The most frequently heard word during this period is "winter," with complaints echoing around the world, involving layoffs and turmoil, and causing other problems in some countries. Moreover, some friends are entangled, wondering when is the best time to start a business and when it is better to stay at home and wait and see. In fact, it can be explained in one sentence: it is best to do everything when the cycle starts. So, how can we identify the cycle? You will naturally understand after reading this article.

In my impression, it seems that every few years, people will say that the "winter" is coming, but after a while, no one mentions it anymore, and everyone is busy living their lives.

This is actually the economic cycle. When the economy is on the rise and getting better, everyone lives smoothly and vibrantly, with high morale; when the economy is on the downturn, corporate profitability declines, wages do not increase, and even layoffs begin, it is the most obvious "winter" that people feel, which is the trough in the economic cycle.

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So, the question arises, why is there an economic cycle?

Credit brings new ways to play

This has to start from the foundation of economic operation - credit.

The commodity production in the agricultural era was in the form of small workshops, and the financing model was also very simple, which was to save money and invest by oneself.

For example, a tailor opened a small shop, and the business was good, and he planned to open another one on another street. Then he would save the profits of the current shop as the initial investment for the next shop. The process of capital accumulation is very long, but the risk is very small. Even if the new shop's business is not good or it goes bankrupt due to poor management, it will not affect the operation of the old shop.

Take the well-known Hermès as another example, which was originally a small workshop making horse gear. The first leader of Hermès himself was also a humble leather craftsman. It took nearly a hundred years to turn that small workshop into a slightly larger factory. The logic in the middle is: slowly accumulate profits, and then use these profits to expand the business, open new factories, new shops, keep rolling, outlast competitors, and become an international giant.▲Saddlebag - The embryonic form of Hermès leather goods

This leisurely pace of development would drive today's enterprises crazy, but that's how everyone played back then until the arrival of the industrial era, when the banking industry forcefully intervened and changed the game.

The industrial era's commodity production model is large-scale, specialized production, with huge initial investments required for factories, assembly lines, workers, etc. It is obvious that the accumulation of self-owned capital is not suitable for this production model, and there is a need for a large-scale, more professional financing model. Banks and capital markets emerged to meet this large-scale financing demand.

With banks and capital markets, it means that borrowing money is possible, that is, credit. Enterprises can borrow money from others, such as issuing stocks, bonds, and other means to raise funds from the market and invest in production; individuals can also borrow money from their future selves, exchanging time for space, such as home loans.

For example, the German industry that you are familiar with was matured by bank loans, and it appeared almost overnight. Before the Franco-Prussian War, Germany (at that time, there was no modern Germany, only a bunch of small countries) also had a weak industrial foundation. However, after the Franco-Prussian War ended and they seized coal and iron mines, they went crazy with production capacity, borrowed from banks to build railways and factories to develop heavy industry, and began to invest in new technologies on a large scale, and soon became a strong power on the European continent.

The United States is also the same. The United States has been crazy about increasing production capacity and infrastructure construction shortly after its founding. Where did the money come from? It is basically all financed in the United Kingdom, that is, issuing bonds in the UK, which was different from now and was the capital capital of the world. Everyone who needed money had to go to the British, and even the Qing Dynasty had to borrow money from the British for war indemnities. Americans borrowed money to build railways and canals, and were very busy.

Without the capital raising by banks, Germany and the United States would basically not be able to develop. In Marx's words, if you save enough money to build a railway, the railway will never be built.

The modern industrial model is: borrow money first, then build, and repay the loan after making money, which is equivalent to moving the future money to the present, or moving the idle funds in the United Kingdom to the United States. This is also the biggest function of finance, which can allocate resources across time and space.

There is also a big problem with this. The United States has a financial crisis every few years, and it is too much debt to repay. After bankruptcy and reorganization, it continues to borrow money. The well-known Morgan consortium was originally a financial intermediary for the United States in the United Kingdom, taking American projects to the United Kingdom for financing and borrowing money, and then converting debt into equity in the future if it cannot be repaid.The modern economy relies on credit, but credit has its own expansion and contraction cycles.

Bubbles will eventually burst.

The expansion and contraction cycles of credit coincide with the boom and recession cycles of the economy, and they promote each other.

The starting point of economic growth is generally due to technological progress or the emergence of other huge demand gaps, such as the Internet boom in the United States last century, the home appliance craze in Japan, and the current mobile Internet explosion in China.

Let me give you an example to feel it.

In 1847, a financial crisis occurred in the United Kingdom, and even the Bank of England, the central bank of the British Empire, almost went bankrupt.

