FORCED DISCONTINUITIES IN ECONOMY

FORCED DISCONTINUITIES IN ECONOMY

Cycles Hurt!

Recession has arrived home and we do not have any model to explain it yet. Clearly, all models have failed, starting with the simpler ones, those so useful to teach at universities. Moreover, there is neither vision nor understanding of the overall picture which recession is bringing to surface. And so, patches are being laid on top of other patches, just trying to avoid the wreckage with a pathetic note of desperation and anxiety.

Nikolái Dmítrievich Kondrátiev, Николай Дмитриевич Кондратьев (18921938) and Joseph A. Schumpeter wrote on cycles in economy early in the XX century. It seems to be widely forgotten. Everybody thought a big recession was impossible, even although there have been a good number of financial and banking crisis in modern economies after WW2. Therefore, we have to admit that – even nowadays – cycles do exist!

Policies are being classified into pro-cyclic and anti-cyclic. Anti-cyclic measures are implemented with utter persistence. Although the cycle persists. And the cycle hurts! It is like pandemics although with no vaccination possibility at hand. Casualties are running high, with economical deaths all over the place. And all we can do is not to get exposed to the financial viruses; otherwise we are finished, economically speaking.

Obviously, the best way to avoid recessions of this kind and their associated costs would be by eliminating ‘natural’ cycles. This, in theory, could be done in two main ways:

a)     Rigidity.

b)     Maximum flexibility with forced discontinuities.

Rigidity

This would mean to regulate absolutely everything related with economics and finance. This would make the economy to run flat, with no cycles. However, it would be very fragile to any failure of the system of rules, although with no flexibility nor resilience, what would become potentially hyper toxic. Moreover, it is assumed that previously to implementing a rigid and fixed set of rules, a new and fit model of the global economy is needed.

And so, here we are in a vicious circle: we cannot rely in a new economic model before we check its validity through several crisis and/or recessions. And we cannot implement a thorough – and very rigid – set of rules unless we have tested a new comprehensive model.

Although this concept of rigidity makes me wonder if it were not the system communist countries used to perform. And it was a phenomenal catastrophe. Better forget about this concept for the time being.

Maximum flexibility with forced discontinuities

If we force a discontinuity, then we may shorten the cycle artificially. Obviously, it would be very disputable that we could enlarge the cycle. In any case, without having a fit model, it would be very risky to do so; too much would be at stake. Therefore, we will only examine forced discontinuities shortening economic cycles.

Being ‘time’ the main variable in economic cycles, it is by acting in this variable that we will create a discontinuity – partial or total – in the economy. The second important variable is – perhaps – political: the geography of nations and their interrelations. Therefore, we could define partial discontinuities either as such affecting a set of nations or those that globally affect an area or sector of the economy. Other discontinuities could be desirable, even although we could consider them as minor discontinuities.

By originating a discontinuity, there is a big degree of potential control of both end and start sides of the cycles. And there would be an interregnum, a time which does not belong to any cycle. This period of time in between two consecutive cycles is of paramount importance, as we will analyse afterwards.

As this strategy is almost immune to rules, it gives maximum flexibility to the governance of economy and finance, as well as to the management of businesses in general. With the important exception of the interregnum, that should be thoroughly regulated. Even although it appears much easier to model and regulate that interregnum that the whole economic cycle.

A total, that is, global discontinuity, would result in innumerable possibilities. We should not forget that a discontinuity has some elements of a rupture, some of them desirable, even although others not so. Before evaluating, we could summarize them as:

  • Bank deposits backed by central banks and governments
  • Accountability reset
  • Assets to its fundamental value
  • Toxic assets to zero
  • All credits and debts to its fundamental value
  • Financial insurances reset to zero
  • All rates reset to zero (therefore, inflation reset to zero)
  • All (economical) trials and processes reset
  • All (economical) court (and other) penalties reset
  • Pension plans
  • Non financial insurances
  • Bankruptcies during interregnum (no collateral effect on economy)

This may seem more difficult than it really is, since the date of the discontinuity would be known very much in advance, even years before. Therefore, all those concepts would be discounted in advance.

Finally, we could summarize that a forced discontinuity has three parts: a time before the cycle ends, an interregnum, and a time where next cycle starts.

Interregnum

As we have seen before, the interregnum is a time which does not belong to any cycle. This period of time in between two consecutive cycles is of paramount importance, needing to be thoroughly regulated, even although it appears much easier to model and regulate than the whole economic cycle. The whole cycle may last up to more than half a century, whereas the interregnum lasts scarcely a few weeks.

 We could see the interregnum as economic holidays. All activity is inside the ‘kitchen’, with no activity outside. And so, it cannot last more than a few weeks, perhaps less than a month, even although it could only last – at least in theory – a fraction of a second, an instant. A year, or a quarter, appear as an excessive length of time for an interregnum. Being many salaries and payments due on a monthly basis, we will estimate a month as the maximum desirable length for a primary – global or total – interregnum, a week or two for a secondary – partial for a whole country or sector – and a day or less for minor ones.

Gaspar Llinares

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