Does anyone who understands finance have any insight on why this pattern seems so predictable? Is it due to fundamental economic drivers, or is it merely correlated with major historical events (internet 2000s, globalization 1990s, deregulation 1980s, post-WW2 society 1950s, etc)?
If technological society does not continue to innovate at the pace of the last few decades, will boom/busts smooth out at a point of slower growth?
Technology can make the problem worse by reducing the time taken to economic changes, exaggerating the feedback loop. However there has been one big success of formal macroeconomic control modelling: inflation. Almost all the Western economies have a good system for controlling interest rates in order to maintain an inflation target.
I don't think anyone has really invalidated Keynes' work on business cycle theory, although it is recognised that it doesn't quite cope with a heavily financialised economy and there is huge political opposition to counter-cyclical fiscal policy.
There is huge political opposition to raising taxes and cutting spending during expansions, yes. However there is huge political support for cutting taxes and increasing spending during contractions.
Would they have to always want that though? I mean, I believe a lot of things can be made more efficient by economies of scale, and in some cases avoiding perverse incentives of for-profit motives (the stories I keep reading about the worst of the American prisons come to mind). In other words: that some systems work best when handled by the government. So I have no trouble believing there are situations where paying more taxes gives me the best value for money in terms of increasing personal happiness, because they would be spent on improving those systems.
I'm not sure if there is any government out there currently that I trust that much, but it's sounds hypothetically possible to me.
That's a misconception. State run prisons are no better.
Regardless, it's not that people don't want government to provide services. They want government services and they want low taxes.
Sounds an awful lot like the post 2008 environment, no?
The real problem with the 2008 recession is monetary stimulus doesn't really work.
In practice, ever-increasing debt absolutely requires ever-increasing growth in order to service it. We've so far been lucky, in that the period during which we've used this policy has coincided with the enormous productivity gains that came with the computer revolution. But rearranging our economy so that it's dependent on continual windfalls from external sources merely to stay afloat seems reckless at best.
It seems that we're currently approaching the top of the S-curve for computation via integrated circuits; further increases going forward are likely to be incremental and margin-focused, as opposed to paradigm-shattering. Maintaining the 1950-2010 rate of productivity improvement will require new paradigm-shattering advances in some other field (machine learning? Internet of Things stuff?). It's possible that these are indeed forthcoming, and we can continue our absurd growth levels for another fifty years. It's also possible that we're nearing the edge of the problem space and we won't have any more easy order-of-magnitude productivity boosts. If the latter is true, then our economy will inevitably collapse with enormous collateral damage. As an economic system, this seems unstable at best.
Once real AI comes I'm not really sure what will happen because it is unpredictable how the AI will be made, but if the past is any indication it will be made recklessly in a race between a bunch of companies. Idk how long our current world order will continue to exist and how much the AI works with us after that event. Hopefully the zoo it keeps us in will be nicer than the way we have treated animals, and hopefully that takes 20 years after the birth of real AI.
I wouldn't worry about innovation slowing down, I would worry about the end of meaningful human innovation that we are clearly headed towards.
some possible areas - AI, 3d printing, falling renewable energy prices, continued marginal gains from computers, quantum network communication, longer term - quantum computers, expansion of VR, driverless cars, etc. Point being there are a lot of promising areas on the horizon.
No, it only needs increasing growth of the rate of debt growth is accelerating; if it is merely constant debt growth (over the long term), constant (not “ever-increasing”) economic growth allows debt service costs to grow constantly and still have the otput not devoted todeny service grow constantly at the same rate.
> We've so far been lucky, in that the period during which we've used this policy has coincided with the enormous productivity gains that came with the computer revolution.
It's been practice (“policy” is a bit too strong) since Eisenhower. And economic growth was stronger earlier in that period than later. Too the extent that it's been sustainable, it's not due to some unusual economic magic of the “computer revolution”.
> But rearranging our economy so that it's dependent on continual windfalls from external sources merely to stay afloat seems reckless at best.
Even to the extent the computer revolution might be relevant, that's not an external source when discussion the economy. That is a thing that was produced within the economy, and government (deficit-financed) spending played an important role in it.
People dependent on income from wage labor need to pay off debt for sustainability because the ability to do labor eventually declines or is lost.
Governments aren't individuals.
I'm not sure there is a good case that “Keynesianism” is the problem; the late anti-tax orthodoxy of the Republican Party, which has nothing to do with Keynesian fiscal policy, seems more to blame.
This is because government debt isn't a zero-sum game.
Especially since our currency is no longer gold standard/backed (partly because of the Great Depression).
It is also exactly the year inflation took off like a rocket - see the "Cumulative Inflation" graph. And the standard of living for the middle class (at least in the US) began to stagnate (up to this day).
Switzerland was on the gold standard until 1999. Since abandoning the gold standard, inflation in Switzerland has been minimal.
Clearly abandoning the gold standard does not necessarily lead to inflation. You haven't even shown a correlation here, much less causation.
I was not trying to prove causation. There appears to be correlation, but obviously other factors (like government spending) are at play
Also the payments are fixed amount, not erasing of whatever debt you may have. A key aspect is that for those with debt the bank must use the cash towards paying off the debt first, whereas those with no debt will just get cash appear in their current account (or a cheque in the post, or whatever). Not saying it's practical, easy, or without ways of gaming the system, but those are the baseline intentions.
I read "random payments into bank accounts" as "payments into random bank accounts", which I think is one reasonable interpretation but clearly not the only one. I also took "reducing private debt by..." as being a requirement on the individual payments rather than simply a goal of the program.
With neither of those attributes, my analysis doesn't apply.
What would you consider an invalidation of the theory?
One recent example: the choice between austerity and stimulus, in the US and Europe, shortly after the 2008 downturn. Keynesian economic theory claimed that if your interest rate approached 0%, that you could no longer stimulate the economy via interest rates, but that the best way to improve the situation was for the government to create and spend money. And that doing so wouldn't cause sudden inflation.
Another theory said that fiscal austerity measures and the reduction of government debt would improve the situation. This theory also suggested that the US should experience strong inflation in the years immediately following 2008.
