Wealth is really a subjective reflection of how we feel about the current state of things.
Finance unimpeded by dealing with physical objects tend to respond faster to news and sentiment than physical operations which are tied to physical infrastructure
Credit which the modern economy is built upon trust. In times of uncertainty, trust evaporates credit becomes unavailable. Credit crunch ensues.
Austrian economics versus Keynesian economics
Austrians economists, subscribe fully to the Adam’s invisible hand theory, hold the view the market is always rational, crashes are a necessary catharsis and central banks should not intervene to prevent the crash in this process of creative destruction.
Keynesian economists believe the markets are rational most of the time but malfunctions somethings. In these exceptional times it is necessary to step in to fix the malfunction so as to avert unnecessary hardship. Central banks are the lenders of last resort.
Keynesian economics on handling market malfunction
All market malfunction usually stems from an economic shock
the IT revolution shock lead to heavy and ultimately unsound investment in software technology. The period of rapidly advancing DotComs share prices, the underlying manic optimism, the resultant excess infrastructure capacity and excessive use of leverage marks the initial phase of this malfunction
at the height of the euphoria, market participants start to come to their senses, share prices start softening as demand fails to catch up with excess capacity.
fear sets in when market participants start exiting the market. Panic ensues, rapidly declining share prices and triggered margin calls compounds into a vicious cycle.
The key challenge for central banks in such turbulent times is to act with resolve to provide dollops upon dollops of credit all the way to infinity if necessary to tame the turbulence and to restore proper market functions.
Japan’s 20 years of stagflation and slow recovery post 2008 are outcomes of mild central bank response to stimulate the economy due to concerns over inflation
The real economy
aggregate demand – consumer side
aggregate supply – production side
availability of credit – money supply in the market
Sources of low inflation rate – lack of demand or excess production capacity
East Asian behavior which tends towards saving a larger portion of their earnings compared to the west
Aging population world wide which results in lesser consumption versus a younger population
Automation which allows for higher throughput volume given the same amount of resources.
