E The Business Cycle -- The Implicate Order of the Economy

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APPENDIX E

The Business Cycle --
The Implicate Order of the Economy

This Appendix addresses a very difficult question: what determines the time-evolution pattern of bank-money (specifically, the timing and scale of the overinvestments in commercial real estate)? Since the space-time pattern of commercial real estate loans does propagate through the economy, with potentially devastating consequences (see Appendixes C, D, F, and H), it is most important to understand how and from whence this pattern originates. The following Charts display the ordered structural links in the money chain:

The average family income after tax, in constant dollars.
The year-over-year change in the money stock:

M2-M1,

M2, and

M3.

The interest rates and the change in consumer prices:

the lending rate (prime),
the T-Bill rate, and
the consumer inflation rate.

The GDP per capita, in constant dollars.

The Charts demonstrate that the changes in the time-distribution and time-structure of money enfold the implicate order¹ of the national economic enterprise. One unavoidable conclusion is this: the people who control this implicate order control the economy.

Chart E-1
Chart E-2
Chart E-3
Chart E-4
Chart E-5

¹ For the concepts of enfoldment and implicate order, see David Bohm, Wholeness and the Implicate Order, 1980. For a more technical presentation, see David Bohm and Basil J. Hiley, The Undivided Universe, 1993, at 6, 10, and 176-180. For the concepts grounding in metaphysics, see Martin Heidegger, Nietzsche, translated by David Farrell Krell, Vol. II: The Eternal Recurrence of the Same, at 116-117 (in The Character of "Proof" for the Doctrine of Return).

The Business Cycle1
The Link Between the Family Income After Tax and Commercial Real Estate Loans

Chart E-1

Chart E-1 What Drove Banks to Increase Commercial Real Estate Loans? The Link Between the Average Family Income After Tax and Royal Bank Commercial Real Estate Loans

Increases in real average family income after tax (arrow a) preceded increases in commercial real estate loans (arrow b). Banks continued to channel high loan percentages into real estate, well after the real family income after tax had started falling. The mismatch signifies overinvestments. These were followed by a recession (arrow d), price meltdowns, increases in bankruptcies, etc.

Sources: Royal Bank annual reports (loans by industry, as at September 30); and Statistics Canada, Income After Tax, Distributions by Size in Canada 1993, Catalogue 13-210, June 1995 (average family income after tax, in constant 1993 dollars).

The Business Cycle2
The Link Between Changes in the Money Stock (M2-M1)
and Commercial Real Estate Loans

Chart E-2

Chart E-2 What Drove Banks to Increase Commercial Real Estate Loans? The Link Between Changes in the Money Stock (M2-M1) and Royal Bank Commercial Real Estate Loans

The money stock (M2-M1) represents very liquid assets. Increases in the year-over-year change in (M2-M1) (arrow a) preceded increases in commercial real estate loans (arrow b). Overinvestments occurred when financial institutions continued to channel high loan percentages into commercial real estate, well after the change in money stock (M2-M1) had stopped growing. Money stock data in millions of dollars.

Sources: Royal Bank annual reports (loans by industry, as at September 30); and Statistics Canada, Canadian Economic Observer, Historical Statistical Supplement, 1994/95, Catalogue 11-210, June 1995 (Bank of Canada: monetary aggregates -- M1, M2, and M3).

The Business Cycle3
The Link Between Changes in the Money Stock and Commercial Real Estate Loans

Chart E-3

Chart E-3 What Drove Banks to Increase Commercial Real Estate Loans? The Link Between Changes in the Money Stock and Royal Bank Commercial Real Estate Loans

Increases in year-over-year changes in the money stock (M2-M1, M2, and M3) (arrow a) were followed by increases in commercial real estate loans (arrow b). Overinvestments occurred when financial institutions continued to channel high loan percentages into commercial real estate, well after the changes in money stock had started falling. A recession followed (arrow c). Money stock data in millions of dollars.

The Business Cycle4
The Link Between the Lending Rate and Commercial Real Estate Loans

Chart E-4

Chart E-4 What Drove Banks to Increase Commercial Real Estate Loans? The Link Between the Lending Rate (Prime) and Royal Bank Commercial Real Estate Loans

Increases in real average family income after tax and in the money stock, combined with the opportunity to earn higher interest incomes from inflated lending rates (arrow c' ), drove banks to channel proportionally more loans into highly collateralized commercial real estate.

Sources: Royal Bank annual reports (loans by industry, as at September 30); Statistics Canada, Canadian Economic Observer, Historical Statistical Supplement, 1994/95, Catalogue 11-210, June 1995 (CPI deflator); and International Monetary Fund, International Financial Statistics Yearbook, 1993, and International Financial Statistics, July 1995 (Canadian treasury bill rate 60c and lending rate 60p).

The Business Cycle5
The Link Between the Gross Domestic Product and Commercial Real Estate Loans

Chart E-5

Chart E-5 What Drove Banks to Decrease Commercial Real Estate Loans? The Link Between the Gross Domestic Product and Royal Bank Commercial Real Estate Loans

Increases in GDP per capita (arrow a) were followed by increases in commercial real estate loans (arrow b). The economic expansion was followed by speculative overinvestments; and these led to the decline in the GDP -- or the recession (arrow c). The recession forced a contraction in commercial real estate loans (arrow e).