Economic cycles are periods in which irregular movements in the economy are brought on by spending habits of ordinary citizens, government interventions such as raising and lowering interest rates, tax breaks and rebates, and forces of nature like hurricanes, earthquakes, and other natural and man made phenomenon.
The economy can be affected by trends in the marketplace that may bring on stagnation, decline, and growth. These fluctuations are measured using the real gross domestic product (GDP) and despite being named economic cycles, they don't follow a mechanical or a predictable pattern.
Sometimes during the course of an economic cycle, which can change courses at any given time, the economy may grow at a high rate or cool down just as fast, in a short period. How fast the economy grows or shrinks depend largely on the forces that have the most affect at the time.
There may be times in which people get complacent with their investments, especially during times of long and sustained growth. People tend to get lulled into a false sense of security with their stock portfolios, 401k's, real estate sales and purchases, and other investment vehicles.
The economy goes through periods in which it grows rapidly and people make a lot of money, their investments appear safe, secure, and will never stop rising, and then all of a sudden, everything goes sour.
If you are old enough to have gone through other business cycles that rose and fell, when stock prices soared high in a bull market, big equity buildups were realized in the housing and related real estate industries, and businesses earned huge profits, you know that the boom times are eventually going slow down, or come to a sudden, screeching, and painful end in a bear market.
Many people become frightened and nervous. There may be a run on bank accounts and a sell off of stocks might occur. Banks may tighten credit, real estate prices may take a plummet, and some companies may have to begin laying off or going bankrupt.
But since this is a cycle, eventually, the real estate market will start rising again, businesses will start to prosper, stocks prices and 401k plans will start to make money, banks will loosen credit requirements and the economy will slowing start to grow again.
This is called stagnation, recession, stagnation, and inflation. It's all a part of the cycle. Stock prices are going to rise and fall, so is the real estate market, and so is the rate of bank and business failures and their resurgences.
Can the world go into an economic depression? Yes, it can. If governments around the world don't work together to stabilize the worldwide economy before it becomes too late, an economic depression could very well happen. Governments have to act in a wise and concerted effort to head off any such event, or everyone will suffer the consequences.
Whether your money is in a business venture, real estate investment, stocks and bonds, 401(k), IRA, mutual funds, a savings account in a bank or credit union, or any other investment, being informed is the key to making sure that your wealth is maintained in a safe and secure marketplace.