Boom and Bust Cycle - Explained
What is the Boom and Bust Cycle?
Written by Jason Gordon
Updated at March 28th, 2023
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What is the Boom And Bust Cycle?
A boom and bust cycle refers to a series of fluctuations in an economy in which there are persistent expansion and contraction of the economy. Boom and bust cycles affect different sectors and industries in an economy, for instance, when it occurs in the business cycle, businesses undergo fluctuations. In a boom cycle, industries and businesses enjoy surplus, high sales, and profit margin and significant business performance which in turn affects the overall economy. The reverse is the case in a bust cycle, this is the period business encounter losses, individuals are also subject to a decline in income and there is an overall shrink on the economy.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Why the Boom And Bust Cycle in Important
Boom and bust cycles occur in different economies at different times, both cycles also last for different periods of time. According to a business report, 28 boom and bust cycles have occurred in the business cycle since 1929. Generally, boom cycles are times when there is a surplus of jobs, economic growth, growth of business and industries and enough money in circulation. Bust, on the other hand, is a period of economic struggle coupled with the scarcity of jobs, losses in investments and economic decline. In boom cycles, obtaining credits is easier and cheaper, the investor also records high returns on their investments. The bust cycle sets in when investors begin to make too much investment which creates a decline in the value of investments.
Additional Factors in Boom and Bust Cycles
While boom cycles are related to periods of economic growth, employment and presence of wealth in an economy, bust cycles are associated with periods of recession or depression in an economy. There are certain factors that lead to boom and bust cycles in an economy, for instance, malinvestment is a major cause of bust periods, this happens when investments are very cheap and there is too much supply of capital in an economy, thereby creating an excess investment. There are certain monetary policies that the government uses to restore confidence in an economy and lift the economy out of depression. Such monetary policies are created by the Federal Reserves or Central Banks.
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