Managing Coronavirus: Pandemics, Panics & Economic Cycles
By Paul Lechner, Esq., CPA — Lechner Law Office, P.C.
Winston Churchill once observed that when a situation was manageable it was neglected, and that by the time it was thoroughly out of hand the remedies that might have effected a cure were applied too late — a failure of foresight, willingness to act, and clear thinking.
The “Business Cycle” was first described in Clement Juglar’s Des Crises Commerciales, published in 1860. He suggested cycles run their course in seven to eleven years. Expansions and contractions are the natural rhythm of the economy — the Reagan Boom, the Dotcom Bust, the Housing Boom, the Subprime Crisis, and now the Coronavirus Recession.
Bailouts
As public health authorities moved to contain the coronavirus, business and personal incomes fell abruptly. Our credit-based economy is a source of progress but also of danger. Shrunken incomes and cash flow lead to financial misfortune. Long term, there is no free lunch. Government borrowing not used to invest and provide for the future will lead to future economic suffocation.
Manias
At the peak of the tulip bulb mania in March 1637, tulip bulbs sold for more than ten times the annual income of a skilled craftsman. Everyone imagined the passion for tulips would last forever. The market collapsed when traders could no longer find buyers willing to pay increasingly inflated prices. What did the panicked speculators do? They sought help from the government.
Crowd Psychology
Humanity is extremely uncomfortable with uncertainty. As a result we substitute herd instinct for certainty. A basic distinction between the individual and the crowd: the individual acts after reasoning, deliberation, and analysis; a crowd acts on feeling, emotion, and impulse. Once individuals have formed a crowd they act in a manner quite different than in isolation.
Conclusions
Without returning to work our future is unstable. For the last seventy years our government has sought to stop the business cycle by spending and guaranteeing more and more debt. We are at a point never reached before. More debt is not the solution.
Remember Mark Twain’s saying: “History doesn’t repeat, but it does rhyme.”
Some say the future cannot be predicted — I say the way to predict your future is to create it. It’s not too late to get prepared. Let’s get back to work while being responsible for our actions. Our tax and financial planning and financial diligence services help business owners navigate economic uncertainty with confidence.