IIRC, the US government spent something like 1/3 to 1/2 the money that some Keynesian economists recommend spending on a stimulus. Other countries tried varying degrees of austerity. So to test the theory, you'd need to compare what happened in different countries.
Note that this particular "Keynesian" theory does not necessarily recommend heavy government spending when the Fed interest rate is above 0%. Basically, it's only about emergency measures when ordinary economic theories have failed.
For an easily-accessible version of this particular "Keynesian" theory, and why it's supposed to work, see this paper on the "Capital Hill Baby Sitting Co-op": http://www.eecs.harvard.edu/cs286r/courses/fall09/papers/coo... This is really more of parable than anything else, but it explains the logic.
Tl;dr: At the government's scale, money is a weird abstraction and you can't always pretend that it works like grain or cars or other simple economic goods. Or to put it another way, if the economy gets bad enough, then everybody wants to work more hours at the restaurant, but nobody wants to go out to eat—and therefore something has to give.
I'm not qualified to comment on whether this theory is actually true. But that's how you might test it, and an explanation of why it's supposed to be useful under certain circumstances.
Economics is a challenging area to have theories because it is really really hard to run experiments. As a result you have to use existing choices and try to identify what the theory predicts, then walk forward in time to see if that prediction was accurate or inaccurate. It is really hard to do because humans tend to want things to succeed and can unconsciously add or subtract data points that move them closer to 'prove' or 'disprove' depending on what they want. Eliminating that bias is very difficult.
On a related note, we're also due for an ice age based on historical cycles. However as systems change and the balances within them shift, it can be difficult to see which variables force the cycle and which merely enhance it. Easy to see an enhancer as a major force when it isn't.
So back to business cycles; there are four outlier economic events which I think can provide some insights into what may or may not happen in the next decade. These are (in chronological order) The dissolution of the USSR in the 80's, Japan's meltdown in the 90's, the misnamed "Mortgage crisis" of 2009, and the collapse of the Venezuelan economy in 2015. Each of these events share a common thread of state controls and markets being ripped apart by events. I don't think we have yet learned all we need to learn from them.
What I observe is that the rapid shift of materially significant (from a GDP perspective) wealth from the general market to a much smaller number of market 'maskers' on a sovereign state basis, has an attenuating effect on systemic controls and other market damping systems.
So looking at how business cycles happen in a system where more and more interacting economies are less market driven and more exploitation driven is, again in my non-professional opinion, might shed some light on how the cycles will evolve.
The Austrian economists would argue that what happened in 2008 was a breakdown of the fiat monetary system and that the responses were just bandaids. In the longer-term view, when you look at shifts in power and rising and falling of empires, 2008 could be the first of many massive shocks to the economy.
Ideally the restaurant would lower wages until fewer people want to work there, and lower prices until people want to eat there. Decreasing the value of money feels like a dirty hack that benefits the richest at the expense of everyone else. Remember before we adopted these policies recessions used to be really short.
- the record-breaking auction prices of art pieces (Picasso, etc) at Christie's & Sothebys
- the vast pools of money chasing late-stage tech startups driving up late-round valuations,
- the increase in student loans for college students driving up tuition prices outpacing "official" inflation metric
There's also "shrinkflation" which is a form of inflation but does not count in CPI calculations. Also, many homeowners complained that their house insurance went up 20+ percent even though they don't live in a hurricane or flood zone.
The pundits saying there's no inflation seem to only look at the flawed CPI statistic. If the Fed's quantitative easing creates $4 trillion in new money, that has to show up somewhere in the economy. (Unless _everybody_ coordinates to hide all $4 trillion in a mattress to negate its effect.) If citizens are seeing a reduction in purchasing power in real terms, you have inflation happening.
I have the most exposure to this in the realm of medical products. A family member has Type I diabetes, and so must continually buy insulin and blood testing supplies as an everyday expense; several times, he has been forced to switch products (between varieties of insulin, from purely chemical test strips to ones with an electronic reader, &c.) by the discontinuance of the older product. The new one is always much more expensive, and never reduces in price to match the old; this has resulted in a significant increase in his expenses for these supplies, despite nothing ever occurring that would appear in inflation statistics.
Yes, and airlines charging a new extra fees for baggage when they used to be included in the base airfare is another form of inflation. This "shrouded pricing" is used to hide price increases in various industries.
- the "Walmart" economy - no inflation there, regular Joe Schmoes have not had a real raise in years
- the "Hamptons" economy - lots of money sloshing around (thanks to the Fed), bankers, etc spending big on luxury real-estate, etc.
Congress doesn't want to spend money on infrastructure.
Explaining business cycles has been a primary motivation for macroeconomics' existence as a field. There are many theories, but theories are hard to disprove in economics.
The two big, long-lived families of macroeconomic explanation are from the Keynsian and Austrian/liberal "schools."
Austrian economics has Hayek & Mises' nobel prize winning theories, and built on by monetarists like Milton Friedman. These theories revolve around credit/money supply. Too much money is available at too low a rate, causing bad investments. When these undertperform, a downturn occurs.
Keynsian explanations revolve around "aggregate demand." When people and businesses are worried, they borrow/spend less and save more. This leads to less stuff being made, the definition of economic contraction.
The Austrian explanations are a little more straightforward to understand in a simple form. Keynesian is s bit harder. I recommend starting from the "paradox of thrift" concept, if you're interested in Keynesian.
I consider him closely related to Austrian economics, neoliberal economics... at least when it comes to business cycles.
A lot of "keynsians" are much more removed from keynes himslef than Friedman is from Hayek, Mises, Bastiat..
Obviously every individual is different and taxonomies are fuzzy. I'm not attached to my taxonomy, just trying to comment without lots of footnotes.
I'm not arguing the nature of the facts, just pointing out the fact. Hopefully you can relax a bit, this is just a dialog and not a debate where I'm trying to score points against your claims.
You left out Marx.
I think there's very little Marxist economics left, in the technical sense.
Marx is pretty early.
