Cycle vs. Structure (Do We Have it All Wrong?)

Well, that title is a turn-off! Sounds like it belongs in some dusty economic journal. Suppose I suggested that your business’ short-term fortunes depend critically on the answer – just a bit more interested now? Let me go a little further and suggest that the entire global outlook hinges on the answer. In fact, we could be at a critical juncture in world economic history, and not really know it. That’s where the divide between perception and reality can be particularly damaging. Do we–could we possibly–have it all wrong when it comes to our current economic circumstances?

If we do, it could make all the difference. Knowing where we currently stand is crucial to moving forward. If there is a widely-shared opinion on what’s happening around us today that conditions our collective behavior, then whether or not we are collectively correct, our consequent actions will determine the future. Put more plainly, if we think it’s a low-growth world, we’ll adjust our economic behavior to low-growth mode, producing – you guessed it – a low-growth world.

It’s a nasty trap to get in, and we’ve seen it before in modern economic history. With a fresh memory of extreme losses, soup kitchens and long lineups for single job-offerings, the post-Depression world radically adjusted economic behavior, vowing never to overdo it again. Sadly, they overdid it in the other direction, lowering activity well below normal. Consumers hiked their savings rates and decided to live with a lot less than they had in the Roaring 20’s. Businesses – the surviving ones – leaned out operations, reined in investments and scaled back hiring. Their activities were anchored in a belief that things would never be quite the same again, confirmed by years of sub-par overall activity. It took a long time and a monumental effort to get people believing in ‘normal’ again.

There are a lot of parallels to today’s economy. Since the Great Recession, hopes have been repeatedly dashed. The ‘failure’ of significant government stimulus measures, economy-inhibiting political wrangling, widespread public discontent, and bizarre events in the natural world have contributed to the seven years of stop-start growth we’ve become all too used to. And then there’s messaging. Our information age has continuously fed our appetite for angst, and has helped to create ever-newer lists of reasons why this state is actually structural – that is, we are condemned to this state unless we re-do its architecture.

But is what we are living through – like the Great Depression period – just a big, exaggerated cycle? Suppose globalization has given us the capacity to grow for longer than usual, and our economic psychology hasn’t quite caught up to it? Could be that for a time, we will have longer longs, higher highs and lower lows, all because we are now including a significant number of ‘catch-up’ economies. That puts quite a different spin on things.

Clearly there are structural issues. Yet there seems a stubborn refusal in certain circles to see the role of the cycle. Sometimes it seems that, in our zeal to fix things, we may be delegating the prescribing to the one selling the medicine, when natural remedy is all that’s needed. In eco-speak, maybe this is the moment the economy is ready to heal itself, and we just don’t realize it.

So, is there a magic moment? In a normal, shorter cycle, it happens when consumers can’t delay purchases any longer. The car is falling apart, the appliances are breaking down, the roof is leaking. Businesses see orders going up, and that they are running out of capacity. The courageous ones take a leap of faith, and the rest eventually follow. These days, nobody wants to be that first mover. Post-Depression, it took heavy government spending to get things going. We’ve used up that capacity long ago in most countries. But with pent-up demand in the US and in Western Europe clearly rising, what we are really waiting for is a grand realization that the sluggish years are over. That could happen in a flash – or, given that bad news sells so much better than good, we could be in for a long wait.

The bottom line?

Our future is hanging on perceptions of what’s going on in the broader economy. Today, we are choosing to see a clotheless emperor, when he might actually be putting on his Sunday best. Let’s hope that our perceptions of current conditions take current data seriously – the sooner the better.

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