Recently, due to various factors, many companies have expressed their difficulties.
If nothing else, in terms of economic growth rate, our GDP growth rate in the past two years has been much lower than before.
So it is very difficult.
But, you know what?
The GDP growth rate of many developed countries over the same period is actually much lower than that of our country.
In the past 10 years, the GDP growth rate of Germany, Japan, and the United States has generally been around 1%-3%, and sometimes even almost no growth.
However, many excellent companies still exist and are born in these countries.
In the 40 years of reform and opening up, our country’s economy has grown rapidly.
There is gold everywhere and it is too easy to make money.
In the past, people with courage went to sea to do business.
Get something from somewhere else that I know but you don’t, and you can make money by buying and selling.
At that time, it was better to sell tea eggs than to build an atomic bomb.
Later, the Internet era came, and countless young people resigned to start their own businesses.
With an idea and a set of PPT, you can get millions of financing with just one blood and two mouths.
At that time, the tuyere came, and the pigs could fly to the sky.
Most of the enterprises in China were born in the 40 years of the soaring economy.
However, we have been in this high-growth economic environment for so long that we have never experienced a real economic cycle.
Only experienced booms, not recessions.
So that when the economy starts to decline a little, it will feel the cold wind.
People who have only experienced spring, summer and autumn know that there will be four seasons.
Today, China’s GDP growth rate has dropped to 6%, which is incomparable with the previous era when it often exceeded 10%.
We are beginning to experience a real winter.
And at times like this, the more we need to calm down and truly understand what an economic cycle is.
In today’s article, I will use Radar Rio’s theory to systematically talk to you about the economic cycle.
— 1 —
Wealth growth comes from increased productivity
What exactly is an economic cycle?
Why do business cycles exist?
Before answering these two questions, I would like to ask you to think about the two most basic questions.
The first question is, what is the nature of business?
If you are a student of 5 Business, or an old reader of our official account, you will be able to blurt out:
The essence of business is transaction.
Without transactions, there is no business.
No matter how good the product you make, if you don’t trade with others, there will be no business.
I am a corn farmer, you are a sheep farmer, I want to eat mutton, and you want to eat corn, what should I do at this time?
We can only trade.
If there is a transaction, there will be transaction costs, and if there is a transaction, a business will be formed.
The second question is, what is the nature of wealth?
Is it money?
Money is just a measure of wealth.
But money is never the essence of wealth.
Wealth is created by human beings through labor.
This is the essence of wealth.
China’s GDP last year was 90 trillion, and the figure of 90 trillion is a measure of wealth.
But in terms of the essence of wealth, the GDP is 90 trillion, which means that the Chinese people created something worth 90 trillion through labor last year.
So how much wealth can people have?
Why do you feel richer today than before?
Because the productivity of our labor has increased.
What’s the meaning?
I will give the simplest example.
In the past, I could chop down a tree a day by myself.
Later, I had a better axe and could chop down two trees a day.
Later, I got a chainsaw and could cut 20 trees a day.
The productivity of labor has greatly increased.
An increase in the productivity of labor means an increase in the rate at which a person creates wealth.
So, how much wealth can human beings have, and how rich can they be?
It depends on the productivity of human labor.
The growth of wealth comes from the improvement of productivity.
With the continuous development of technology, human productivity has been increasing.
— 2 —
Currency + Credit = Your Total Spend
So productivity has increased and more wealth has been created, so what will people do next?
Put the produced goods on the market for trading.
When there is a transaction, there must be a buyer and a seller.
Buyers, can use money to buy goods or services from sellers.
In addition to currency, buyers can also use another thing to buy goods or services.
What is credit?
Currency is the wealth you already have today.
And credit is the wealth that others believe you can have in the future.
So credit, like money, is actually wealth.
Money is your wealth today; credit is your wealth in the future.
Today’s wealth, plus future wealth, is the total amount you can spend today.
So why is credit the future wealth?
I will give the simplest example.
You go to dinner today, swipe your credit card, and when you swipe your card, the money you paid for your meal doesn’t actually exist.
You’ll need to wait until the end of the month to get paid to repay the money.
You don’t have the money right now, but you swipe your credit card and eat first.
You see, you buy today’s things with your future wealth.
Then you didn’t actually pay the money today, why is the restaurant willing to let you swipe your card?