It basically boils down to Marx's Law of Profitability, where the rate of profitability tends to fall as investment in fixed capital increases:
"If the amount of paper notes in circulation were doubled the prices would double" and things like that. I really do wonder what those economists would think of modern economics.
I'm indeed Marxist, how did you know? We recently commemorated the 40th anniversary of Groucho's death, by the way.
Or maybe you were correcting me? https://en.wikipedia.org/wiki/Marxian_economics
'Freshwater' economics / econometrics and even complexity / system theorists have given us a lot of insights into bubble formation. Dealing with recessions is something that doesn't really have an expert consensus beyond 'avoiding obviously bad things'. Heck, go ask economists to reconcile recessions with the efficient market theory.
In terms of maturity, economics is where medicine was after people accepted Ignaz Semmelweis’ theory that doctors and surgeons should wash their hands. The consensus opinion is against things like leeching (a gold standard) and people more or less agree on the right things to optimize (low, stable inflation; lower unemployment; somewhat high reserve requirements for banks, etc.).
For anyone reading this, I recommend the book "Manias, Panics, and Crashes" it's not well organized but it's very interesting.
Bubbles have a few things in common, they're speculative in nature, they're hypergeometric, and they’re fueled by credit expansion. More or less – too much money chasing ideas that aren’t going to pay off.
I’ve been warning people about used car prices since 2015 (though I expected the prices to decline about 8 months before they did). That clearly fits the pattern – after the recession used car prices were high so banks felt it was a relatively secure loan to make, but then the volume of car credit products (loans and leases) went up and made car credit too cheap, people bought too many new cars and now those cars are starting to flood the market which is a problem because banks expected to get more money out of the cars.
There’s speculation (I think cars will be worth a lot when they’re off lease). There’s credit (here Mr. 610 FICO, you can get a new RAM). There’s hypergeometric growth (the U.S auto industry sales grew much faster than the economy – a weak case of hypergeometric growth).
And now there’s the bust. We haven’t seen panic selling yet, but we might soon.
In my opinion, the clearest sign that something’s wrong is in the bond market. Something like ¼ of the world’s government bonds have a negative interest rate. People put up money today in exchange for less money in the future, it doesn’t make sense. It’s a sign that something is seriously wrong in the world economy. Too much money chasing too few ideas. I have a heterodox view – many economists think that interest rates are too low, but I think they’re too high. The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects.
At the same time there’s a few trillion in negative interest rate bonds, it’s hard to raise capital to start a business. That’s messed up.
There is some hope. I think we could continue the expansion for a at least 4 more years if we overhauled the tax code, we slashed rentier’s regulations (zoning, occupational licensing, and a few more), and we opened our boarders to high performance immigrants – not drug slingers but Ph. Ds / Executives / etc.
Could this be related to past 30 years of consolidations in the banking industry?
Smaller/specialized institutions invest differently than large ones. Anecdotally, they can be more willing to take on small high-risk investments in local businesses (R&D, small-scale disruption) or cyclical low-risk low-yield investments (small farms)...
Taleb makes a similar argument in Antifragile. I think his arguments lack in formality, but [England's Work](http://www.englandlab.com/uploads/7/8/0/3/7803054/2013jcpsre...) on the matter certainly support him.
In my opinion, something that happen periodically and continually to a system can't be easily classified as 'abnormal'.
I think 'inherent' would be a better word.
I'm not convinced that recessions and contractions NEED to happen. I'd bet that they're more common in market based economies but I haven't seen anything that suggests they're critical to equilibriums as we know it.
It's funny, I made two responses, two weeks ago along these lines surrounding the Tesla bond auction. IMO, most people don't want to hear it because they believe they are doing the best they can with whats available for them to allocate. Too much money chasing the same shit that's consistently providing less and less returns… best to sit quiet in the background and do what one must's in this environment despite it all…
Yeah, yeah, it will be so good for Tesla to sell its new expensive (how many people can afford a $35k+ out of pocket for something that will sit idle for most of its lifetime?), the future™, cars with 0% down to subprime on the mass market once it gets at scale™ to people who can barely afford monthly payments on their used old and busted gas guzzlers… for fucks sake, hedge funds pay for satellite time to time their shorts based on bloated auto inventory now, because people are just waiting to have their new electric cars… who knows, maybe there will be a new gov program, an EBT of sorts for autos, cash for clunkers was a good step in that direction lol
>The market is trying to burn off excess value that’s not being used well and world governments are trying to insolate rich people from those effects.
I think this is only going to exacerbate feedback loops that end up only weakening the governing systems because "god forbid" that any of the The Market™ burn off accidentally get allocated to those who end up besting those who are trying so hard to lock in less money 5-100 years from now on gov/corp bonds…
While we're at it, original Keynesian theory has been considered disproven by the existence of stagflation, which the theory would consider impossible.
That's like saying there's two families of space research, Astronomy and Astrology. One of these things is mainstream and taken seriously, one is not. As the other guy said, it's Keynsian vs Chicago, Austrian isn't in the game, it's fringe stuff.
..at least relative to this topic, busines cycles.
They can also convert bank deposits into 'yellowstuff' and put that in a vault, or safe at home. However, the mining inflation rate in 'yellowstuff', plus fees for storage, come to a depreciation of about 1.5%. So if the WoC is successful, and NIRP policies demand less than about -1.5% interest rate, then there has to be a War on Yellowstuff too.
Dane here. We're fine. It's not affecting consumers directly. The negative rates are locking at zero or close to zero. Government has talked about intervening if it would go negative, which I would tend to believe. I honestly don't know the exact consequences of what would happen in any case. I feel motivated to buy a new apartment because of the low rates, so I'm guessing it's working as it should. But that's all just anecdotal.
Would that be your first apartment? It seems to me that the programs of low interest rates are motivating the wrong people - people who already have significant assets and can borrow against them to buy another/several properties.
It's a fantastic video for explanation for how the economy actually works.
