Tuesday, January 22, 2008

Self Fulfilling Prophecy

The economy that is. Excuse me while I get all economic-y.

Economics is a bunch of theories based historical events to predict the future. Well, with recessions, it too is a theory but all it takes is for one person to allude to a recession for the markets to panic as they did yesterday and today. So what happens....a recession.

I mean most economists are smart people and many know that it is based on history but damn it, all it takes is for rational thinking to take over. So there is no need for a recession panic to start. The markets should have gone about as normal thus reducing the impact of a possible recession. I am not saying that a recession won't happen but the severity of it can be greatly reduced if people buy and sell as normal.

So now governments and markets are freaking out. So now the bale out begins and we'll see what happens and if it stabilizes.

Just historically, consumers are going to save more of their money and not spend on big ticket items. The money that they save will be at a lower percentage rate earning less than if the Fed did not cut the interest. Businesses will slow down plans for growth especially if their products or services are not seen as extremely necessary. Thus leading to more unemployment and more strain on the average person.

Adding to this is the drop of the value of the US dollar. People are freaking out about it but what happens it that it makes American goods cheaper in the world market. So this encourages foreigners to buy American thus boosting the goods exported and leads to a stronger dollar. We need people to buy and if our goods and services are cheaper then we should encourage it.

Looking globally, China is our biggest challenge because they used a fixed exchange rate so currency will be artificially cheaper than even our dollar. If they were to allow their currency to float then that would probably lead to a situation where their currency would be more expensive than it is now, making their exports more expensive and allow more of a world market where different countries can drive up or down prices.

Anyway, off my soapbox now.

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