Because the bank will advance the money to the restaurant first.
Then why would the bank advance the money to the restaurant?
It’s because the bank believes you’ll pay the money back at the end of the month.
The bank’s belief in you is your credit.
So credit is future wealth.
Once you can use your future wealth to participate in today’s purchases, your total spend increases.
For example, you originally only had 2 yuan, and now you borrowed 1 yuan by credit, then you could only spend 2 yuan, but now you can spend 2+1=3 yuan, your The total expenditure has increased.
Money is today’s wealth, credit is future wealth, today’s wealth plus future wealth is equal to the total amount you can spend today.
This sentence is very important. Only by understanding this sentence can you understand why there is an economic cycle.
— 3 —
Your expenses are other people’s income
Spending is the driving force of the economy.
As your total spending increases, other people’s incomes increase accordingly.
Because your spending is someone else’s income.
What’s the meaning?
You originally only had 2 yuan, but now you have borrowed 1 yuan by credit, and your expenditure has changed from 2 yuan to 3 yuan.
When your expenditure changes from 2 yuan to 3 yuan, then there must be a person who could have earned 2 yuan, but now he can earn 3 yuan, and his income has changed from 2 yuan to 3 yuan. .
Once his income changes from 2 yuan to 3 yuan, then the money he can spend also changes from 2 yuan to 3 yuan at the same time.
In the same way, then there is another person who could have earned 2 yuan, but now he can earn 3 yuan, then this person’s expenditure has also changed from 2 yuan to 3 yuan at the same time…
And so on, in this way, because at first one person borrowed 1 yuan, eventually in the entire economy, everyone earned 1 yuan more, and at the same time, everyone spent 1 yuan more.
It sounds amazing because one person borrows $1 and everyone ends up earning $1 more.
You know, when calculating GDP, four important parameters need to be considered, one is consumption, one is investment, one is government purchases, and the other is net exports.
Consumption, investment and government purchases are all expenditures.
The total spend comes from each transaction.
Let me give the simplest example. If everyone traded at 2 yuan in the past, and 3 transactions occurred between 4 people, then the total expenditure in the past is 2*3=6 yuan.
Assuming there is no net export, the GDP at this time is 6 yuan.
Now a person borrows 1 yuan, and everyone’s expenditure becomes 3 yuan, so the total expenditure now is 3*3=9 yuan.
GDP becomes 9 dollars.
Just because of the loan of 1 yuan, the GDP has changed from 6 to 9. The loan of 1 yuan has stimulated the multiplier growth of GDP.
Therefore, through borrowing, you can stimulate the economic development of the entire country.
— 4 —
Economic cycles are inevitable
We just said that people can exchange goods and services with money and credit.
Money is the wealth of today; credit is the wealth of tomorrow.
So in other words, people can spend with today’s wealth and future wealth.
However, the wealth of the future does not exist today, and you can buy things with it because others believe that you will create it in the future and give it back to him.
This also means that you are actually buying more things today than you are creating wealth today.
Today you have not created future wealth, you have already consumed it in advance.
And if you use your future wealth to consume in advance, then one day, you must create wealth by producing goods or services and trading with others to pay off the pre-consumption.
In the long run, your consumption must be equal to the wealth you create.
Otherwise, where did the things you buy come from?
And borrowing, let us consume more than the wealth we create today.
In the example just now, because of the loan of 1 yuan, the GDP has changed from 6 yuan to 9 yuan.
With borrowing, GDP will enter a positive cycle and begin to grow exponentially, and the economy will rise rapidly at this time.
However, on the day when you need to pay off your debts, your consumption today will be less than the wealth you create today. At this time, you will become very nervous and start to make ends meet. What should you do?
You will consume less and buy less.
But you have to pay attention, your expenses are other people’s income, once you don’t buy things much, other people’s income will decrease, and other people’s income will decrease, then he will not dare to buy things, he will not dare to buy things, in addition A person’s income will also decrease, and the other person will not dare to buy anything…
So it entered a vicious circle, and the economy began to decline rapidly.
Until all debts are paid off, and everyone regains confidence and starts to borrow, the economy will start to grow again and enter a new cycle.
All past liabilities must be made up through future creations.
Understand this, and you will understand the inevitability of economic cycles.
