Why recessions are inevitable

As markets continue to wobble and more people discuss the possibility of heading into a recession, let me share a fundamental truth about money:

  • If markets never crashed, they wouldn’t be risky.
  • If they weren’t risky, they would get expensive.
  • When they’re expensive, they crash.

So markets will always crash, because if they didn’t, they would become more susceptible to crashing.

The same is true for recessions

When the economy is stable, people become optimistic.

  • When they get optimistic, they go into debt.
  • When they go into debt, the economy becomes unstable.
  • When it’s unstable, you eventually get a recession.

A lack of recessions plants the seeds of the next recession, which is why we can never get rid of them. In other words, stability is destabilizing —  something economist Hyman Minsky figured out half a century ago.

It’s one of the most useful observations in investing because it explains why volatility is both inevitable and caused by people acting reasonably.

Here’s why this is important

If you view every debt-fueled recession, market crash, and asset bubble as an example of your fellow people acting crazy, you might become cynical, which makes it hard to be a long-term optimist, even when you should be.

If you view them as inevitable, you realize they’re just part of the ride and an occasional reminder that the fasten-your-seat belt sign should never be turned off.

None of this is fun, but virtually all of it is inevitable.

Try to enjoy the ride.

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