Based on this distinction lies the distinction between the policy proposals advocated by Liberals and Conservatives, Democrats and Republicans. Irrespective of which of the above statements "Savings drive the economy" vs "Spending drives the economy" sounds right to you, it's important for people to understand that this distinction exists on a fundamental level in economics (and in today's political climate, even more important than holding an opinion on which two statements are right, it's important to understand that the difference exists).
But due to international demand - especially on Japanese production) - in the 80s and early 90s, those nations didn't spend on infrastructural improvements (factories running at 95-100% capacity (sometimes bursting even higher), so when they inevitably had to spend on capital improvement (expansion, new tooling, etc), they had to take production lines offline, which led to production drops, which led to their economy crashing.
"Spend" and "save" (where "save" is a mix of capital investment and so-call "rainy day funds", and "spend" is consumerism) are far too often viewed as independent factors, when they rely on each other being in balance to keep the economy working well.
When an economy spends everything it has (or more - which happens with credit that is too easy to come by), and forgets to plan ahead, it crashes in predictable cycles.
When an economy saves "too much", it never grows (or crashes due to having too much capital investment and not enough demand).
The US' coming out of the Great Depression - largely due to WWII production - was a giant case study on this: factories, production lines, and employable people were massively under utilized, so when demand was created (by gearing up for war), all those people and production factors were "available" to be used. In other words, they had been "saved" (from the economy's point of view) for a decade instead of "spent" (again, from the economy's point of view).
This is part of why there is a "healthy unemployment" value that economists toss around ... generally in the range of 4-6%. Those "saved" resources (human capital, in this case) are available to be "spent" when needed.
If you run at an unemployment level (regardless of whether that "employment" is production capacity, personnel, funding, etc), that is too low OR too high, you run into boom-bust cycles.
That's what central banks try to regulate (albeit not very well, when viewed in the long term).
> If you run at an unemployment level (regardless of whether that "employment" is production capacity, personnel, funding, etc), that is too low OR too high, you run into boom-bust cycles.
I don't think this is a good summary of the theory - it's recognised that reaching the limits of capacity causes inflation, but no mainstream economist would refer to unemployment as a form of saving. Labour is a "wasting" good; you either spend a day or waste a day, you can't save up time while unemployed and spend it later.
Economists prefer a minimum level of unemployment because it effectively prevents labour organisation being used to drive up wages.
Except human capital is, from the economy's point of view, like money in your bank account: if you have none to spare, you cannot absorb increases in demand (to personalize it, say you have $100 per month for gasoline - if the price doubles, you can buy half as much for the same money .. you have no cushion to absorb that change).
Just about every economist I've read over the last 20+ years (ranging from the 1700s to now) agrees there, more or less - regardless of the school they adhere to: if you're operating with no margin of error, you experience the booms and busts less well than if you have a margin.
Unemployment is a form of margin in this context. Say there's 100,000 employable people, but 5,000 of them are unemployed. When demand for labor spikes by anything less than 6%, there is an "instant" buffer to bring onboard while new employable labor is "spun-up" (via training, growing old enough to work, etc).
>Economists prefer a minimum level of unemployment because it effectively prevents labour organisation being used to drive up wages.
Pretty sure you have that backwards: the lower the unemployment, the more wages are likely to rise. If your unemployment is too high, wages will fall (or remain stagnant).
I don't think either the Keynesians or the Austrians can really claim a victory in those examples because external factors played a large role.
It's "bad" because there's no buffer to absorb increase in demand of production and service creation
Does a similar video exist from the "Savings drive the economy" point of view?
But as I said, everybody has an opinion on "savings vs spending" (just look at the responses to my original comment), and it's such a clear classification that at that end of the day you can divide every individual on one or the other side of this debate.
Savings vs Spending is actually more accurately defined under "Say's Law". Whether you believe Say's law to be true or not. Keep in mind, pro-spending side defines Say's law different than pro-savings side (it's like pro-choice vs pro-life).
The economic ideas which fall under "Savings drives the economic growth" are:
Free Market policies, deregulation, privatization, reduced govt spending, (most) Republican/Conservative economic policies, anti-war, lower taxation, global trade, anti-protectionism, "Work and jobs will always exist".
The economic ideas which fall under "Spending drives the economic growth" are:
Increased govt spending (includes war spending), regulated markets, nationalized industries, UBI, Welfare, "machines will do everything one day", higher taxation, (most) Democratic/Liberal economic policies, higher spending on education, universal healthcare, infrastructure spending.
Funniest part about economics is that if you try to look at "evidence" then you'd find both the side being able to present the same events as an evidence of their theory being right. New Deal is simultaneously an example of how govt spending got us out of recession and how it dragged the recession to 10+ years.
While Friedman is often portrayed as a 'synthesis' or mid-point between the philosophies of Keynes or Hayek on a linear plot, I found him to be closer to Hayek philosophically.
EDIT: Also important to point out that Austrian school economics are against manipulation of monetary policy. They argue that interest rates, credit and savings ought to be driven by market factors rather than the government. It's not so much "debt is bad", but rather "artificially driving up debt by manipulating monetary policy is bad".
Keynesians would say the government should employ policies to increase overall consumption in the economy (aggregate demand).
Austians would say government shouldn't do either, but rather allow the free market to find the correct balance between consumption and investment. They are particularly against monetary policy because it increases overall investment in an economy (aggregate supply). The problem is that artificially high rates of investment inevitably lead to businesses offering goods and services that cannot be sold profitably (malinvestment).
That's why Austrians believe that artificially low interest rates cause business cycles.
There's a difference in the velocity of money in the domestic economy; it’s not fundamentally tied to savings vs. spending, but is correlated to it.
A bank is not constrained by savings to lean. When a bank lean money is creating that money as a liability for the borrower and a asset for itself.
Likewise the three around 1960 to before 1980 all look different. The expansion after 1960 is unusually long and even though it dips at one point before 1970 does not go negative until after.
