A Sketch of the Recent U.S. “Business Cycle.” [originally given, April 2005]

A. I am sketching the recent history U.S. economy in terms of growing indebtedness driving spending and (temporary) prosperity. [comments in brackets]

(1) It’s like a relay race, where corporations first accumulate debt, driving the economy. [in the 1990s]

(2) They drop the baton, but consumers pick it up pretty quickly, so the economy does “okay” for awhile. [in the 2000s]

(3) Now [2005] it looks as if the consumers may drop the baton, but it’s possible that government debt-accumulation could get it before it falls or pick it up quickly.

[if you make a prediction, don’t attach a date to it!]

(4) Of course, the [real-world] story is more complicated than that…

B. The story focuses on the interplay of expansionary forces pushing for economic boom and those contractionary forces encouraging recession. [The results depend on which forces are stronger.]


Contractionary forces

Expansionary forces


Late 1990s: the “new economy”

1. Rising government surplus.

2. a growing trade deficit (rising imports, falling exports).

[both hurt aggregate demand]

1. High profitability & [later, the] stock market bubble, encouraging private debt accumulation for consumption and [by corporations,] fixed investment.

2. [generally] falling oil prices.

3. The Fed let it happen.

  Clinton-era Economic boom, unequally-distributed but lowering unemployment.


Overexpansion (excessive expansionary forces) leads to:

1. stock market collapse,

2. implosion of fixed investment.

1. Fed lowers interest rates dramatically to fight recession.

2. encouraging housing price bubble

3. and further consumer debt accumulation.

  Recession, moderated by continued high consumer spending.


1. Steeply growing trade deficit;

2. the working off of excessive corporate debt delays fixed investment.

1. Fed lowers interest rates further.

2. Housing bubble and consumer spending continue, now encouraged by:

 3. government debt accumulation (tax cuts for the rich and increased military spending).

   Jobless recovery: economic recovery not fast or strong enough to improve the job situation significantly. [until recently]

Recent changes

1. Soaring trade deficits (and low U.S. interest rates) cause the falling dollar, especially after 2002.

2. Fearing inflation, Fed hikes interest rates starting in June 2004.

The Future

1. The falling dollar (encouraged by the trade deficit) encourages inflation.

2. Oil prices hikes help cause inflation.

3. The Fed raises interest rates even further to fight inflation [until now, it seems], discouraging private debt accumulation and weakening the housing bubble.

4. The housing bubble seems to be popping, so that household debt encourages consumer spending cut-backs and bankruptcies.

1. Fixed investment recovers due to improved profitability, falling corporate debt.

2. Government debt accumulation to pay for war and tax cuts for the rich.

3. Falling dollar encourages greater demand for U.S.-made goods (except due to the China trade and rising input prices).

  Japan” scenario [as in the 1990s there]: wave of household bankruptcies, recession, rising unemployment. Private investment falls again. Prolonged stagnation.

  Rosy” Scenario: Government debt accumulation and corporate expansion encourage recovery, based on consumer debt peonage (debts accumulated from the past, stricter bankruptcy laws).