Circles seem to pop up everywhere in life. The very ground on which you stand is part of a large circular mass known as earth, which spins on it's axis in a circle while revolving around the circular sun as our moon circles around us. Our seasons are cyclical, so is fashion. Our political tendencies are cyclial and so are Lindsey Lohan's stints in rehab. Perhaps the best known entity for being cyclical is our economy. But is it really cyclical? A cirlce is an unending line which ultimately leads you back to your origional point of origion. While our economy fluctuates like Mel Gibson's emotional maturity, we most certainly are not back at square one.
Imagine spreading a slinky out from the base of your staircase to the top stair. Could this be a visual microcosim of the economy? We see a cyclical economy with linear nature over time? If this were the case it would sure put investors nerves at ease.
This type of economy would be ideal. Slow and steady linear growth offering modest returns and security. Most people are under the dilusion that this is how the United States has grown over time. However, the United States story reads slightly different.
Growth, of any kind is event driven. We see this in both a macro and micro sense. The United States, by and large has seen multiple periods of stagnant growth since our inception. We move through time not seeing a great change when BAM - the industrial revolution. Big spike in growth. Following this exponential growth the economy again tapers off like a Chevy Chase movie. BAM - the technological revolution and anther big spike. We expect our economy to look like this:
When in reality it has looked like this:
Look at 1890-1940- very little growth. Then the 70's, again very little growth. What happened in the 40's, in the 80's and in the 90's to cause such huge growth in Gross Domestic Product? Industry, tax cuts, technology. Events happened.
This holds true in a micro sense as well. How much did innovators like Bill Gates and Steve jobs change the economic and cultural dynamic along the west coast in the 70's and 80's? Think of one of your own great successes - can you trace it back to a single event which acted as a catalyst for the success to come? Probably.
So if linear growth is ideal and event driven growth is real what is the life analogy? To me, event driven growth (like our economy) is the perpetual bachelor. He is somewhat unpredictable and has wide swings in emotion. He parties like Charlie Sheen (90's economy) and depresses like BP's PR team (2008 economy). Our bachelor friend met Apple in the 70's and is on top of the world, this could be the one that sets us up for the rest of our lives! No, not interesting enough in the 80's, we break up and hit a lull. Wow, our bachelor friend is dating Enron...shoot that was a messy break up. The constant up and downs are a roller coaster of emotions, but with each failure comes additional knowledge to at least keep us trending up (think of the spread out slinky going up the stairs). Recently our friend called it quits with subprime lending and has been having casual one night stands with Ford. That too will fade.
The ideal economy is more like a marriage. You put in the time up front to fully understand what you are getting into. Your emotions continue to grow steadily over time as your feelings deepen to a level our somewhat promiscuous bachelor friend will never know. Like marriage, a linear growth economy is comfortable, reliable, dependable and rewarding. You can't have both (unless you diversify - and I don't condone the swinging culture).
So, to bring this full circle; are things as cirular or cyclical as they seem? No. If marriage is to the ideal economy what bachelorhood is to the real economy than our finishing point must be far different than our starting point. Makes perfect sense, right?
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