What Does Boom And Bust Mean?

Stocks are losing value.  People are taking money out of banks they think might actually go under.  Housing prices are virtually in freefall.

And there is no likelihood of this situation improving any time soon.

We are in what the experts would call a bust situation.  We’ve been through plenty of years of the boom part of the cycle, so now it is the turn of the bust part to make an appearance.

But what exactly is a boom and bust cycle?

Understanding how it works helps you to understand how the current situation has come about.  While the current events are without a doubt worrying and dramatic in turn, it isn’t as though we haven’t seen them before.  This might be one of the worst instances of boom and bust that we have experienced in history.

Boom and bust basically refers to the cycles that the economy goes in.  It is impossible for things to continue in a positive fashion ad infinitum.  The sub-prime crisis that set off the current situation has shown this to be true.  During the boom years banks offered bigger and bigger mortgages.  Credit card companies offered bigger and bigger balances on their cards - despite the fact that many people wouldn’t be able to pay them back.

You could say that the idea of people living on the ‘never never’ has led to many of the problems we see today.  It seems daft that we could take out mortgages for more than our homes are worth and expect to be able to pay for them comfortably.  Credit became so easy to get hold of that creating future problems was almost inevitable.  Sooner or later someone would have to pay the balance - and this time it’s the banks who have taken a big hit.  And that hit has been big enough, in fact, to require large injections of life saving currency from their governments.

You can see some of the evidence of this by visiting many of the websites that represent various newspapers.  Take a look at the Times Online for example.  This is just one of the sites that reports on the latest effects of the economic situation.  It can be seen at http://www.timesonline.co.uk.

Interestingly enough, it would appear that the boom and bust cycle can be predicted as well.  During the research that went into writing this article, we came across a piece on the MoneyWeek website, which can be found at http://www.moneyweek.com.  This article (written just over three years ago in 2005) predicted that the bust would finally kick in during 2008.

And of course that has since been proven to be correct.

There is logic to the boom and bust cycle that means it will always continue, even if the bust part is unpleasant for all concerned.  For example, it’s obvious that house prices cannot keep going up and up, and yet while they are increasing we are happy to ignore the impending bust we know will follow.

It will undoubtedly be the case that the people who have bitten off the most will find it impossible to chew now that the problems have started.  As inflation starts to go up - another sign of the bust part of the cycle and another indicator of recessionary times - anyone who was at the limits of their solvency will experience problems very quickly.

It’s something of a cliché, but we know things will get worse before they get better.  The alarming thing is that even with all the events going on at the moment, we may still not have reached rock bottom.

The only good thing to be said about the bust part of the cycle is that the boom will come next.  But the stages of the cycle can be spoken about in terms of years rather than months.  This is no quick process – and there is no quick fix either.  The state of the currency markets is a good indicator of that.  Struggling countries find their currencies performing poorly, losing a significant portion of their value in just days in some cases.

The boom and bust cycle is inevitable.  We have enjoyed the boom, and now we must tolerate the bust.  And in a few years from now, we will come out of it and return to the boom times once again.

But it may be a bit of a wait.