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  • 21Sep

    Is the economic situation predictable?

    When the New York Stock Exchange crashed in October 1927, many people lost everything they had. From the other point of view, many speculators earned a lot of money, so they became rich as they had never been before. Actually, the system at that time was overloaded with extremely low interest rates. That encouraged many people to invest in the stock market. Economists of that time believed in Say’s law, which assumed that the aggregate supply creates its own aggregate demand. Thus, people thought that every product had to find its consumer on the market in very short time. From a practical standpoint, it meant that investing on the stock market wouldn’t have any risk and was bound to bring profits. Some people predicted that the bubble was growing, and they knew when to get out of the market. In other words, they predicted the economic situation, and they were still winners, although the economy was in chaos.

    Only changes are inevitable

    Although the economic situation is predictable, many people are not aware of changes in economy. Many of them don’t even know how the economy functions, so they are always unprepared for new challenges. The only constant thing that never changes in this turbulent world is the fact that everything is susceptible to change. If we are able to predict changes, then we’ll be able to prepare for them in advance. Regardless of whether the times are good or bad, we’ll always be on the side of the winners.

    Maybe the universal formula to predict the economic situation and to take benefits from it is: “Be in the right time at the right place”.

    Lessons from the history

    Trend goes up

    Maybe the universal formula to predict the economic situation and to take benefits from it sounds: “Be in the right time at the right place”

    Let’s concentrate on some other very interesting phenomenon – a great inflation in Western Europe that lasted for 150 years, from the second half of XV-th century to the first half of XVII-th century. It is also known as the price revolution. Nobody knew what caused the prices to constantly go up. Many people from all of Europe were traveling to a New World , looking for a better life there. Many of them were organizing expeditions and were searching for gold and silver. Quite often they were returning, bringing huge amounts of goods with them. That caused prices to go up and it looks like the only people that gained benefits from that were those brave ones that took the risk of the adventure. The others, which were a great majority, were losing.

    There is another interesting story. One of the greatest minds ever, Thomas Edison (genius without a doubt), had no knowledge of how the economy works. He wasn’t the only man of that time working on the electric bulbs, but his invention was the most practical and popular. However, Edison was not pleased and he even once said: “My greatest invention didn’t bring me any profit, but only trials in courts for the last forty years.” When it came to companies fusions in 1892, his capital was only 5 percent share in General Electric Company. Not that much, but if he kept his block of shares, his ancestors would have the package worth 30 billion dollars today. Unfortunately, instead of waiting, Edison sold it all, so it looks like other people had more fruits from his labor than he did.

    As we can see, the economic situation can be very unpredictable, especially for those who are not familiar with the principles of the economy. Let’s take investment funds as the last example. They usually invest your money on a stock market so when the stock goes up they have a great result. On the other hand, they are also very prone to changes in trends and any crisis can harm their results to a great extent. But after they had good results for some time (much better than deposits in banks) when the stock was going up, they usually advertise these great results and make even more people invest their money there. That is the time when the red light should light up for you. A word of wisdom might be: if even your neighbor tells you to invest in such funds, it is probably the best time to leave them immediately :).

    What does it take to predict the economic situation then? Some people would say that the most important thing is to follow the information about new trends and to follow those trends. Others would claim that strong academic education broadens our horizons and makes us more skilled and prepared for the challenges. To some extent, both claims are correct. If we are supplied with good information, we are aware of what is happening around us, and we are able to estimate our environment, the chances to be unprepared for some unpleasant surprise are smaller. The level of knowledge is equally important. Some people can be supplied with good information, but are still too unaware and confused, simply because, they don’t have enough knowledge to understand the situation.

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