The Consequences of an Economic Upswing

When economies boom, people splurge - an example

When the economy is in upswing, following things happen:

1. Businessmen will earn more profits.
2. As a result businessmen feel more generous and reward their management, staff and workers - who, in turn have more cash in their pockets.
3. Having surplus cash people start spending more - on essentials, luxuries, entertainment, travel, etc.
4. Such spending a large section of people will create more demand for goods and services - will increase the income of many more people.
5. Price of goods, real estate start going-up. None will bother about the slight price-rise as people are relatively comfortable.
6. Companies profits will increase - share prices in the market go up - PE and P2BV ratios will go up.
7. Slowly situations develop for an economic as well as stock market crash.

This is an economic cycle that keeps repeating itself both locally and globally. The length of an economic cycle like this last anything between 7–15 years.

What I said above is very well known - there is nothing great about it.

Knowing this what are we going to do?

This is a more important question!

Do the following:

1. Prepare yourself to ride the boom.
2. Make good money.
3. Don’t Splurge!
4. Be aware that good times do not last for ever.
5. Invest wisely but in small quantities (for shares will be expensive and will be trading at crazy valuations), preserve cash for the eventual crash, and when that happen, unleash the cash to amass all the great companies shares that you wanted to buy but could not because they were expensive.

Conclusion:

The consequences of an economic upswing are more money in the pockets of people, who tend to splurge. Wisdom is in conserving cash and investing wisely for the rainy day and for progress towards financial freedom.

How can Investors Capture the Benefits of the Economic Prosperity of a Nation?

None other than businesses and corporations invariably capture the benefits of the economic prosperity of a nation.

Why?

Because economic growth comes from more incomes in the hands of population, who in-turn armed with more income, demand more goods and services, which businesses come forward to produce and render.

If an investor wants to capture this growth, what shall he do?

Naturally, he must invest in the shares and stocks of these companies!

Will property and gold capture the full economic growth of a country?

Yes, to some extent indirectly, but corporations directly capture maximum growth, directly.

In conclusion, the right way to derive investment benefits out of the economic prosperity of a country, especially a great and stable nation like India, is through prudent long term investments directly in the shares of good listed companies after learning investing or indirectly through ‘Index Mutual funds’ or ‘Exchange Traded Funds (ETFs)’.

What is Negative Interest Rate?

Full Question: What is negative interest rate? Is it Helping Japan?

Interest rate is a very important economic tool in the hands of central banks. A high interest rate discourages business from borrowing and thus adds as brakes on the economy. Conversely low interest rates are supposed to spur borrowing (presumed for fresh investment) and consequently boost the economy and growth.

Interest rate is not a tool in isolation. The governments have other tools. Creating more liquidity in the system to encourage businesses to borrow and invest. Printing money, given very technical sounding name to camouflage the dirty act, ‘Quantitative Easing’ has been used for a few years in a row by the US and now being repeated by Europe and Japan, is an extreme measure of the liquidity tool.

Cutting down tax rates is a fiscal measure to promote growth.

All these and other techniques have been used governments to spur growth some times very effectively and some times with poor results. Tools have limitations. They are not panacea.

Coming back to your question “Is it helping Japan?”, it seems it is not helping much. Japan and many mature economies have been languishing for the last few years. In fact, in my opinion, the global economy has actually not recovered properly since the global economic collapse post Lehman Brothers incident in 2008. All the stimulus packages have just managed to prop up otherwise slump economies.

We must appreciate that various monetary and fiscal tools are temporary jigs that can address a sudden temporary glitch in an otherwise sound economy; they can not address deep fundamental issues like saturated economies.

US, Europe, Japan and China have reached saturation after rapid economic progress. These countries can no more grow at a rapid pace internally. For a few more decades they managed to grow by helping other developing and under developed countries. While there is tremendous potential to grow on the back of developing and underdeveloped countries there are severe limitations too! Many of these countries do not have the wherewithal to pay for the development. Many other do not have required political stability. All these factors limit the possibility of internal growth based on external activity.

In conclusion, in my opinion, in the face of many complex global challenges, low interest rates have not been helping Japan. I doubt wether rates helped other countries either. The US is showing signs of growth but we cannot attribute this to low interest rates or other measures alone. Perhaps after a prolonged recession she has returned to natural growth?

Please Note: This is almost a reproduction of the question I had answered on the website ‘Quora’, which I thought could be useful to the visitors to this blog site also.

What Is Inflation?

Inflation could be a subject of a lifetime understanding for an economist. Thankfully, I am not one hopefully you are not one too, so let me explain in simple words.

Inflation means a rise in price level. For examole a kilogram of sugar was $0.50 last year and now it is let us say is $0.55. Let us also assume that prices of all other commodities remained unchanged. This means that not only the price of sugar has gone up by 10%, the inflation in the economy was 10%.

We can also say that the value of the currency, the $ in this case, has gone down by 10%, for while $0.50 could by 1 kg of sugar last year, it can buy only.0.91 kg now.

We have understood what is inflation, now let's understand whether it is good or not.

A low level of inflation is belueved to be good for the country and its economy. Why? Because prices rise when demand is high, which in turn means that incomes of people has increased making them demand more. However if inflation is very high it is not good for the people as theit currency is depreciating rapidly and becoming worthless.

No or negative inflammation suggests lack of growth, which means low income, less number of jobs etc., and hence not good for the country.

Therefore all governments and central banks constantly struggle for maintaining inflation at low yet positive levels of one to five percent, thereby ensuring a healthy balance between growth and currency stability.