>Basically, I was wondering if anyone could explain why they are
>inevitable.
To argue that cycles occur in the economy 'naturally', i.e. to imply they occur without human agency is wrong. Yet apparently cycles do occur, sometimes in industries and sometimes accross entire economies. Our earlier discussion on X's posted article points to cycles too.
During the boom, most entrepreneurs and investors appear to be geniuses, earning extraordinary profits year after year. During the bust, their fortunes are suddenly reversed, and they seem like dunces and suffer losses year after year [except a minor few who can adapt appropriately]. Yesterday's profitable ventures mutate into a mountain of malinvestments.
In a free market,profitability is not hugely skewed toward one end or the other but occurs in differnt values accross all business sectors. That's because demand for goods is not unpredictably increased in every sector at the same time, causing profits everywhere. Neither is demand decreased everywhere at the same time, which (if not predicted) leads to losses everywhere. Yet, during an artificial boom, profits increase everywhere, and during a bust everyone suffers losses.
Compare the 1920's to the 1930's and tie this in to the emergence of the federal reserve (and other central banks globally) as lender of the last resort, essentially a tool to bail out banks by rescuing them via non-money (i.e. stealing from everyone via government control) To sound like a socialist - a central bank ensures that losses are 'socialised', i.e. spread about when they should be borne by private bankers and unwise borrowers.
Many banks wanted a central reserve so they could play fast and loose, secure that if they went overboard they'd be bailed out. The result was that they extended credit way beyond the safe point and way beyond the point where the credit represented the actual value of underlying investments. Such a scam usually collapses when the market feedback confirms the relative (to goods) worthlessness of all the 'easy money'. Normally a lag in market feedback produces a 'correction' or small crash. When this is prevented by 'easy money' the feedback takes longer, and when it does it crashes dramatically.
This is how it goes:
Central-bank monetary inflation and credit expansion causes the boom and promises to improve permanently the profitability of operations across the entire economy. Higher prices, larger profits, more production, higher wages, larger incomes, more employment. Flush with funds, banks lend to entrepreneurs who are eager to obtain credit at held-low interest rates to pursue projects whose profitability has been artificially inflated by the skewed 'easy money'
Entrepreneurs make more profit across the economy and fewer losses. They expand production and employment by using the borrowed money to bid more intensely for factors, especially capital goods. Since the additional funds have not come into the banks by shifting them away from other expenditures, revenues and profits need not fall in other areas of the economy to provide this stimulant to banks and borrowers of the expanded credit.
Because the central bank allows banks to hold only a fraction of the funds in their checkable deposits as cash, money newly created by the central bank can be lent and deposited over and over. This results in a "money multiplier" effect.
On paper and in government statistics prosperity seems good. In truth, the boom is filled with malinvestments and misallocations as yet shielded from the market feedback to come. Although the practice of fractional reserves allows a magnification of monetary inflation and credit expansion, to the benefit of the banks in the boom, it results in a dangerous mismatch of assets and liabilities. The liabilities are payable on demand while the matching assets of loans are not recoverable on demand by banks. An accident waiting to happen.
Profits earned by entrepreneurs no longer correspond to the satisfaction of consumer preferences, the feedback is skewed by the artificial spending stream fed by the central bank. Entrepreneurs are misled by the credit expansion into shifting the use of factors into activities considered less-valuable by consumers. In other words they gamble on any old game thinking it will produce wealth.
'Cronies', I.e. those with political links to the central bank, can 'win' by moving in time, knowing the real picture, or being first in line for a bail out. honest entrepreneurs, without this protective link or inside knowledge, and the entire working class are the one's who will actually pay for the folly.
(quick speculation - during a big crash would be the best time for socialists to extend the hand to small holders and entreprenuers left outside the govt-crony club)
Japanese growth in the 80's had much to do with its [at the time] hailed"government-business partnership" The price it paid came during the 90's, losing billions in its banking sector after loaning billions to failed or mediocre ventures.
If a central bank tries to 'reinflate' the economy by extending credit to banks the cycle simply begins again, as banks look for borrowers before liquidating its bad debt.
There is another problem, when producers seek growth but won't achieve it with their current activity they may 'panic borrow' in order to invest in 'anything' that might help them grow [out of fear of being overtaken]. If that fails they have mini-crashes which can affect industry sectors at a time. The banks lend with confidence on two counts (1.company x has always done well, 2. if they don;t this time their assets are worth having).
>Why can we not have an ever growing economy
We'd have to have the limit somewhere equivalent to the limit of the universes potential energy. Practically any economy is limited by the combination of resources and human ingenuity applied. The first factor can be guessed at in a given system, the second is essentially unpredictable.
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