Business Cycle Unconcealed
My purpose in this Chapter
is to develop an Empirical Model of the business cycle. The Model draws on the ideas of
Schumpeter, Hayek, Fisher, Minsky, Cantor and Wenninger, and others. But the investigative
methods are those recommended by Aristotle, Hobbes, Kant, and Schopenhauer. Like
Schumpeter, I am interested in discovering the nature and kinds of change, the causation
of change, the extent and duration of change, the phases of the business cycle, the
starting-points and end-points of the cycle, etc. But, I am also interested in discovering
what Schopenhauer called the "unité de plan" (unity of plan), if any,
that underlies the business cycle. The unity of plan is what reveals the motives and
intentions of the players -- governments, banks, creditors, employers, families, etc. --
and their wills. Like Hobbes, and the Roman Judge before him, I want to know WHO
BENEFITS from the business cycles.
The Model is corroborated
by empirical evidence (summarized in Appendixes B
through H). The Model's schema is organized
around several categories -- related sequences of possible or necessary
economic changes. The list of changes for each sequence is not complete. The Model claims
that the business cycle is driven by increases in the real average family income after
tax and by increases in the money stock. Money is used by financial
institutions (capitalists and usurers in general) to earn higher capitalist incomes from
highly collateralized loans. Entrepreneurs and their employees are used.
"Credit creation" is the usurers' primary tool for entangling entrepreneurs. The
economic expansion is followed by speculative overinvestments. Overinvestments conform to
a rule -- they signal the beginning of the harvesting and predation phase of the
business cycle. Entrepreneurs are often abused when the "credit channel"
is blocked. Inevitably, speculation and overinvestments lead to a "credit
crunch," with potentially catastrophic social and economic consequences.
methodology, I use the notion of schema to connect principal financial, economic,
and social concepts in one common representation. The connection is dynamical. The
purpose of the schema is to exhibit the analytic unity, the regularity that
underlies the business cycle. This unity is what reveals to Understanding the
reality of the connection between the distribution of money, including bank-money, and
economic prosperity (or misery). The key claim of the Model is this: the business cycle
is nothing but a concealed Plan to finance the creation of new wealth, essentially
for the benefit of capitalists and usurers. A related claim is this: speculative
overinvestments are an integral and necessary part of the business cycle;
they anticipate the harvesting and predation of the new wealth. Unfortunately for rich
usurers, unfair or predatory transfers of wealth can have serious consequences:
- More families become indentured
- The government becomes indentured
to Big Money.
- If the economy is
destabilized, even the sovereignty of the Nation becomes threatened.
What does this mean? It
means the perpetuation of Capitalism -- the rich masters continue to rule the serfs and
helots. It means a decrease in the freedom of the citizen. Here's my Model of how
things can unfold.
Income Increases. The real average family income after tax increases -- the
year-over-year change in Money Stock increase:
- The annual changes in
(M2-M1), in M2, and in M3, all increase.
Money Stock. According
to Bank of Canada Review: M1 consists of currency outside banks, personal
checking, and current accounts; M2 consists of M1 plus non-personal notice deposits
and personal saving deposits in chartered banks; and M3 consists of M2 plus
chartered bank non-personal term deposits plus foreign currency deposits of residents
booked in Canada.
- The propensity to consume increases. Personal and government expenditures on goods and
- Investments increase. Industrial and commercial capital expands. Entrepreneurial
activities increase. Employment increases. Consumer consumption increases.
- The real gross domestic product (GDP) per capita increases.
and Lending Rates Increase. Financial institutions and money dealers
(usurers in general) perceive a general opportunity to use the new money to earn higher
fees and interest income from heavily collateralized loans. Credit money increases
throughout the whole production chain -- from the raw material producer to the consumer.
"Credit creation" is used to finance entrepreneurial innovation.
(C) Speculative Overinvestments Increase. The
expansion is followed by a relaxation of credit standards and speculative overinvestments
(Fisher and Minsky). Financial institutions provide loans to finance speculative
investments (Galbraith). Long-term expectations are manipulated (Keynes).
- Proportionally, greater loan
amounts are channeled into a particular business sector (e.g., commercial real estate) --
at the expense of other sectors of the economy (e.g., manufacturing and technology). Bank
loans can become massively misdirected.
- The number of building
permits increases significantly. Residential and non-residential construction increase.
- Capacity utilization rates
in manufacturing (durable and non-durable) fall significantly.
- The T-bill rate increases.
- The prime lending rate
- The inflation rate
increases. The spread between the prime lending rate and the inflation rate widens.
- Speculators push
get-rich-quick schemes, and many banks oblige. Lending short is used to acquire
"quick assets" (Schumpeter). The opportunities for manipulating expectations and
the influence of speculation can be enormous (Keynes).
on Speculation and Liquidity-Preference. The importance of psychological
time-preferences and expectations, or liquidity-preference, was first emphasized by
Keynes.1 Keynes identified three
determinants of liquidity-preference: (1) the transactions-motive (current needs
for cash); (2) the precautionary-motive (desire for future financial security); and
(3) the speculative-motive (gambling for profit). These determine how individuals
allocate their cash-holdings. Keynes conceived increases in cash-holdings as potentially
divisible into two "compartments": the first satisfies transaction- and
precautionary-motives; the second, speculative-motives.
