Continuous expansion is not healthy for any economic system. Over-expansion will cause the needed contraction to be more severe than otherwise needed. The current policy of “bubble” economics has been delaying the inevitable. Further delay could facilitate a collapse just as it did in Rome’s final days. Contraction allows the system to detoxify from the previous expansion period. Unprofitable and unsustainable efforts and entities are removed from the system. Leverage is reduced and equity in investments are increased to prepare for the next opportunity to expand. Just as eight hours of sleep is a period of contraction and recuperation in preparation of the next day, economic contraction performs the same function. Economic health requires a rest period after it has been expanded beyond its normal cycle. Cycles are a part of nature. Electromagnetic waves are measured as cycles, time is measured in cycles, as all life is measured in cycles. Biblical cycles of time are well documented and provide us with an anticipated calendar of events. Jubilee is a time of contraction and all debts are canceled. Land is to be given a year of rest every seventh year, another form of contraction. We know that during that year of rest, weeds grow deeper roots and pull up the minerals depleted by the shallower root system of food crops thus creating a natural fertilizing function. The Sabbath was established as a rest day, another time of contraction. The Sabbath was made for man, man was not made for the Sabbath.
Profit is made from innovation at the time of compression. When the expansion comes, the fruit of the compression is realized and enjoyed. The harvest is substantial. The problem arises when we don’t understand the cycle. Society wants continuous harvest without any additional investment. During the Great Depression, people were put to work by building infrastructure: roads, bridges, national parks, etc. When the economy turned around, Americans enjoyed the fruit of all that labor but those efforts could only last so long before it would take another investment in infrastructure. The U.S. energy infrastructure is in decay. Trillions need to be invested in pipelines, water, roads, bridges, and rail. The days of cheap energy are gone in this current paradigm. Rail is a more efficient method in moving goods and people.
Profit from leverage is temporary. Greater leverage can provide short-term profits but the risk goes up exponentially. The risk/reward ratio becomes unmanageable and puts the organization in peril if some unforeseen event occurs. Sudden loss of access to capital markets causes businesses who are highly leveraged to contract their balance sheet at all costs. They do that by selling assets pennies on the dollars to raise cash so that they can meet their cash requirements. When leverage is taken to an extreme, the slightest change in demand or some event occurring at the wrong time will cause a cascading effect and create an insolvent business. This is the core problem with the derivatives market. By definition, a derivative is a leveraged position. For that matter, insurance is a leveraged event if most of the insured evoke a required distribution at the same time. Life insurance companies work the odds that we all won’t die at the same time.
Lowering your debt is a contraction based plan. Do it now. It will prepare you for the next expansion phase, if and when it happens. Low or no debt encourages restful sleep, reduced stress, and puts you in a position of helping others.