VIRTUOUS CYCLES AND VICIOUS CYCLES-WARNING: THIS IS NOT A POST ABOUT MOTORCYCLES. BUT IF IT WERE, THE AUTHOR WOULD ELECT TO RIDE THE VICIOUS CYCLE.

One of the Author’s favorite sites is “Calculated Risk”. It is an economics site that focuses on mortgage lending and finance. An article from September 18th discusses two types of cycles, virtuous and vicious. Below is a high-falutin’ economic and academic description. But in basic terms these cycles are series of events that have good or bad outcomes. The mechanisms are usually self-reinforcing, so they generally continue and amplify until something big derails them.

From Wikipedia:

In many parts of economics there is an assumption that a complex system of determinants will tend to lead to a state of equilibrium. When this tendency is absent terms like virtuous circle and vicious circle (or virtuous cycle and vicious cycle) to describe these unstable patterns of events are used. Both circles are complexes of events with no tendency towards equilibrium (at least in the short run). Both systems of events have feedback loops in which each iteration of the cycle reinforces the first (positive feedback). The difference between the two is that a virtuous cycle has favorable results and a vicious cycle has deleterious results. These cycles will continue in the direction of their momentum until an exogenous factor intervenes and stops the cycle. The prefix “hyper” is sometimes used to describe these cycles. The most well known vicious circle is hyperinflation.

Calculated Risk describes these cycles relative to interest rates and the housing price cycles. Basically, the “Virtuous Housing Cycle” is over. We may have started into a “Vicious Housing Cycle”.

Below are the cycles with text descriptions and graphics, as modeled by Calculated Risk.

FUNNY THINGS ABOUT CYCLES. THE FASTER THEY GO, THE MORE DIFFICULT THEY ARE TO KNOCK OFF THEIR PATH

Several physical forces are at work while a motorcycle is rolling. But it is the gyroscopic force that keeps the cycle upright as it moves. And the faster a cycle goes, the stronger the gyroscopic force that keeps the bikes upright.

Physical forces do not often have perfect economic analogues. But comparisons and metaphors are helpful. And if the economy moves into the “Vicious Cycle”, it might take a mighty poke to knock it out of the cycle.

NOT ALL CYCLES ARE VIRTUOUS, EVEN IN THE DESERT OF THE REAL!