— 5 —
what is deleveraging
Understand that cycles are inevitable, and you will understand that economic development and recession are not determined by how good people are at innovation and hard work, but mainly by the total amount of borrowing.
The total amount of borrowing, to a certain extent, can be controlled by the central bank.
The central bank can adjust the scale of lending by adjusting the interest rate, and can control the total amount of money by issuing money.
Once the economy hits a recession and people stop borrowing money, what should we do?
The central bank will start to lower the interest rate. After the interest rate is lowered, the cost of borrowing money will decrease. Some people will start borrowing money again, and some people will start borrowing money, which will stimulate the economy and slow down the speed of economic recession.
However, when the recession reaches a certain level and interest rates are reduced to zero, people are still afraid to borrow money.
Just like the financial crisis in 2008, interest rates in the United States have fallen to zero, and there is still no way to restore the recession.
When the interest rate drops to zero, everyone will not borrow, and there will be no credit available for consumption. This leverage will disappear. At this time, it also means that the ability of the central bank to use interest rates to adjust the economy has disappeared. leverage.
If deleveraging occurs, the economy will start to decline rapidly, so what to do?
At the heart of the problem is that the debt burden is too high, so it must be reduced.
There are only four options at this time: cut spending, reduce debt, redistribute wealth and issue money.
Spending cuts refer to cuts in spending by individuals, businesses, and governments.
It’s easy to understand, you buy less when you don’t have money.
But of course this is not a good thing.
Because once you cut spending, other people have less income, and the economy goes into a vicious circle.
Debt reduction means reducing debt through debt default and restructuring.
What’s the meaning?
If the borrower can’t repay the debt, the lender will say, “Forget it, you can pay me back half, at least I can recover part of it, and the debt will be reduced.”
At this time, everyone’s psychological pressure on debt repayment is greatly reduced.
Wealth redistribution is the distribution of wealth from the rich to the poor.
Without loans, the poor dare not borrow money, and the rich cannot lend money, what should I do?
Then tax the rich more and distribute it to the poor, so that the poor can pay off their debts, thus bringing the economy into a new cycle.
To issue money means that the central bank prints more money.
Print more money, and then people use that money to pay off the debt, which also clears the debt.
Cutting spending, reducing debt, redistributing wealth, and issuing money essentially reduces debt and puts the economy back into a positive cycle.
— 6 —
The four stages of the economic cycle
The economic cycle is an objective law.
A complete economic cycle consists of four phases: boom, recession, depression, and recovery.
What is a boom period?
As long as there is credit and borrowing, the economy is bound to rise excessively, with debt growing faster than productivity.
Debt is growing faster than productivity, which means that at current levels of wealth creation, it is impossible to pay off current debt.
At this time, the economy will go through a period of prosperity and reach a peak, which we call the “peak boom”.
What is a recession period?
After reaching the “peak boom”, it will start to decline and enter a recession.
People started to be afraid to borrow and try to get rid of their debts.
While debt is being wiped out, debt is still growing faster than productivity.
People still cannot afford to pay off their debts.
The recession period usually lasts about 10 years.
What is a depression period?
After a recession comes a depression.
During the recession, debt has been wiped out a lot, and debt has started to grow slower than productivity.
At the current level of wealth creation, it is possible to pay off debts. People can already afford to keep borrowing.
But people still lack confidence and dare not borrow.
As a result, the economy continued to decline and reached the “bottom of the boom”.
What is the recovery period?
After reaching the “trough bottom”, the economy will slowly start to recover.
At this time, people finally have the confidence to borrow, and the economy finally starts to grow and enter a recovery period.
boom, recession, depression, recovery. Together, these four stages constitute a complete economic cycle.
— 7 —
How to deal with the economic cycle?
After understanding the economic cycle, what should we do in each period?
How should we allocate our assets?
Where should we focus our money?
The Merrill Lynch Investing Clock advises that in good times, we put our money in investable commodities.
For example, when China’s economy is growing rapidly, what will people buy?
Because of the rapid economic growth, the price of commodities will become more and more expensive as the trading confidence becomes higher and higher.
The sooner you buy, the more you can enjoy the bonus of rising commodity prices.
So when the economy is booming, you should put your money in investable commodities.
What about in recession?
During recessions, cash is king, and you have to keep cash firmly in your hands.