With that classification we already have 4 categories of recessions (3 between 1960 and 1980, and one for two recessions after 1980). The reason is prior to the 1980s recessions were generally driven by political events or changes in government policy exogenous to the private sector. According to this link: https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...
the 1961 is because of FR interest rate move,
1969- government tightens budget and interest rates go up
1973- Stagflation starting with OPEC tightening oil supply
You'll notice all of those are caused by events outside the control of the private sector or in other words the cause of someone's deliberate policy rather than an event of the system. Economic policy cannot predict these nor should it try to predict human behavior. Which brings up the point again that they are not predictable because I don't think anyone would say they can predict the behavior of an individual or a conglomerate like OPEC with great certainty.
That said post 1980 many of the recessions are caused by financial crisis that are endogenous to the private sector, so that is worth looking at. But the claim that the business cycle from 1945 to 2009 is predictable does not hold up.
(And what is the vertical axis supposed to be labelled as? I don't even know what the chart is of.)
Although it's always popular to blame some group ("bankers" "irresponsible borrowers..." you could devise the others, and "the government" is almost always seen by someone as at fault), it appears that the answer is often "in all of us."
Fundamentally cheap capital available for too long lets dumb behavior sustain itself longer.
People stop questioning absurd market conditions, particularly in real estate. When growth slows down at all, over leveraged enterprises miss growth target, the cash spigot turns off and bust follows.
In my area, it's blindingly obvious that real estate is fubar. Single family home prices have been stagnant, and there are dozens of medium density apartment and condo developments going up that are only sustainable because of tax abatements and foreign money laundering.
However, the actual graph looks a lot more random without coloring various parts of it or all the other lines. Notice how the time spent below -1.0 varies a lot.
I think the only thing that is predictable is that there is some sort of cyclical event - where neither the frequency nor the amplitude is known. The peak-to-trough or trough-to-peak magnitude is not predictable and neither is the timing - unless you have some crystal ball.
The doomsday-ers will always beat the drums of fear. People will ignore them until there's an actual downturn - then we'll all point to them and marvel at their genius. Being a bit cynical, but I've seen this play out twice before in my professional career.
What's the causal relationship? You're suggesting the bubble causes fear, but what causes the bubble to pop?
The next step comes when people borrow money to invest in the market, because it's going up, and they can make more money that way. So now the market really starts to go up, because there's so much money pouring in. The fundamentals are completely out of view here - they're not even a distant reflection in the rear-view mirror. Everyone's making money, and nobody wants to get out, but everyone kind of has this nagging sense that the party's going to end sometime.
Eventually, the banks kind of wise up (way too late) and start limiting the amount of money they're going to lend for purposes of buying assets in this market. Then the price stops going up. Then everyone rushes for the exits, because they don't want to lose money, especially since most of the money is borrowed. But everybody can't be one of the first ones out the exit, and so a bunch of people lose money.
Borrowed money. Money they can't pay back.
Now the banks are in trouble, because they've made a bunch of loans that people can't pay back. That's how a bubble can hurt the larger economy.
As I recall this has been experimentally verified but I can't remember enough to find a citation.
Unfortunately because even the micro phenomena are complex and difficult to quantify, you can't reliably use micro knowledge to mathematically predict macro phenomena the way you could in something like physics.
Since the economics that most non-economists really care about are all macro stuff, this tends to mean that people are not really aware of experimental econ. It's still useful in cases like this, though: You can't experimentally confirm the actual causes of boom and bust cycles, for instance, but you can show that certain conditions are sufficient for the emergence of boom and bust cycles.
too much fear / too much greed
Mandelbrot is rather well known for the Mandelbrot Set. But interestingly he started his study down this path as he looked at markets and the apparent predicability in such a chaotic and unpredictable environment. He studied wool markets but extrapolated that out further to many financial markets and then economics as a whole. He would say that financial markets are anything but quite unpredictable, just that the models we use are rather wrong.
I would suggest checking out the book "The Misbehavior of Markets: A Fractal View of Financial Turbulence". It's quite good.
There are many reasons for a cycle, some we think we understand, some we clearly do not. Everyone agrees we cannot predict the future. By the way, books are written about cycles, people writes their thesis on this topic, it is difficult to summarize.
The short answer is we have a list of things that have caused cycles in the past. And we have a calculation how often and how likely a new cause is to be added to that list (tech bubble was not on the list in the 80s, now it is). From this list of known causes and calculating the odds a new cause will come along, economics try to predict cycle peaks and valleys as best they can. Their track record is atrocious and a joke at best. Despite what is reported in the press sometimes, economics are actually getting worse at analyzing cycles. Ray Dalio is mentioned in a few comments, Dalio does not have a good track record when it comes to macro economics though his hedge fund has performed well in some years (don't believe marketing BS).
No one knows how innovation will effect boom and busts. Research on this is heavily manipulated. One can find strong connections between innovation and cycles if you want to AND one can find almost no connection between innovation and cycles. So unfortunately the real answer to this one is "it depends", all else equal (ceteris paribus) if innovation in tech slows it is likely part of many things slowing down and hence the lengthening of cycles we have seen MAY continue (again ceteris paribus).
TL;DR pattern is not predictable nor consistent. Tech and innovation has little to no effect except in extreme cases, the pace of innovation should not have a major impact. Demographics and population factors show strong evidence for warranting a majority factor weight.
Lastly, analogy: have you heard of yo-yo dieting? How long do most dieters last on a diet before failing that diet? What is the common causes of failing a diet? How long after failing to diet do they try again? Why do some people succeed when dieting on the first try and never regain the weight, why some on the 5th try? why some never? The economy acts just a person trying to yo-yo diet but it's 300 million people making and losing money instead of fat (well also fat).
And yet the underlying cause of the busts has varied.
People bring up the "due for a bust" observation and they may be right. But I have to ask, "What is going to be the economic trigger this time?"
Som are clearly booming like the regular stocks are.
But some are also built to resist inflation.
And it can be a self-fulfilling prophecy .. expect a bust, look for a bust, have a bust: declare you "knew" it was coming
I highly recommend JL Collins Stock Series blog posts and specifically this article on market events of the past 100 years: http://jlcollinsnh.com/2017/07/26/time-machine-and-the-futur...
That there is a pattern which predicts a certain outcome?