- Speculative activities lead
to a "credit crunch" at some banks. Per-share cash resources at many banks and
trust companies plummet.
- Banks tighten credit,
claiming to reduce their exposure. Many loans to small and midsized businesses are frozen,
reduced, or called. Bank action can increase substantially the risk of illiquidity at
entrepreneurial firms -- and, therefore, can add substantially to the instability of
enterprises (especially in the high-tech sector). The burden of debt acts to depress
- Many companies are
destabilized -- including "sound" companies (Schumpeter).
- Banks ration loans or shut
off credit to selected sectors of the economy. Many borrowers are forced to liquidate
assets. A price meltdown ensues. The value of collateralized assets plummet. (Cantor and
- The loan portfolio
deteriorates. Non-accrual business loans increase.
- Even the otherwise low-risk
residential mortgages sector can be destabilized. Non-accrual residential mortgages soar.
and Predation Follow. The opportunities for harvesting or predatory
transfers of wealth materialize. These can be exacerbated by: monopolistic practices,
financial concentration, parallelism or tacit collusion, and net advantages of Big
Business over citizens.
- Companies downsize.
More people are replaced by technology.
- Instances of "unsound
credit," "wildcat banking" and "reckless banking" increase
(Schumpeter). Some large companies default. Many big corporations swallow up weaker ones.
- The unemployment rate
increases. The number of unemployed and underemployed increases.
- The gap between the rich and
the poor increases. In real dollars, a sudden transfer of wealth takes place, just
before the onset of the recession. Money is transferred from the lower and middle classes
to the richest families (top quintile). The widening of the gap is transient and
traces an impulse pattern; but, the gap can decrease if the economy is destabilized.
- The Gross Domestic Product
decreases. In real dollars, the decrease in GDP per capita is not insignificant. A
severe recession follows.
- A price meltdown takes
effect. The value of assets decreases. The value of collateral plummets.
- Personal debt deteriorates.
The debt outstanding of persons and unincorporated business swells -- both, on a per
capita basis, and as a percentage of personal disposable income. The economy risks going
out of control, if the excess cannot be reversed. More families are indentured
to Big Money. Families feel economically threatened.
- The government is forced to
increase the average transfer payments to families. This is a counter-cycle policy.
(The increase in transfer payments follows a ramp-step pattern.)
- The net international
investment position with foreign countries deteriorates significantly.
- To recover their funds,
creditors move to take control or ownership positions in defaulting firms. Assets of
defaulting businesses and consumers are seized or confiscated. Dispossession and
expropriation activities (legal and fraudulent) increase. Big banks can retain the
properties they seize until prices recover.
- The government deficit
increases. All government levels can be affected. Net lending of all government levels per
capita increase substantially. The governments' consolidated debt deteriorates
substantially. Government securities (total funded debt) soars. The interest on the public
debt soars. Counter-cycle policies create more problems: the government is indentured
to Big Money. The economy is destabilized. The "safety net" is threatened.
- Markets that indulged in
overinvestments collapse. Distress spreads to other sectors of the economy
(Bernanke-Blinder Model, and Cantor and Wenninger).
- The exchange rate (e.g.,
Canadian dollars per U.S. dollar) increases significantly.
- The total number of
foreclosures and evictions increases. The average claims per foreclosure increases.
- Family bonds are broken.
A large number of people is reduced to poverty. The number of homeless people and the
number of starving people increase. Poverty and personal distress spread. The number of
beggars in the streets swells.
on How to Create a "Rabble of Paupers." The German philosopher Hegel
addressed the poverty issue in Philosophy of Right. He held that the fall of the
standard of living of a large number of people is correlated with "a consequent loss
of the sense of right and wrong" and with "the concentration of disproportionate
wealth in a few hands."2 For Hegel, it is precisely the "loss
of the sense of right and wrong," the loss of "honesty," and the
"loss of shame and self-respect -- the subjective bases of society" [my
emphasis], which combine to create "a rabble of paupers."3 Hegel pointed out that these
phenomena have plagued Britain, especially Scotland. Apparently, the policies in these
places were to "leave the poor to their fate and instruct them to beg in the
- The number of business and
consumer bankruptcies swells. Small business owners accuse creditors of predatory
- The total criminal code rate
(excluding traffic infractions) increases. The property crime rate increases. The fraud
rate increases. Even the number of homicides increases.
- The number of therapeutic
abortions increases. The rate of increase in therapeutic abortions is especially high in
areas were non-performing loans are high.
- Health problems increase.
For example, the number of hospital discharges (alive or dead) associated with
cardiovascular disease (ischemic heart disease, including acute myocardial infarctions or
heart attacks) increases. The increases appear to anticipate or coincide with the
potential loss of property (from expropriation, foreclosure, etc.).
