployment, lower availability of credit and falling prices. The trough phase follows the contraction phase and ends before another expansion phase. During this stage, the supply and demand decrease considerably and the employees do not have as many materials. It is common for businesses to lay off employees or shut down during the downturn.

Governments and large financial institutions use various means to try to manage the course and effects of economic cycles. In an attempt to end a recession, the government may resort to an expansionary fiscal policy, which involves rapid deficit spending. Conversely, it may try to use a restrictive fiscal policy to keep the economy from overheating during periods of expansion, by taxing and generating a budget surplus to reduce overall spending.

Central banks try to use monetary policy to help manage and control the business cycle by raising interest rates and slowing the flow of credit into the economy to reduce inflationary pressures and the need for a market correction. When the cycle hits the slowdown, a central bank may lower interest rates or implement expansionary monetary policy to stimulate spending and investment. During the expansion, it may employ a restrictive monetary policy.

According to Investopedia.com, the popular sentiment of financial analysts and many economists is that recessions are the inevitable result of the business cycle in a capitalist economy. The empirical evidence, at least on the surface, seems to strongly support this theory. Recessions seem to occur every decade or so in modern economies, and more specifically, they seem to follow periods of strong growth on a regular basis. This model comes back with striking consistency.

Why? Although they don’t teach this at any business school, it’s designed by the top 1%. They control the FED, they put in place elected officials, they are the “tail that wags the dog”. Every time there is a “market correction,” the wealth gap between the richest 1% and the 99% widens. Every time the stock market crashes or the housing market crashes, the rich get richer.

Here’s the scary part – the last recession, called the Great Recession, happened between 2007 and 2009. At the time, the International Monetary Fund (IMF) concluded that it was the most serious economic crisis and financial since the Great Depression. That was 12 years ago. This means that we are due for another market meltdown. It happens – it comes with a “striking consistency.”

In fact, the same things we heard just before the Great Recession of 2007, we hear them now. Turn on your news. Stock market at record levels. Interest rates at record lows. Banks are making “easily eligible” or “ineligible” loans to artificially prevent the housing market from collapsing too soon.

What does it mean? If you are considering withdrawing money from your home, do so now while interest rates are still at historically low levels. If you are considering selling your home, do so now before the market collapses. If you are considering buying a home (or investment property), you may want to wait until the market collapses. If you are heavily invested in the stock market, you may want to diversify into safer, growth-oriented investment vehicles.

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Judd Matsunaga, Esq., Is the Founding Partner of Matsunaga & Associates Law Firms, specializing in Estate Planning / Medi-Cal, Probate, Personal Injury and Real Estate Law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. The opinions expressed in this column are not necessarily those of The Rafu Shimpo.

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