For example a certain simplified weather pattern (e.g. "if it rains for three consecutive days 9/10 times it rains a fourth day") makes it possible to predict a certain weather ("it has rained the last three days so there will be rain tomorrow as well")
Obviously that is not a prediction with absolute certainty but nonetheless a prediction.
I mean, to provide a counterexample: we have about as good a model for beta decay of H3 as we are ever going to get, but we still can't tell you when your geiger counter is going to click.
 Pause for some physiscist to jump in and tell me this is totally not true and there remain deep theoretical holes here.
exhibit B: macro human behavior never changes, we pretty much all desire and react the same way.
exhibit C: history repeats because too few learn from other's mistakes.
exhibit D: it has never ever been a good idea to trust anything a bank says. they don't love you and are at war with you. they are counting on you to fall in love with the wrong girl, again.
exhibit E: 100 years of data is not enough.
Eg Australia and Israel barely noticed the Great Recession.
Give your central bank some credit!
Do you know why? AFAIK India too did not get very affected by it, maybe because it has a large internal market with both domestic suppliers and consumers. Or I may be thinking of the Asian crisis in 1997-1999 or so - not sure. Had been to S.E. Asia at that time and they were just recovering from it, IIRC.
As a consequence we now, apparently, lay claim to the longest period of uninterrupted growth in modern history.
However, we've had uncharacteristicaly flat growth since, narrowly avoided recession a couple of times, and are battling low wage growth which, in combination with rising energy and property costs, is beginning to undermine consumer demand.
This has been unhelped by the end of a mining boom, related decrease in Chinese growth and demand for commodities, structural taxation challenges (income taxes were reduced during the boom, and we struggle to tax multinational companies), and a huge speculative property bubble (fuelled by lower interest rates, favourable taxation schemes, currency flight from foreign investors, and ultimately the self-reinforcing returns). I'm sure demographics are playing a role too.
Considering most of our pension schemes ("superannuation") are invested in either property, mining, or banking (itself dependent on property), there's huge uncertainty ahead.
And compare https://marketmonetarist.com/2015/07/14/the-euro-a-monetary-...
I don't know about India. They probably just printed enough money to avoid the Great Recession. (But had some other problems independent of the Great Recession.) Some Googling on the same blog revealed https://marketmonetarist.com/2013/07/17/too-easy-and-too-tig...
I doubt they did only that, or even that. The RBI (Reserve Bank of India) and the Indian finance ministry have some well-educated and experienced economists (some even with Harvard / Oxford type backgrounds, or at least were earlier) (though I'm not saying they are perfect, no one is). Even without being a finance professional or economist myself (though I did take a year of Economics in 11/12th grade), I can tell that (mainly gut feel or educated guess, of course).
A sort of caveat or counter to what I said above, though (and what you said as well) is that (IMO) no economist fully knows what they are doing, partly because the field is so complex (dealing with economies of nations or the world, after all), and partly because economics is not a science like the physical sciences are (and hence not perfectly predictable, even if you have a supercomputer), not matter how hard proponents of that try to claim so. It's not called The Dismal Science for nothing ...
The banking crisis might have caused a recession, but what turned that recession into The Great Recession in Europe and the US was too tight money: nominal GDP just fell off a cliff.
India was further away from the dreaded 'zero bound' on interest rates, and never had any problem generating enough nominal GDP. (India's problems are with the real part of the economy. So they are producing too much inflation.)
The Fed and ECB also have clever people. They still made mistakes--especially when evaluated with the benefit of hindsight.
>The banking crisis might have caused a recession, but what turned that recession into The Great Recession in Europe and the US was too tight money: nominal GDP just fell off a cliff.
Was going to ask what nominal GDP is, but googled it, it seems it is GDP without being adjusted for inflation. Okay.
By "too tight money" do you mean less money available for business investment, or higher interest rates for borrowing it, or something else?
>India was further away from the dreaded 'zero bound' on interest rates, and never had any problem generating enough nominal GDP. (India's problems are with the real part of the economy. So they are producing too much inflation.)
Okay, this second paragraph seems to indicate that nominal-GDP-wise, India was okay, but it was not okay after adjusting the GDP for inflation?
A rapidly developing country, no doubt - but not developed yet
The vast majority of Indians aren't involved in either the "real" economy enough (ie, the one governments measure), or are too poor for it to matter
Yes, India has come a long way, but it still has a long way to go - economically speaking
Not too sure about that. Also will depend on what exactly you mean by it. If income tax payers, maybe yes. But if just people who earn money, there are other means than income tax to include them in calculations.
Anyway, it's a very complex issue.
>Yes, India has come a long way, but it still has a long way to go - economically speaking
True. And not just economically - in other ways too.
If a president could time a recession, it would make sense to ensure that it was over before the next election.
For a certain class of people, recessions aren't a problem, but a tool which allows you to write off your more speculative investments.
The difference is that without e.g. interest rate manipulation, we'd probably have a lot of "rolling waves" of small recessions. These small recessions would be frequent but also limited in duration, scale and scope.
With suppression of interest rates, the malinvestment becomes bigger and broader. Meaning their unraveling is much more traumatic.
9 years into the latest boom, with ZIRP and NIRP and QE and mark to unicorn accounting and all the other oxycodon shots necessary to abort and forget the 2008 run on the system, we can only wonder what has been built up in terms of malinvestment and what the unraveling will be like. Not just in the world of finance and credit, but also in the real economy, where much of the recent competition and "disruption" is really based on venture capital backed companies not worrying about profitability for years on end.
I would look to psychology in addition to economics. There are several well-known psychological factors that suggest there will always be a boom/bust cycle:
1. People copy other people. Fear and greed are infectious. People become envious when their neighbour or brother-in-law continue to make quick profits from investments.
2. People make irrational judgements when affected by emotions like fear and stress.
3. People tend to make overoptimistic judgements about future events and their own business acumen. Conversely people often deny reality and do not critically assess their past performance.
4. In judging the future, people place too great emphasis on recent experience and discount events which occurred before they were born.
