Dear Economists, Please Don’t Conflate Political Crack-Up with ‘Recession’

Howard Marks has long made the point that the seeds of bad economic times are planted during the good times, and the seeds of good during bad. Marks’s correct vision of recession and recovery needs to be discussed in the here and now.

Considering good or booming economic times, it’s not unreasonable to suggest that the individuals who comprise any economy sometimes develop bad personal and work habits. At the same time, companies reach in terms of how they expand, the individuals they hire, along with how many they hire.

Banks and investment banks similarly are forced to reach somewhat. Precisely because there’s more competition to make loans, and to finance new and existing companies, capital allocators reach too. So do they with investments. That they do is somewhat logical. Money flows and lending may be denominated in dollars, but they signal the movement of goods, services and labor. During good times production of goods and services grows, as frequently do labor forces, and all of this is revealed through credit expansion.

Recessions, far from a terrifying sign, actually just signal a broad realization of errors by individuals and corporations. Recessions signal recovery precisely because they signal the correction of the mistakes made during the good times.

That they do explains the corollary to Marks’s point: during troubled times we lay the groundwork for better. Yet again errors are corrected of the expansion, hiring, investment and lending variety, bad personal habits are nipped, bad hires that don’t fit for companies and individuals alike are released into the market economy in search of better matches, plus individuals and businesses shore up their personal financial situations.

Some Keynesian thinkers in the economics profession believe consumption powers economic growth, but as the mildly sentient among us know well, investment is the true driver of growth. Crucial about investment is that it’s a logical consequence of savings, which explains why good times emerge from the bad. As individuals and corporations shrink their outgoings, capital formation grows, thus setting the stage for growing amounts of investment that puts an economy once again on a growth path.

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Πηγή: realclearmarkets.com