- Economic and social ills
translate into deep resentment of Big Business and Big Government. Deep cynicism and
distrust increase. Loyalty -- to businesses, even to governments -- is withdrawn. Economic
arrangements are viewed with considerable suspicion. The commonwealth is threatened. Large
numbers of people believe that they may be sacrificed to the safety of a few thousand
Capitalists and monopolists.
on Sacrificing Millions for the Safety of Thousands. In the words of the Scottish
philosopher, David Hume: "Thousands are thereby sacrificed to the safety of millions.
But we are not without danger, that the contrary event may take place, and that
millions may be sacrificed for ever to the temporary safety of thousands. . . "5 [my italics].
Profits Are Declared By Big Business. Many big businesses reap gargantuan
profits. Armed with NET ADVANTAGES, many of the biggest corporations thrive, buy back
their shares, rightsize, etc.
- The average net incomes of
Big Banks increase substantially (the decreases in net incomes, which previously coincided
with increases in provisions for credit losses, prove to be transient). Total bank
- Fewer shareholders control
more and more shares. Wealth (assets or capital stock per shareholder) and power
become more concentrated.
Megabanks. The total assets per capita of the
top three banks in Canada have exceeded those of the top three banks in each of Germany,
Japan, and the United States -- year after year after year. As a matter of fact, as
recently as the year 1995, the total assets per capita of Canada's top three banks
exceeded those of America's top six banks. In other words, if America's top six banks had
merged in 1995 into three Megabanks, the total assets per capita of the three hypothetical
new super banks would have still been less than those of Canada's top three banks.
- Big Business demands
increased "commercial powers" from indentured Governments. Banks, in the name of
heightened GLOBAL COMPETITION, demand the right to move into new businesses, such as
insurance, or the right to form megabanks, through acquisitions and mergers, etc. The
indentured Government promises another financial sector reform.
of Power. The
problems from concentration of commercial powers are not new. David Hume: " . . .
where the riches are in few hands, these must enjoy all the power, and will readily
conspire to lay the whole burden on the poor, and oppress them still further, to the
discouragement of all industry."6 The problems can get worse: "
. . . it is easy for the rich, in an arbitrary government, to conspire against them
[the labourers and artisans], and throw the whole burden of the taxes on their
In this connection,
it is interesting to note that the ratio of personal to corporate direct taxes in Canada
increased more than fivefold -- from 1.759 in 1960 to a record 9.612 in 1993!8
- Hayek's ominous effect
materializes: the gap between the "completely propertyless" and the
"wealthy" increases dangerously. The economic freedom of the individual
decreases. The Government increases its control over the citizen.
But the State becomes virtually a "puppet" of Big Business (Bertrand
Will Canada Break Up? To use an analogy from physics,
Canada will break up as soon as the forces that repulse Canadians exceed those that bond
them. In a Hobbesian world where everyone wars against everyone, the bonding-energy cannot
be too high. Still, how can we go about estimating Québec's separation energy? The
knowledge that Canada is a Capitalist society helps. In a purely Capitalist society, everything
is valuated in dollars and cents. We can therefore safely ignore all non-monetary
contributions in our calculations. For an order of magnitude for the repulsion energy, let
me propose that we use the extent to which people are indentured to their creditors.
Accordingly, the order of magnitude of the repulsion can be determined from personal
and unincorporated business debt plus government debt, as a percentage of personal
disposable income. The greater is this debt, the faster is the rate at which Canada
(or any other Capitalist country) breaks up. Personal and unincorporated business debt in
Canada peaked at about 87.4% in 1979, and soared out of control to about 100.9% in
1994. Ironically, the Québec referenda were held in May 1980 (1979+1) and in October
1995 (1994+1)! (See the Charts in Appendix H.) Despite
a UN report declaring Canada the "best" place to live in the world, many
disaffected Québécois decided to act on their desire to separate or disaffiliate
from Canada -- culturally, politically, and economically. If they succeed, serious, --
possibly calamitous --, consequences can follow. Why? Because the breakup of Canada is not
a Canadian problem only -- it is a problem for all Capitalists. The
dissolution of Canada will shake down Capitalism everywhere. To borrow a couple of
Humean expressions: the "natural death" of economic
servitude "lies in the womb of time."
See John Maynard Keynes, The General Theory of Employment, Interest, and Money,
1964, at 147-164 (The State of Long-Term Expectation), 166 (time-preference), 170
(liquidity preference), and 194-209 (The Psychological and Business Incentives to
See Hegel's Philosophy of Right (1821), translated with Notes by T.M. Knox, 1952
and 1967, at 149-150.
3 Ibid., at
150 (concentration of wealth).
4 Ibid., at
150 (the poor in Britain and in Scotland).
5 See David Hume, Selected
Essays, edited with an Introduction by Stephen Copley and Andrew Edgar, 1993, at
203-216 (Of Public Credit), especially 215.
6 See David
Hume, Selected Essays, edited with an Introduction by Stephen Copley and Andrew
Edgar, 1993, at 154-156 (Of Commerce), especially 164.
7 Ibid., at
8 Ratio derived from
Statistics Canada data; see Statistics Canada, Canadian Economic Observer, Historical
Statistical Supplement 1994/1995, Catalogue 11-210 (Direct taxes, all government
levels: from persons and from corporate and government business enterprises, at 14).