As every investor out there knows, the modern economy can be quite volatile. In fact, it is simply taken for granted that every period of growth is going to be followed by a period of economic stagnation or even contraction. This alternation is known as the boom/bust cycle, and it has occurred twelve times in the United States since the end of World War 2, and nearly every economist out there agrees that it will happen again sooner or later.
Why does the boom/bust cycle occur? The national and world economies are influenced by an enormous variety of factors that are too complex to cover in a short article (or even a long book!) but two of the most important factors are the respective actions of the federal government, and the central banking system.
Both the government and the central banking system attempt to artificially manipulate the economy into growth by making investing easier and more tempting. The government does this by subsidizing investments such as mortgages, technology, and farming expenses. And the central banks do this by setting interest rates lower than the market would naturally set them.
Whether this economic manipulation does more good than harm is a question that remains up for debate, but virtually all economists out there agree than it can do some harm at times by causing what it known as “overinvestment.”
One common example of overinvestment occurs in the housing market. Many times, (i.e. in the early to mid 2000’s) an economic boom caused by low interest rates will result in an excess of new, expensive homes being built. Sooner or later, low interest rates will no longer mask the reality that there simply isn’t enough demand for that real estate. At that point, people will begin selling off property as quickly as possible to salvage their investments, which will cause the prices in that flooded market to drop even faster. It should be clear how this can lead to an economic downturn.
Bust cycles are usually accompanied by high inflation, which is why investing in a more stable liquid asset is a good idea. To learn more about gold (and how it can protect your wealth during the next inevitable economic bust) visit Red Rock Secured online today.
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