Globonomics!

Consulting|Technology|International business

Reasons for me to dig deeper into the economic fundamentals of the world!

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Let me give a brief explanation as to why I chose such a vast and a diverse topic. Is this out of academic interest or is there more to it?

I believe my interest in the world economy was spurred on early on in my career at the age of 23 when I was curious to know what exactly does the term ‘economic fundamentals’ really convey? In my quest for knowledge, I tried seeking answers. I got a myriad number of them – most were largely theoretical with no practical emphasis and I was not convinced else it was the other way round – all too much to do with numbers and I was lost!

I wanted to bridge this gap with a set of defined tools/techniques. I am not here to do research on this topic nor do I intend to bore my readers with this.

What I seek are answers.

The world economy changes by the second. Its the most fluid of all the parameters and almost all the markets are directly / indirectly dependant on the ‘economy’. You have a hot economy, people have jobs, there is more disposable income, people are worried about inflation. On the contrarian viewpoint, you have a slowing economy, people lose jobs, there is less disposable income and suddenly people are worried about deflation!

Everyone agrees that cyclical ups and downs in the business world are normal but why is it that no one is able to predict with certainty as to why this happens? What is so elusive about the “world economy” that people are baffled to arrive at definite predictions.

In my experience, the only thing that is as non predictive as the world economy is the human life itself!

Like I said before, my quest to seek answers began in 2000 and peaked in 2001 when the world economy collapsed.

The US was in a short recession, people lost jobs, the world followed. Germany sank, the Japanese economy was, as it is, in doldrums since the 1990’s and its economy was in deflation.

Today, we hear all the above economies have picked up after business confidence picked up from 2003 till date. Will this sustain? For how long? Who predicts these? What role do Central banks have in all this? Do they use definite tools/techniques? How accurate are those methodologies?

I am going to try to do a “Roopa Purushottaman” here. For people who do not know her or have not heard of her, she is the popular ex-Goldman Sachs economist who came out with the very interesting BRIC report in 2003 that took the world by storm! It interested Indians immensely because the ‘I’ in the ‘BRIC’ report stands for India. It summarized that by 2050, India, among its peers such as China, Brazil and Russia, would be the world’s 3rd largest economy after the USA and China!

Currently, while the rest of the world economies are trudging along at about a 1-2% GDP growth, the Indian and Chinese economies are streamrolling at over 6-10% GDP growth every year!

Moreover, the demographics of the Indian and the Chinese population (rated the #2 and #1 most populated countries in the world respectively) indicate a larger working class population unlike their American and European counterparts.

So, while the populace in America and Europe ages and starts relying on the Social security benefits that will cause a huge hole in the Government kitty, the Indian and Chinese populace will see increasing earnings and more disposable income. This trend is only set to accelerate towards till 2050.

A link to that article can be found at the Goldman Sachs website. They have even made available a PDF link of the same and it really made for interesting reading! 

Anyway, lets turn our attention back to the present reality: What happens if there is a slowdown in 2007? How would the Chinese and the Indian economies get affected? Indonasia is hit by an earthquake almost every week. There is economic tension due to the political tensions prevailing in the Middle East (rising oil price worries – will oil touch $100 a barrel – it is currently hovering around the $70 a barrel mark – the OPEC is a cartel with a collusive oligopoly market structure), there is an ever increasing threat by anti-social element threatening world economies. Global warming is rising – the Arctic ice is melting. Weather has become unpredictable in most continents of the world. Is globalization here to stay? How does that impact the world economy? How will a unified European currency impact the world? Is the US Dollar being challenged? When will the EURO reign as the standard currency for all world currency transactions? Do stock markets really follow the random walk theory? Is there a link between the world economies and the world stock markets?

We seek answers to some of the most basic questions posed above and I seek them with a number driven analytical approach.

Why is it that we did not realize the slowdown of 2001 till it was almost too late to correct? Can no one predict with some degree of certainty as to what happens next?

How effective were the recent chief’s of Central banks such as the legendary Alan Greenspan or Wim Duisenberg in defining monetary policies and defining the economic governance of sustained interest rate hikes and controlling / tiding over the difficult times of the late 1990’s and early 2000/01?

Who can forget Alan Greenspan’s term “irrational exuberance” used first in 1996?
http://www.irrationalexuberance.com/definition.htm
(Source: Irrational Exuberance, by Robert J. Shiller – http://www.irrationalexuberance.com)

How are their successors faring (Ben Bernanke of the US Fed and Jean Claude Trichet of the European Central Bank)?

Welcome to the global space. The economy rules! All of the rest follow. Stock markets, currency markets, real estate markets and the like!

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Written by Naveen Athresh

October 17, 2006 at 9:16 am

2 Responses

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  1. […] credit crunch for most financial institutions. In fact, if you look at why I started this blog (https://ecofin.wordpress.com/2006/10/17/reasons-for-me-to-dig-deeper-into-the-economic-fundamentals-o…), this was my primary objective – to preempt such recessionnary trends and whilst I have been aware […]

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