Easy example: governments, by definition, will spend more money year after year. Governments rarely 'scale back' their expenditures. When 1) taxes cannot be raised and 2) money cannot be raised through treasury bonds, then there is a crash.
Government is bound to follow the boom/bust cycle and brings the rest of the economy with it. Sectors of the economy that heavily rely on government spending like: health care, defence, banking, education, transportation, will crash and it will be sudden.
Was tulipmania irrational?
Tulipmania was not just crazy speculation
> Earl Thompson, formerly of UCLA, takes a different approach. He reckons that the market for tulips was an efficient response to changing financial regulation—in particular, the anticipated government conversion of futures contracts into options contracts. This ruse was dreamt up by government officials, who themselves were keen to make a quick buck from the tulip trade.
> In plain English, investors who had bought the right to buy tulips in the future were no longer obliged to buy them. If the market price was not high enough for investors’ liking, they could pay a small fine and cancel the contract. The balance between risk and reward in the tulip market was skewed massively in investors’ favour. The inevitable result was a huge increase in tulip options prices. (The price of options collapsed when the government saw sense and cancelled the contracts.)
It states that Tulipmania was a rational response to anticipated government regulation that would let investors cancel their futures contracts for only a small fee.
The cliché goes, "Economists have predicted nine of the last seven recessions," but I think the numerator is actually higher.
This article: https://www.theatlantic.com/magazine/archive/2008/12/why-wal... was published in 2008 but is still underrated.
The former are always right and the latter are always wrong.
I'm guessing that the average client of those firms hasn't really lived with a significant stock market investment during a bear market. Will these clients keep their money invested in a larger percentage than the typical ETF investor?
If so then I think that's a huge bullish signal for these new types of wealth management firms.
If not, then those companies are going to have to go out and raise money in a downturn.
If you can hold peoples money during a downturn, then I view that as a very positive investment signal, there has to be something more than the dollar, bitcoin, hedge funds, and gold that people can turn to in a downturn.
They really seem to want to help educate their customers. Of course, they want to do this because the more educated they are on the matter, the less likely they'll pull their money out.
They don't claim they're doing rocket science.
The only thing I might do, which contradicts what you suggest, is try to increase my input each month during a bear market if I can afford it.
Maybe I'm missing something about how ETFs work, but AFAIK the Japanese stock market is way bellow where it was in the late '80s - early '90s, so that anyone who would have invested in related ETFs back then (had those ETFs existed, of course) would have lost lots of money in this 20-years span. If the same thing were to happen to either the European or the US stock market (i.e. a long period of stagnation) then putting money in a "a robo-ETF company" will be a losing bet (and it is a bet, make no mistake about that).
Also, you'd want to diversify outside of a single market, like Japan stocks. You'd want to be diversified across bonds, stocks, real estate, currencies, precious metals, commodities, etc. This is so easy and inexpensive to do today for the average person.
Dollar cost averaging across a broad spectrum of investment instruments over a long period of time is better than holding cash.
I mostly agree with you, my question was addressing the "invest in ETFs and forget about it" part that OP was talking about (the "robo-ETF company"). What you're proposing sounds more like active investing, which of course will be one of the few viable options once a global crisis re-emerges.
I believe the above mentioned companies also offer non-ETF investments for customers with over 100K. In this case instead of putting your money into an ETF, they basically buy the individual stocks that the ETF would have been tracking.
You rely on the fund to be diversified within its target sectors, and you diversify by picking multiple different funds across different sectors.
It's not quite timing the market because the portion going into cash is scaled accordingly to how much is going into other types of funds and also has the benefit of being used if there's an emergency that requires a decent amount of liquidity.
Having it all in liquidity would be a poor choice. Cash should only be a part of the overall strategy.
Banking - Governments around the world decide to break up big banks. This allows for the return of small local co-ops that aren't listed on the stock market. Now the market is super competitive and so the big banks stock go into decline (the hypothetical value of the co-ops increase but you can't capitalize on that).
Mining - Recycling gets so advanced we no longer need to mine stuff. Mining industry is no a shadow of its former self. New industry isn't as valuable as before as the barrier to entry into recycling is much lower.
Healthcare - US government decides to take over the industry because a cultural shift. Industry collapses.
Now, we live in a world with no Wall St, environmentally stable, and everyone has access to healthcare. But the people who went into ETF's essentially have no money. Obviously, this world would require much reform (more taxes), but one that I don't think is entirely unobtainable.
That's the thing, can ETFs do that? I.e., can they make active investment decisions (like, how do you diversify globally)? By the current definition I think the answer is "no", but it's interesting how things will evolve, though.
During the last crisis (2007-2011) the stock indexes fell almost in unison around the world (including MSCI World). Had you "diversified" into it in February 2008 (just as Bear Sterns was imploding) you wouldn't have made your money back until 2013-2014 (I took the data from here: http://www.stockq.org/index_en/MS001.php). Correlation can hit you pretty damn hard. But there were active investors who made lots of money during that same time-frame.
Later edit: Plus, switching from a ETF focused on US stocks to one focused on MSCI World (let's say) looks like active investing to me, i.e. you have to take an action based on what you think the future will bring (in this case you think MSCI World will be more stable than US stocks). I was responding more to the OP when he was saying about how he/she would like to put his/her money in an ETF and forget about it.
If your doing a long-term buy & hold strategy, you really don't need to worry about temporary dips in your portfolio. That's why the ETF-and-forget-it long-term strategy is nice. If you're investing and you don't have a long time horizon or you're scared of a dip in your portfolio, you don't belong in the stock market anyway (stick to bonds and other conservative investments).
That's paper losses - unless you panic sold
If you kept investing throughout that time, you'd be substantially further ahead than otherwise
In a gold rush, sell shovels.
That said, the majority of my capital is traded by me. It's all in the futures market, specifically US debt instruments.
