Tuesday, August 11, 2009

The Business Cycle and Restoring Profitability

Profitability increased in the U.S. financial sector during the 1st Quarter, indicating a new phase in the Great Recession.

Business cycles are part of the process of eliminating excess capacity, debt, and generally cleansing the system under capitalism. Less profitable, or less connected, businesses go bankrupt or are consumed through takeover - and the survivors increase their profitability by taking the extant market share. This restoration of profitability is part of what creates the conditions for new private investment, and the creation of new private sector jobs. Lehman Brothers, Bear Stearns, Merrill Lynch and Washington Mutual represent just a partial list of major financial institutions who were either consumed, or liquidated, in 2008.

Overall aggregate demand must not collapse as various sectors cleanse themselves of overcapacity. 'Rolling' recessions are therefore more desirable. Systemic collapse means there will be no demand anywhere; to prevent this possibility, government can step in to provide demand Keynesian-style, through stimulus and the like.

The 'liquidationist society' inherent in capitalism is not particularly pleasant, and fairly destabilizing. Attempts to ameliorate it have left excess capacity and mounting public debt throughout the world economy. Public bailouts and guarantees of debt, along with liquidation and consolidation, have helped the U.S. financial sector restore a measure of profitability.

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