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What are Boom and Bust? Alternative Economics 101 - Chapter 5: Tax Your Imagination!

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5. What are Boom and Bust?

Boom and bust cycles are more than an economic event. The social, political and cultural fall-out has a significant impact on peoples lives and purpose. Dreams are either fulfilled or destroyed. At one extreme there is renaissance, and at the other civil war.

Boom and bust cycles are a consequence of inflation. The compounding of percentages slowly divides the wealth into two groups: the rich and the poor. We all need each other, but during a civil war, one side claims the other side is expendable. The ideal favors equality, and trading as equals. The reality develops into something quite different, even without factoring in generational differences. 

At some point, the poor become too poor to continue paying their bills. This results in bankruptcies, foreclosures and business closings. Every such failure impacts others, directly or indirectly. The bust is caused by the boom. Deficit spending by government is the only possible remedy, which is why deficits have grown so large.

Percentages & Compounding

Inflation has three sources. Profit is only one type of compounding percentages. The other two are taxes and interest. In general, businesses use profit, governments use taxes, non-profits and individuals use interest. The different percentages are constantly compounding. 


Boom and Bust Drivers by Steve Consilvio

A lot of inflation is hidden on the product side of the transaction. Smaller sizes and goods of lesser quality are sold at the same price as before. While the price did not change, inflation did occur. More goods can be produced faster. Manufacturing skill can sometimes mask an inflationary rise, which is why efficiencies are lauded. Another approach is to find cheaper labor, so the worker carries the burden of inflation rather than the customer.

Compounding percentages have deadly consequences.The disagreement over taxes is why the colonies revolted against the king. Complaints about taxes are common in history. The Communist Manifesto decried industrialism and the descent of men from serfs into paid wage laborers. It was an attack on private ambition and the quest for endless profit by corporations. Our complacency with interest was a main reason why America was attacked on 9/11. Osama bin Laden lays out this complaint in his Letter to America in October, 2002. All three movements are responding to disparities created by the application of percentages. Like the Supply and Demand Theory variants, revolutionaries tend to blame one sector of society, rather than examine how all the elements interact.

Any percentage, no matter how small, or where applied, will eventually result in doubling.The rate of compounding is variable, but not the result. Nations develop massive inflation and debt values because of incremental cause and effect. Corporate and individual debt and wealth accumulate in the same manner.

Albert Einstein discovered the Rule of 72, which calculates the amount of time required to double the principle, based on the percentage rate of a loan. The same formula can be applied wherever percentages are used, not just to loans. A 10% markup doubles the value of an apple more slowly than a 50% markup, but the price will eventually compound. How we handle money and apply percentages has consequences. The difference between a pricing equilibrium and hyperinflation is the difference between renaissance and civil war.

Monopoly

The best known model of boom and bust cycles is the game Monopoly. Henry George was an economist of the late 19th century, and the game was meant to demonstrate his idea that increases in land values impoverish society. It was originally called The Landlord's Game, and was not intended to be a game for fun. People were supposed to learn how society creates the rich and poor as a byproduct of trade. Except for one person, everyone goes bankrupt. It reveals something anti-democratic in the economy. One person will gain all, and everyone else will lose all.

Monopoly is best understood as a generic mathematical model, rather than a land or rent exchange. It does not matter what good is being bought and sold. Monopoly demonstrates that inflation causes wealth to concentrate. The rich and poor are created by mathematical forces, not by political privilege, intelligence or hard work. The winners and the losers are all behaving the same way, so there is no reason to blame anyone specifically for the result. We The People are responsible.

The beginning of the game is the boom cycle. Everyone appears to be getting richer together. This is the Keynesian approach, with the bank pumping more money into the game. Pent up demand is released, and buyers start buying. At this point, nobody owns any much property, so the players are equal. Slowly advantages form, as a result of luck with the dice roll. Eventually a tipping point is reached and the bust cycle begins. The bust cycle is not universal. There is the one person who is gaining from everyone else's losses, which serves as "proof' that the boom cycle is not dead. The data is being misread. The bust cycle is when the rich get richer, and the poor get poorer. It sets the stage for civil war and revolution, not just the end of a game.

The rags to riches phenomenon is considered to be a strength of democratic-capitalism. It is actually a symptom of dysfunctionalism. Rising to the top is not freedom; it is the process of desperation. Volatility causes the rich to fall and the poor to rise. Neither extreme would exist in a properly managed commonwealth.

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Steve grew up in a family business, was a history major in college, and has owned a small business for 25 years. Practical experience (mistakes) have led him to recognize that political rhetoric and educated analysis often falls short of reality. (more...)
 

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