The situation at that time was like this. In 1843, after the Qing Dynasty lost the Opium War with Britain, the Qing government agreed to open five ports for trade and fully open the Chinese market. That was a huge market of 300 million people, and British capitalists were shocked, thinking that the imperial navy had made a great contribution and actually won such a large market, how many cotton fabrics could be sold.

At that time, the capital interest rate in the UK was relatively low, and British capitalists began to go crazy to increase production capacity, borrowing money to open factories, hiring workers, and buying machinery. Machinery manufacturers also thought it was an opportunity and borrowed money to buy lathes and steel to produce machinery. Moreover, because of the huge amount of raw materials to be transported, stocks were even issued to build railways at that time. For a while, it seemed that everyone in the country made money, and the whole country was thriving, ushering in a new period of dividends.

But in 1847, just three years later, problems were found, because a famine occurred in 1846, and the British government had to spend money to buy food. The United States and France, which were the major grain producers at that time, took the opportunity to raise grain prices. The British government had no money, so it had to borrow from the Bank of England. The bank lent money to the government to buy food, and there was no money to lend to capitalists. In order to speed up the repayment of capitalists, the bank also tightened the money supply and raised interest rates.

This is a big problem, because the invested factories have not started to make a profit, and the bank does not lend money, and these factories have only done half, and no cloth has been produced. The bank broke off the blood, and had to go bankrupt and close down, dismiss workers, capitalists lost the bottom, and workers also faced massive unemployment.Moreover, these factories were in debt to the banks to the tune of a huge sum, and they were fundamentally unable to repay it. At that time, the currency was gold and silver, and there was no way to print money, which almost led to the collapse of the Bank of England. Have you ever heard of a central bank of a country almost going bankrupt?

▲Bank of England

Of course, even without this famine, the great bubble of Britain would also burst, as later facts proved that the people of the Qing Dynasty did not buy the nightgowns, nightcaps, and tailcoats produced by the British at all, and soon the Taiping Heavenly Kingdom movement broke out, and they bought even less.

Americans were more clever at the time, grasping the market and finding that the Qing Dynasty was in constant turmoil and needed weapons the most. They made a lot of money by selling guns, such as the well-known Roosevelt family, which started with the trade of selling mink skins, American ginseng, and guns to the Qing Dynasty. This American ginseng is quite interesting. Americans used it as a radish, occasionally adding it when cooking beef, and later found that the Qing Dynasty had a strong demand for it, so they brought it to China. However, the economic cycle did not spare the United States. When the Qing Dynasty finished the war and did not need so many guns, a large number of American companies also went bankrupt. But the Roosevelt family had already changed to real estate and finance.

Through this example, everyone can understand the economic cycle.

When the economy is in an upward phase, that is, when there is demand or technological progress, everything looks thriving, and everyone is optimistic about the market and thinks it will continue to grow.

Enterprises have the impulse to borrow and expand production. Large enterprises have more borrowing channels, they can borrow from large banks, and they can also issue stocks, bonds, etc. Small and medium-sized enterprises may borrow from private financial institutions. The capital market also has the impulse to lend money to enterprises, because they believe that the money lent out can be recovered with interest.

Enterprises, with money, will expand production scale, increase employee salaries, hire more employees, and make a lot of noise. In this way, employees also have money in their hands, and they also have the desire to consume, buy houses, cars, luxury goods, etc., and the increase in demand further stimulates supply, and enterprises borrow more money and expand reproduction.

A series of operations such as personal car and house loans, and corporate borrowing and expansion of production will naturally generate a large amount of leverage, and the debt ratio of the entire society will rise, that is, bubbles are generated.

Before the end of 1989, under the stimulus of low interest rates, Japanese house prices and the stock market soared crazily. Until the end of 1989, the famous "crazy caveman" of Japanese history, Miyazawa Yasushi, took office as the governor of the Bank of Japan. After he took office, Japan raised interest rates five times, and finally in August 1990, Japan's interest rate soared from an ultra-low of 2.5% to 6%. This caused trouble, and the stock market and housing were cut off from the money supply, and no one took over, and they could not rise. Subsequently, it turned sharply and collapsed rapidly. The person standing and speaking in the picture below is "Bubble Popper" Miyazawa Yasushi himself.Families are like this, and so are businesses. Slight changes in the market, such as rising interest rates, declining demand, or product price reductions, can all cause a company's profits to fall short of interest payments. At such times, businesses can only resort to layoffs, cutting off low-profit businesses, and so on.

