How Recessions are Made

I realize that a big gap in my blogs exists, however, there has been a lot of focus on the last year with current economics.   These are trying times to existing traditions, thoughts, and ways of doing things.   I find myself constantly in the last two years challenging my views on everything I was taught.   In the investment world, there have always been ideas that work for shorter or longer periods of time, but each will test your patience and persistence beyond any expectations.   

In my past, I was hired by a broker-dealer that had been bought out by GE Finance only two years before.   When I arrived for my first day, on my desk lay a copy of the book, "Who Moved my Cheese"  by Dr. Spencer Johnson.   A book I believe everyone should read a couple of times and then refer back to it as life changes.   At the time I thought it was a great read, but only after seven more years later, when I left to pursue another opportunity, did I really understand the impact of the book.    

As human beings, we like stability in our lives and also some change.   The problem is that we often like to have control over both stability and change, but life has a way of giving us unwanted change that forces us to search again for stability we once thought we had.  

I have come convinced that the single biggest threat to our economic stability is the excessive use of debt.    Looking back at the last hundred plus years has shown me that without financial balance we tend to use debt till we blowup, experience the pain, forget and then repeat.    If bad habits are left unchecked they often lead to bigger injuries later.  

Recessions in the past, prior to the '70s, were much more common and often expected.  This often kept most people to avoid taking on too much debt and spending within their means.   It was a natural deterrent to bad financial habits.  Also, government spending was often held in check by the amount of gold in its reserve.   Finding more gold is a lot harder than printing paper fiat money.    

Recessions are only the representation of bad habits being held responsible.   The government's desire to avoid recessions has only allowed more of the population to create and continue bigger bad debt habits.  This, in turn, has created bigger and bigger recessions to the point that we now face a potential recession that will be much larger than the last Great Recession.    I would not be surprised to see the market take a 70-80% nosedive over the coming few years.   Reliable research I follow suggests such an outcome.   

There seem to be two camps on solutions to this problem, one is to government regulations and the other is to allow the consequences of bad behavior through free-market mechanisms.    I generally sway on the side of free-market mechanisms because it is often non-discriminatory and not as government officials continue to be.   The markets do not care how rich you are or how poor.   They don't care what nationality or color of your skin.   Markets, if allowed too, often manage out bad behavior.    But I also believe the government has the role of being the referee but not both the referee and player it has currently become.    

"The received wisdom is mistaken on how recessions are made. They are not simply caused by shocks. They are caused by a window of vulnerability in the economic cycle where the cyclical drivers of the economy have weakened to the point where it’s susceptible to a negative shock. Within that window of vulnerability, virtually any reasonable shock becomes a recessionary shock. That’s how you get a recession. "

– Lakshman Achuthan, Economic Cycle Research Institute

I welcome your comments below.