Bears, Bulls and the Strategic Necessity of the Business Cycle

By James H. Nolt, Dean of the NYIT-NUPT International College, Nanjing, China and Senior Fellow, World Policy Institute, New York

Business Cycle Very poorly understood among all schools of

economics and business theory ● Neoclassical microeconomic theory

● Marxian and Neo-Ricardian theories Business Cycle could be tamed by

government regulation. ● Business Cycles has recurred with some regularity

● Even within highly-regulated economics (Japan’s)

Business Cycle occurs because of leveraged finance’s

The irresistible temptation

Competitive power

Vulnerability of leveraged finance

Corporatism

Market power and strategic competition

●Bulls: a leveraged growth strategy Bulls flourish in easy money and credit at the

expense of more established bears

●Bears: slower-growing, less indebted

Often large established market leaders

Government regulation can’t prevent business cycle

E.g. government regulation of derivatives

Temptation of quick wealth Insider information Problem for effective regulation

and risk management

Why are economists so blind about the business cycle?

Use Models based on mathematical elegance rather than using realism

The natural tendencies toward market equilibrium are overstated by most economists

Bulls and bears are not just subjective opinions, but represent objective investment positions

Strategic players ● Bears: expect and promote bust

● Bulls: expect and promote boom Non-strategic players ● Hedge their bets

● Neutral between boom or bust

Bulls and bears can be in any line of business

Scale of organization ● Individual firms ● Informal pools of investors ● Formal consortia or cartels Type of investor ● Financial ● Non-Financial

Rival Interests of Bulls Versus Bears

Most competition is asymmetric (different strategies and capabilities)

Simplest dichotomy: Bulls versus Bears

Incomelow high

Growth (debt)

low Dog Cow

high Bull Star

Why cows would be bears

Strategic Competition ●Easy credit and continuous growth

fuels the fast growth of hungry bulls eager to steal market share from the fat established cows

●How can cows protect themselves?

Inexpensive credit is the resource that makes bulls such fearsome competitors

Bear confront bulls: tightening or restricting credit

Bullish debtor loss, bullish creditors are weakened or destroyed

Revenge of bears: competitive impact of restricting credit The longer and more unrestrained the

growth, the more exuberant and wildly speculative the most bullish investor become

The more risky leveraged investments accumulate in any economy, the more vulnerable those bulls become to a reversal of the business cycle when the bears counterattack

An example: Japan 1927-1932

Strategic competition between bears and bulls

●Intense financial, business and political crisis in Japan from 1927-1932

“Big Four” conglomerates (zaibatsu)

Mitsui Mitsubishi Sumitomo Yasuda (now Fuji)● Zaibatsu also linked to powerful foreign banks

and business firms and strong participants in foreign trade and investment

Japan’s new zaibatsu during World WarⅠ

New zaibatsu enjoyed the amazing growth of Japanese industrial output

These new conglomerates grew with massive infusions of cheap capital

They depended on loans from external financial institutions, mostly government-controlled banks

Japan after World WarⅠ Delays its restoration of gold

convertibility of the yen Wartime inflation Shinko zaibatsu resisted the necessary

deflation and remained bulls The old established Big Four zaibatsu

were bears and insisted Japan return to the gold standard yen

Bears launched a devastating two-pronged attack on bulls

Government banks restrict loans Big Four banks curtail credit during

1927 for the new zaibatsu overnight The Big Four gained control of

surviving companies of bankrupted adversaries

During the next few years, Japan followed a tight credit policy

The bitter revenge of the bulls With the onset of the Great Depression, bears

deflationary policies met growing resistance. Bulls sought revenge by funding underground

terrorist groups, military secret societies By 1932,the military took Japan off the gold

standard, devalued the yen and began pumping government credit bank into the new zaibatsu to reinvigorate them once again

Bulls and Bears Today and the Growing Role of Butterflies

More players who act alternatively as bears or bulls are called butterflies

The U.S. and the world are entering difficult economic circumstance

Many large companies have dangerously unhedged positions in various derivatives markets

Thank you for your attention!

Question welcome