Monday, September 22, 2008

Of recessions

Well, here we are - slam dunk in the middle of an economic slowdown.

Economists might quibble about whether, technically, this is recession or not - but it sure as heck isn't business as usual.

It's a bit of a vortex. You see demand slowing down, so you cut production and layoff staff, further eroding the value of your products, creating more unemployed people, which leads to even lower demand and down you go again.

This is of course Econ-101 and pretty basic stuff.

But still, what strikes one is how much of this is just driven by human nature and human emotions like fear, uncertainty, herd mentality, and greed.

The productive capacity of the world as a whole has certainly not gone down overnight. So we have the same goods and services available today as we had a month ago. Neither can demand surge so much in a month as to cause shortages. Yes, some banks have lost a lot of money, the money belonged to someone somewhere, which means a lot of people are going to lose money, but as a fraction of the entire human population they cannot be a large percentage.

For the rest of us, it is the negative sentiment that gets us in trouble. We fear that things will get worse, scramble to save, or to reallocate investments and savings and collectively end up making things even more uncertain.

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