Identification of a boom and bust

Anything prosperous going on in an economy for a longer period of time is a boom. If any economy is growing at an steady rate, it is a boom. One will obviously say that, we are growing because of our hardwork of people of our country and brains of some of our top leaders. But according to rule 2 of "The Basics", you have to wait till bust to check how much brain they have. Don't just conclude on the brain now.

What feeds the boom : The confidence among investors in the boom, feeds the boom. Obviously thing about investor confidence is, it tumbles with stock markets and goes to highly negative values when stock market has fallen more than they initially anticipated. Here, there is always a chances that slight more fall and the whole system collapses. This simple thing is called "Systematic Risk to the system".

Then comes the role of government. Some governments are intelligent enough to realize that they live in a boom, and if we do not interfere, it can bust. So whenever there is mass disbelief in the system, it imparts belief. Often this belief is imparted by spending money or cutting interest rate, market as a whole is not stable when it enters the negative period, because of existence of the downward spiral or the domino effect.

To read more on how severe these downward spiral have been go through these links.
1. Great Depression
2. Asian Financial Crisis
3. Japan's Lost Decade

These recessions were because of reasons that everybody believed in free markets, they thought government should not interfere in matching Supply and Demand. They thought markets will reach equilibrium.
During Great Depression, the German currency Mark lost so much value that it would take 2.4 trillion Marks to get a US $, which lead to terrible food crisis in Germany when their currency became worthless. You would need a bucket full of Marks, to go buy a loaf of bread. Since, you cannot afford the bucket anyway, so that money and the argument are even more useless.

Markets reached towards better conditions for human beings, but only because of the World War when people came together, economic activities started and then the boom begins again for another bust.
It should also be learned that stock markets should not be blamed for a bust. All busts start with an stock market crash, because it is one of the earliest indicators of non-healthy economy. But stock markets is just a indicator, the reasons for the busts are far inside the human nature and existence of a feedback loop.
Obviously, now economist know a lot about such crisis, but i will give you reasons why they are still inevitable. Now, such crisis will not be fast in time and intense with extremities, but they are not inevitable.

I will write about this feedback loop of prosperity and poverty in my next post.