They will set you up with a solid investment plan and rebalance for you, just don't get caught up in their tax-loss harvesting hype. Their value is in giving you the peace of mind that you seek, the tax loss harvesting benefit is overstated imo.
that isn't the only other alternative to betterment, etc. https://www.bogleheads.org/wiki/
They do have an advantage in tax loss harvesting, but the maximum annual savings is basically $3000 * (current marginal bracket for ordinary income - LTCG rate in retirement), which is about $600 for the typical investor. If you have more than 250k in Wealthfront, their annualized fee will be greater than $600.
1. open a brokerage account with your bank,
2. buy vanguard index funds for the next 20 years,
The details are what get me. I need to buy index funds and usually you are advised to save as much as you can. I want the advice that shows me how little I can save. My kids are only going to be kids once and I'm not going to forgo taking them to Disney or work stupid hours so that I can live like a king when I'm old. My goal is to live as well as I can today while still being certain that I'm not going to be a burden on anybody when I'm 80.
Paying an expert for advice appeals to me just because I have no confidence that I'm not taking something important into account.
All you have to do is set up a bank account to automatically put money into your account every so often. That's easy to do on their platforms. They'll keep it balanced among several ETFs based on how risky you're feeling. You won't have to pay any fees to purchase or sell the ETFs like some places charge. They do a great job of making sure you understand where you're at & what you're likely to retire with. They also post plenty of information to help you understand your investment.
25 times your annual expenses.
At your age, with a US assumption, you have the benefit of Social Security almost certainly providing you a good portion of income at Age 67 (any time between 62 and 70 is reasonable, and taking SS at age 62 is best unless you are very likely to live past 84.)
Ignoring SS, if you invest 25 times your annual expenses into a 60%/40% stocks/bonds split, your expenses will be roughly 4% of your investments, so you withdraw 4% each year. Your investment growth (including dividends) may or may not exceed your expenses, but, overall, you should make it 30 years without running out of money. 
What you need to do is determine your expenses (including Disney trips), and make sure you don't exceed that budget once you stop having income. (Of course, you can and should adjust if things go better or worse than expected when you're retired.)
I've got good news and bad news for you.
The good news is that you're not as clueless as you think.
The bad news is that person you're paying to give you advice? They also don't have a clue, but it's their job to make you feel like they do.
Anecdotal evidence: 12 years of investing with Edward Jones in various mutual funds (2005-2017), and I would have made waaaay more money if I'd just bought ETFs to begin with.
Sure, a financial advisor is comforting to talk to, but the fees they charge are murder on your long-term return, and in the end they're just paid to spend all day reading strategy papers which at best will give them the same return as a cat picking stocks. 
So either your advisor is good, and you pay them more than they are worth, or your advisor is bad, and you still pay them more than they are worth. You cannot create more (dollar-denominated) value for yourself by engaging a financial advisor.
You aren't missing anything. You need extraordinary skills, contacts, or crimes to beat the market, and if you had what it took, you'd already be in the financial industry. So just buy the index funds and hold them in a non-margin account, year after year, until you can live for a year on 3% of your accumulated principal. That's all the investments advising you and everyone else in the 99% will ever need.
Seems like I will want about twice that. Maybe $2 million saved so I can have $60k / year and I don't think that's going to happen. Shit.
If you're retiring at 67, 4% is probably safe. $1.5M would be an acceptable target for you at that age.
I'm going to dig into this some more (I really dread it) but I'm guessing I need to save another $500k or so over the next twenty years. Not impossible but not painless either.
I'm glad I started college savings accounts for my kids when they were born. They should each have $75-100k in them by the time they need it. Not enough, but it's a start.
They showed what our effective short term gains capital tax amount would be as a way to sway you from withdrawing. Negating the fact that they are showing you what your tax amount would be at the highest federal and state tax margin.
Nice to know max tax bill is $500 lower but it gave me quite a pause. I guess it's effective.
This eases your fall in a market where different things are falling at different rates, theoretically.
Are you sure? If the price is decreasing, you see buying as profitable? When the price is decreasing, I see profitability as selling. The path of least resistance is the one your money needs to travel.
But since predicting the future is difficult, and fluctuations make meaningful "rising" and "falling" only obvious in hindsight, you might as well sell when prices are unusually high and buy when prices are unusually low. Which probably means that you will be buying when prices are still falling.
what is that even supposed to mean?
if the price is dropping, the market is full of shares for sale. it is somehow easier to sell your shares when there is an excess for sale?
So if you are prices are rapidly climbing, the path of least resistance is up. If you buy, there are currently many other people buying, and that supports your long position. There isn't an abundance of people selling(otherwise the price would 1) stop or 2) fall), so the path of least resistance is not down.
There is something in new(and some old) traders mind, that causes them to sell into a rally, and buy into a crash. They think "this is the top/bottom! yea baby!". The probability of them being correct is very low, since being "correct" means you are accurately predicting the actions of thousands or more individual traders with no evidence. I say "no evidence" because if the everyone is buying, there is no evidence that selling is occurring beyond the short limit orders that buyers are consuming.
I'd guess you know the term "pullback". A pullback occurs when many people(or few people with large size) have the thought that "This is the top/bottom!" at the same time. When the pullback stops and the trend resumes, that's all of those people being wrong at the same time.
You don't buy into the sell off unless you have an incredibly high pain threshold with your equity(ie you are an institution or a market maker, and chances are, you aren't if you are reading this)
I've been doing this with crypto lately.. Man it is brutal. But I'm not leveraged, so my only pain threshold is "can i sleep at night?"
I'm such a contrarian, i f*ing hate going with the herd. So what can i do?
But in all seriousness, going with the herd is the low-risk move. Depending on your trading platform for the cryptocurrencies you are trading, you might have access to cumulative delta information. That's the best way I know of to accurately gauge what the "herd" is doing. Once you see the price is reacting to match the delta(ie, if delta shows buying, and you wait until the price begins to react upwards), this is the moment to join the herd with low risk. The price reacting upwards means that sell-side liquidity has either been consumed, or has been pulled in response to the buying. These are when you can expect those quick bursts up in price, and that closes your scalp trade for a quick profit with minimal risk.
Then again, I've also (to my discredit) sold on the downs before. But (besides hindsight) how do you distinguish a secular decline from a temporary panic?