Tuesday, March 23, 2010

SuperCycles

According to economist Arun Motianey, author of SuperCycles, a SuperCycle is a wave of boom and bust spread over an extended period of time. He argues that the attempts by government policy-makers to stabilize prices are actually the cause of these boom and bust cycles.

Although this book may be intended for a general audience, it was a difficult read for a non-economist like me. It is always hard to tell in these situations if the problem is with the reader or writer, but many parts were lost on me. However, I did come away with some understanding.

Motianey looks through financial history and finds repeated patterns of a cycle. They begin with governments achieving price stability through policies such as the Gold Exchange Standard. This is followed by a collapse in commodity prices which causes a mismatch between prices of inputs (commodities) and outputs (finished goods). This leads to excess investment chasing the available profits, excess credit satisfying the demand from manufacturers, and then excess capacity. This situation cannot continue indefinitely, and the result is a bust.

One particularly interesting part was a table that broke out investment returns since 1929 in the US by periods of high or low GDP growth and high or low inflation:

Real Yearly Returns Since 1929

Equities Bonds T-bills Commodities
Low GDP growth, low inflation 14.0% 9.3% 2.9% 0.4%
High GDP growth, low inflation 10.6% 5.2% 1.3% -0.8%
High GDP growth, high inflation 8.4% -1.4% -1.0% 21.7%
Low GDP growth, high inflation -1.9% -5.0% -1.7% 13.7%

It seems that stocks like anything other than low GDP growth with high inflation, bonds and T-bills like low inflation, and commodities like high inflation.

Instead of the usual book giveaway I often run, the publisher, McGraw-Hill, has decided to run their own. While I don’t use your email addresses for any other purposes, the McGraw-Hill Privacy Statement says “We may also make your contact information available to other divisions of the McGraw-Hill family of companies or to other reputable business information companies, so that they can inform you about other products and services that may interest you.”

Decide for yourself if you want to enter the draw. Here is the free draw link I was given.

3 comments:

  1. I tend to agree with the author on his point about tinkering with monetary and other policies creating these super cycles. I think moral hazard has been unleashed and that has opened a Pandora's Box full of unintended consequences.

    Bailouts and zero interest rates policies do have limits. At some point, we will run out of money and, although rates can technically go below zero, I don't know of anyone who thinks that would be a good thing.

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  2. I think a SuperCycle is over-kill, once you get past 1000 cc's how much faster do you need to go? You end up looking like a Harley Riding South Park Character...

    ... wait a minute, oh, that kind of superCycle.... never mind

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  3. 2 Cents: I find the authors arguments seemed to make sense as far as I could follow them. But, I'd want to read other points of view before making up my mind.

    Big Cajun Man: You always need to go faster ...

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