Contraction Cycle

= the opposite of an economic Growth Cycle. A contraction cycle dissolves economic activity.

Example

Thornton Parker argues the current meltdown is created by three negative drivers, which create a contraction cycle for the U.S. economy:

"The situation is not stagnant, however, because a contraction cycle is running that has three drivers. Two of them are obvious, but few people see the third. The most obvious is the end of the credit driven consumption era. Little need be said about that here, but it must be considered in developing strategies for the future.

The second driver is the declining role of government. Regardless of how one feels about taxes, spending, and budgets, few Americans pause to recall how much the government has contributed to aspects of everyday life that they take for granted. The role of government has contracted since Ronald Reagan said “government is the problem,” and the country is paying the price.

The financial services industry is the third and most powerful driver of contraction on the productive side of the economy." (http://www.ethicalmarkets.com/2009/05/07/from-wall-street-bird-nests-to-main-street-growth-cycles/)

Discussion

How the U.S. financial sytem contributes to the contraction cycle through parasitic investment

See: Productive vs. Parasitic Investment for more details.

Thornton Parker:

"There are two types of investments, productive and parasitic. Productive investments pay for buildings, research and development, tools, instruments, training, distribution facilities, transportation networks, energy systems, and all the knowledge and real world things that are needed to produce and deliver goods and services. Productive investments are unique, they often require long term commitments and are not easy to buy and sell. They are absolutely necessary for creating jobs on Main Street. They involve serious risks and their success is tied to the success of specific companies. Most productive investments are made by small companies and by public companies using cash they have borrowed or generated through operations. Except for helping with public offerings, Wall Street largely shuns productive investments that involve stock.

Parasitic investments just use money to make money by taking advantage of productive investments that others have already made. They do not require long term commitments and are traded like commodities, often in bulk. Wall Street promotes parasitic investments, and claims that their risks can be managed with modern portfolio theory and trading techniques, Much of the trading, however, is simply gambling that shifts risks and profits from one party to another without creating any real world value." (http://www.ethicalmarkets.com/2009/05/07/from-wall-street-bird-nests-to-main-street-growth-cycles/)