Because in recessions, everyone starts selling their assets to pay off their debts.
At this time, the price of the asset will drop.
Once asset prices fall, many people will realize that the so-called wealth I once had is actually just a book number, it is not wealth itself.
What is wealth itself?
You own a sheep, the price of the sheep may have risen to 100 yuan, and now it becomes 20 yuan, but it is still the same sheep.
Wealth never changes, it’s just that the wealth you think you have keeps changing.
So at this time, what you should have is no longer an investable commodity, but cash.
So what about the recession?
During recessions, debt has grown slower than productivity.
In fact, people’s wealth is enough to repay the money, but they still dare not borrow and consume.
At this time, we should hold bonds as soon as possible.
Because during the recession, people are creating wealth fast enough to pay off their debts. In fact, they can already start borrowing money.
But because of confidence, no one dares to lend money to others, and the price of capital will be very high.
But at this time, if you lend money to others, it is actually a very cost-effective business.
Of course, instead of lending money directly to others, you can buy government bonds, or bonds from big companies with high credit ratings.
So in a recession, you should hold bonds.
Finally, when it comes to recovery, what should you hold?
You should own the stock.
During the recovery period, many companies will resume high-speed growth.
If you can hold stocks of these companies at the bottom early on, your wealth will also increase further.
— 8 —
Three tips from Ray Dalio
Ray Dalio, the founder of Bridgewater Capital, gave us three suggestions for dealing with the economic cycle:
1. Don’t let debt grow faster than income.
2. Don’t let income grow faster than productivity.
3. Make every effort to increase productivity.
What’s the meaning?
Let’s look at it one by one.
First, don’t let your debt grow faster than your income, because the debt load will eventually overwhelm you.
Your income comes from the wealth you create.
The more wealth you create, the more income you earn.
In the beginning, maybe you have a lot of income, and a little debt.
At this time, you feel that your income is far greater than your debt, which has no effect on you.
But it’s not enough to just focus on the absolute value of income and debt, you also have to pay close attention to one very important statistic:
Income and debt growth rate.
If your debt is growing faster than your income, you need to be very wary.
Because one day, your debt will exceed your income.
At this time, you don’t have so much income to pay off the debt, what should you do?
The financial crisis in 2008 was largely due to a large number of people who might not have been able to buy a house, borrowing money from the bank to buy a house, and carrying debts that they might not be able to repay for the rest of their lives.
So, remember, don’t let debt grow faster than income.
The second piece of advice, don’t let your income grow faster than your productivity, because that will eventually make you uncompetitive.
What does it mean?
Wouldn’t it be a good thing to have income growing a little faster?
Why can’t income grow faster than productivity?
What does an increase in productivity mean?
I give an example.
I can raise 10 sheep a year by myself, and with the improvement of raising technology and efficiency, such as using better feed, more industrialized methods, etc., I can finally raise 20 sheep in the second year.
This also means that my productivity has doubled.
If productivity doubles, then theoretically, my income should also double, right?
But what if my income more than doubled, let’s say 5 times.
What does this mean?
This means that I am in a bubble, and the extra income does not actually belong to me.
My productivity simply can’t support me earning this much.
One day, this bubble will burst.
What should be done then?
Lower your income?
You must be reluctant, right?
Then you must increase your productivity.
This is also the third piece of advice Ray Dalio gave us to do whatever it takes to increase productivity because productivity plays the most critical role in the long run.
You have to allow yourself to actually produce 50 sheep a year. At this time, you are worthy of this income.
Otherwise, this income will have to be returned to the society sooner or later.
What is the most fundamental way to have wealth?
In fact, it is to increase productivity.
Remember, don’t let income grow faster than productivity, and do whatever it takes to increase productivity.
Well, the economic cycle, I have finished systematically for you.
Today, we are going through a cold winter, but you don’t have to panic.
Because the economic cycle is an objective law.
Economic downturn, it will come.
However, it will also go.
The only question is, can we survive this winter?
My answer is, yes.
Just, you need to wear thicker.
Although it is cold, we should also feel lucky.
Because a life that has not experienced the cold winter is not a great life.
Understand the cycle thoroughly, memorize the three tips, and then, study hard.
In winter, read by the fire and wait for spring.
Remember, whatever the stage, do whatever it takes to increase productivity.
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