I listen to a lot of talk radio and am a fan of economics. Kinda recently former president Clinton was quoted as saying something along the lines of "we need a slow down in the economy". Now, he said it in the context of "to stop global warming", but, when I heard this, I immediately thought
"Give me a break! A slowdown...ANY slowdown...means my investments are going to start falling!"</p>
But stick with me for a moment here and let's think about why an economic slowdown...to recover the economy, might not be so terrible. The following excerpt comes from the book "Against the Gods. The Remarkable Story of Risk". Read it carefully and understand what it's saying, because it seems to explain the point he was getting at. Note that I've slightly modified the original style of the paragraph to make it easier to wrap your head around; bullets, bolding, italicizing, whatever, is all my doing.</p>
Alan Blinder's payoff matrix</p>
Alan Blinder, a long-time member of the Princeton economics faculty, co-author of a popular economics textbook, and Vice Chairman of the Federal Reserve Board from 1994 to 1996, has provided an interesting example of game theory. The example appeared in a paper published in 1982. The subject was whether coordination is possible, or even desirable, between</p>
- monetary policy, which involves the control of short-term interest rates and the supply or money</li>
- fiscal policy, which involves the balance between federal government spending and tax revenue</li>
The players in this game are,
- the monetary authorities of the Federal Reserve System</li>
- the politicians who determine the mix between government psending and tax revenues</li>
The Federal Reserve authorities perceive control of inflation as their primary responsibility</strong>, which makes them favor economic contraction over economic expansion. They serve long terms - fourteen years for members of the Board, and until retirement age for presidents of the Federal Reserve Banks - so they can act with a good deal of independence from political pressures.
The politicians, on the other hand, have to run regularly for election, which leads them to favor economic expansion over economic contraction.
The object of the game is for one player to force the other to make the unpleasant decisions.</p>
The Fed would prefer to have tax revenues exceed spending rather than to have the government suffer a budget deficit. A budget surplus would tend to hold inflation in check, there by protecting the members of the Fed from being seen as the bad guys.
The politicians, who worry about being elected, would prefer the Fed to keep interest rates low and the money supply ample. That policy would stimulate business activity and employment and would relieve Congress and the President of the need to incur a budget deficit.
Neither side wants to do what the other side wants to do.</p>
And there is your explanation! So, then a couple questions.</p>
- With Bernanke lowering interest rates, and Congress passing an "economic stimulus package" who was the winner in the game?</li>
- Is the value of the dollar low due to our "great" economy? Think about the value of a dollar in regard to inflation and fill in the blank. "It takes __________ dollars to buy the same number of products if inflation goes up"</li>
And another thing that I can't help but think back to in the book is the idea of "regressing to the mean". The markets at 14k was pretty stellar, but the whole concept of regression to the mean suggests that that growth couldn't possibly sustain itself.
So don't feel depressed about the markets; it's just how things work. And another thing. If the economy _is_ going downhill, think about what a great buying opportunity you have in the market. I'm not suggesting go out and put all your money on a couple of stocks, but just continue with normal investing; $100 - $200 into your stock options every month.
Ride the wave down and when we hit the bottom and recover, you'll have those stocks sitting there waiting to earn you some scratch.
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