Whether it's a family being forced to sell their house or a company being forced to cut production lines, it will not only further reduce the asset prices of individuals and businesses, but also quickly spread a pessimistic mood, turning the entire market's expectations from optimistic to pessimistic.

When you see the news "XX company is preparing to lay off XX," do you also quietly put your travel plan on hold for the time being, in case the leader secretly pulls you into the "pending" list one day.

Let's take another example.

After "911," in order to boost the economy, the United States reduced interest rates to near 0.

In this situation, everyone is sure to seize the opportunity to buy houses, cars, and Chihuahuas, companies will definitely expand reproduction, and banks will also try to lend as much as possible to earn interest.

Everyone is taking out loans to buy houses, and housing prices keep rising. People who haven't bought houses can't help but rush to take out loans to buy houses as they watch the housing prices keep rising. The whole society is buying houses. When the Federal Reserve raises interest rates, a large number of people immediately can't afford the loan repayments, the loan supply is cut off, banks auction off houses, housing prices plummet further, coupled with the huge pit dug by the United States' financial derivatives, it triggered the subprime mortgage crisis.

In our article "Lending to the Poor to Buy Houses, Actually Triggered a Global Crisis," we have explained this process clearly.

The essence of economic crises is a debt crisis.You might wonder, are the Federal Reserve and the Bank of Japan crazy? Why do they want to raise interest rates? It's not complicated; there's just too much borrowed money, and it's becoming difficult to pay it back, so they have to raise interest rates to control the pace of borrowing, right?

If you still don't understand, let me give you an example. You are the local moneylender in your village, lending money to people for a living. One day, everyone says they want to borrow money to raise pigs, and you think it's a good idea, so you keep lending money to them. Gradually, one day, you start to worry that people have borrowed too much money, and what if they can't pay it back? How do you plan to recover the loans? It's very simple; you say the interest rate has increased. Originally, everyone borrowed money from you at an interest rate of 10,000 yuan per month, and overnight it becomes 100,000 yuan. Wouldn't everyone be in a hurry to pay you back?

After raising interest rates, the cash in the economy will decrease sharply. Many ongoing or planned investment projects can only be cut off, and some start-up companies may go bankrupt, employees may be laid off, and to save money, they might not go to the pet store to groom their dogs, but instead, they might try to do it themselves with scissors. Anyway, the dog doesn't mind. Over time, the pet store might also lay off a pet groomer, and the store owner thinks that since there are fewer customers, it's better to do it himself. You see, after raising interest rates, all industries are contracting. The same can be inferred in other areas, and it's a bleak situation.

Speaking of this, you should understand why Trump is so disgusted with the Federal Reserve raising interest rates, as it will lead the economy into a downturn. Of course, the Federal Reserve not only raises interest rates but also shrinks its balance sheet. What is shrinking the balance sheet? You can simply understand it as the need to take back US dollars from the market, which will inevitably lead to a cooling of the economy.

Now, Trump often criticizes the Chairman of the Federal Reserve, the one in the picture above. He once even planned to remove him, but although he didn't succeed, he often verbally attacks and publicly insults him:

"Powell and the Federal Reserve have failed again. No guts, no common sense, no vision! A terrible communicator!"

"As usual, Powell has disappointed us, but at least he ended the quantitative tightening policy, which should never have started - there is no inflation. Anyway, we are winning, but I definitely won't get much help from the Federal Reserve!"

"If the Federal Reserve does not cut interest rates, it is derelict in its duties. Look at our competitors in the world, countries like Germany, which can borrow money and still make a profit. The Federal Reserve raised interest rates too quickly and cut them too slowly!"

The above paragraphs are all taken from Trump's tweets, and after reading them, you will understand how much he dislikes raising interest rates and shrinking the balance sheet.Of course, Trump also has plans to reduce the interest on the national debt. After all, since taking office, he has implemented tax cuts and economic stimulus measures, which have left the U.S. government deeply in debt. If the interest rates are lower, they can pay back less money. However, persistent low interest rates mean that the bubble will continue to inflate further. As for how this will end, we can only wait and see.

By now, everyone should understand the phrase that economists often mention, that the essence of an economic crisis is a debt crisis.

When there is a technological breakthrough or new demand, everyone is optimistic, borrowing money to produce and consume. If too much money is borrowed in the early stages, played too aggressively, or in fashionable terms, the leverage ratio is too high, when everyone realizes the risks, banks start to lend less freely, and they can't pay back, go bankrupt, and lay off workers, the economic crisis comes.

When those who should go bankrupt have gone bankrupt, and the money that should be repaid has been repaid, and the leverage ratio has decreased, banks will naturally lower interest rates, waiting for the next eruption.