Do financial crises exhibit cyclical patterns? If so, what is the typical duration of such a cycle?

Hey friend, that's a great question, and one many people are concerned about. I'll try to explain my thoughts in plain language.

Are Financial Crises Cyclical?

Generally speaking, yes, but it's not as punctual as an alarm clock.

You can imagine the economy and financial markets as living entities, with their own "breathing" and "emotions." These emotional fluctuations are what we call cycles. It's not a precise scientific formula, but rather a recurring pattern of behavior.

Why Do Cycles Occur?

At its core, this phenomenon is largely related to human nature and debt (leverage).

We can simplify a cycle into four phases, much like the four seasons:

1. Spring (Recovery Phase)

   • The previous crisis has just passed, leaving things in ruins. But the worst is over.
   • Governments and central banks will vigorously "inject liquidity" (e.g., by cutting interest rates), making money abundant and borrowing cheaper in the market.
   • People are still shaken and cautious, hesitant to borrow for investment. But gradually, some bolder individuals start to spot opportunities, and the economy slowly begins to recover.

2. Summer (Boom Phase)

   • The economy is getting better and better; everyone has a job, and wages are rising.
   • Confidence is soaring, and people feel "this time is different." Individuals start boldly borrowing for consumption (buying homes, cars), and businesses borrow to expand (building factories, hiring).
   • Banks are also eager to lend, as it seems everyone can repay. Housing prices and stock prices soar. At this point, the market is filled with optimism, even a bit of frenzy.

3. Autumn (Recession / Turning Point)

   • The party reaches its peak, and the bubble inflates to its largest. Asset prices (like housing) become ridiculously high, unaffordable for ordinary people.
   • At this point, central banks, worried about an overheating economy, start to "tighten monetary policy" (e.g., by raising interest rates), making borrowing more expensive.
   • A certain event acts as a trigger (e.g., a major company collapses), and people suddenly wake up, realizing they've borrowed too much and asset prices are unrealistically high.
   • Panic begins to spread, and people rush to sell off assets (stocks, houses) to repay debts.

4. Winter (Crisis Phase)

   • Sellers far outnumber buyers, leading to a collapse in asset prices, and the bubble bursts.
   • Banks realize many loans won't be repaid and also panic, becoming unwilling to lend further, even demanding repayments.
   • Businesses can't borrow money, leading to layoffs and bankruptcies. People lose their jobs and have even less money to spend. The entire economy seems frozen – this is a financial crisis.
   • Then, after enduring the coldest winter, the next spring slowly arrives.

You see, the entire process is like a "confidence-debt" cycle. From caution to optimism, then to frenzy, and finally to panic and despair, it repeats itself.

How Long Do Cycles Last?

There's no standard answer to this. Historians and economists have been debating it for centuries.

However, we can observe some general patterns from history:

• Medium-term cycles (around 7-11 years): This is often called the "Juglar cycle," primarily related to corporate equipment investment and inventory changes. Many economic fluctuations we experience, such as minor recessions, are somewhat linked to this cycle.
• Long-term cycles (around 50-60 years): This is known as the "Kondratiev wave," associated with major technological revolutions (e.g., steam engine, railways, electricity, internet). During the upswing of a long wave, technological innovation brings great prosperity; towards its end, as technological dividends diminish, profound, systemic crises are more likely to erupt.
• Short-term cycles (around 3-4 years): Most closely related to corporate inventory changes, known as the "Kitchin cycle."

What we commonly refer to as financial crises are often the result of several cycles overlapping and resonating.

For example:

• The 2008 Global Financial Crisis: Approximately 8 years after the dot-com bubble burst in 2000.
• The 2000 Dot-com Bubble: Approximately 10 years after the Japanese real estate bubble burst in the early 1990s.
• The 1997 Asian Financial Crisis

You'll notice that a significant crisis tends to occur roughly every 10 years or so. However, super-crises like the 1929 Great Depression or the 2008 global financial tsunami have longer intervals between them.

To summarize:

• Financial crises are cyclical, driven by human greed and fear, as well as the expansion and contraction of debt.
• This cycle doesn't have a precise duration, but historically, the market tends to face significant trouble roughly every 7-10 years.
• Ordinary people cannot precisely predict when the next crisis will hit, but understanding this pattern can help us stay clear-headed when the market is in a frenzy, avoid excessive panic when a crisis arrives, and even spot opportunities.

Hope this explanation helps you!