Exercising for me consists of hiking the trails in a 40-acre forest near my home. Although, it would be nice to go on ‘real’ wilderness hikes rather than visit the same 40 acres every week, it is fun to see the same forest in different seasons, and the location can’t be beat.
Last weekend when I went hiking, it was between wind storms, and I noticed lots of new branches and trees on the ground. Most of the new trees and branches that were now laying on the ground were previously dead; you could say nature had done some pruning.
Immediately upon noticing all the new dead branches and trees on the ground ready to fertilize the remaining living trees, I thought about the economy and the parallels between it and a forest. If the economy was a forest, a damaging wind may be an economic recession.
It is possible that an economic recession and wind in the forest serve the same purpose. While a windstorm looks destructive at first glance, over the full cycle, the forest will be stronger thanks to the windstorm. Branches and dead trees will fall, and provide fertilizer and more light for the trees that survive. At first glance, a recession appears destructive to the economy, but it provides the catalysts for renewed growth. In a recession, companies go bankrupt, people lose jobs, and an economic reset occurs. Valuable assets are transferred from weaker companies, to the stronger surviving companies, making them even stronger.
Many people have questioned why the U.S. economy isn’t as strong as it should be. Getting back to the forest analogy, I believe the economy needs to be run by the free market, also known as ‘nature’. Instead, Central Banks across the globe have decided that they are smarter than the free market, and are trying to keep the economy growing with the following tactics: Buying assets to artificially suppress interest rates, and keeping interest rates low to raise asset valuations. I have no doubt that the Central Banks have good intentions, but I believe their actions are stifling long term economic growth in exchange for short term stability.
Think of the forest that has gone many years without a windstorm: Even healthy trees have a couple branches that the wind could prune. Those downed limbs would allow more sunlight to shine on the remaining living trees, and those limbs, will eventually provide the fertilizer for future growth. Now imagine not only dead branches, but a dead or weakened tree, that is still clinging to life, but is dying. The windstorm mercilessly destroys the weakened trees for the benefit of the remaining trees.
It could be said that the Central Banks actions have created an economy that is not as strong as it should be, and is vulnerable if ‘nature’ ever takes control.