2009 is upon us and all of us new world order. Indeed, 2009 could be a turning point like no other in the history of civilisation. Fundamental shifts are occurring in various spheres of human existence.
In politics, the USA gets a new president and many feel that things can only get better for everyone hereon. The constant threat of war is diminishing, there is hope that various regional conflicts will cool off a bit and indeed that some may even get resolved.
On the environment front, there is growing awareness of the disturbing impact that our materialistic way of living is having on the Earth. There are many efforts to repair the damage before its too late and encourage individuals and societies to be live in an environmentally sustainable manner.
In medicine, new stem cell research has thrown up exciting new possibilities for treatments of common ailments. What’s more, we are entering into a new phase of medicine where we will be able to grow organs & tissues to replace those worn off by nature. What this could mean for mankind is yet in the realm of imagination!
And of course, in the financial world, we have the global economic slowdown and crises. Many of us are having to deal with life in a way not imagined just a few months back. Things have changed tremendously fast and there is much more to come.
If we want to be prepared for the challenges that lay ahead (and there are many likely to come), then we must heed the wisdom “Forewarned is forearmed” and spend some time understanding the issues at hand.
I would like to focus on the potential financial challenges for two good reasons: one, my specialisation is finance and markets and two, the financial situation has become the most urgent & important issue taking up significant mind space of almost everyone I know.
The first thing to do on a journey like this is to really understand the meanings & implications of the various terms & lingo that are being bandied about nowadays. Since there are many inter linking factors and it’s a continuously evolving situation, it’s probably a good idea to discuss various aspects of it bit by bit and as new issues become known, we shall discuss them too.
Let’s jump in with the most popular term doing the rounds right now, Depression!
As you know, there are lots of types of Depression: mental, physical, geological, spatial, atmospheric and more. But of course what we are interested in is the Financial Depression that the whole world is talking about. According to WordNet, Depression is “a long-term economic state characterized by unemployment and low prices and low levels of trade and investment.”
In economics, a country is said to be in Depression when there are 2 consecutive quarters (totally 6 months) of negative economic growth. This simply means that the country as a whole produced less goods and services that it did the same time the previous year. Almost all developed countries today are officially in Depression. The 2 countries major that are exceptions are: India & China which are still growing by between 6 to 9% - depending on who you listen to.
Deflation ...
Not yet a popular term but just may happen later in 2009 (or in 2010 if things get worse!) Deflation is a state in which prices generally decline. As prices of food, clothing, electricity, fuel and other items of everyday use are higher compared to the same time last year we have Inflation (of around 5% currently).
However, as fuel and commodity prices (e.g., metals & cement) are decreasing, some predictions are that we may even have Zero (yes Zero!) inflation sometime middle of 2009 and who knows, maybe even deflation?
While many of us may think that deflation, i.e. prices going down, is a good thing, it really isn’t so. Deflation, especially if it’s severe actually has a negative impact on economic growth and worsens an already bad situation. As there is widespread expectation than prices later will be lower than the present levels, the public reduces spending which in turn leads to further decrease in economic production.
Stagflation …
This beast is really bad and we should all pray that it doesn’t happen. This term was coined in the 1970s and is Stagnation + Inflation. As the term suggests, it’s a mix of economic stagnation (where the economy does not grow, remains flat and may even decline a bit) and at the same time, prices rise.
This creates a very difficult situation as people generally don’t earn sufficiently more (due to economic stagnation) and affordability of everyday consumption items drops due to their rising prices.
It’s very unlikely that this would happen in India but just in case it does, it’s really big trouble for us. For now, it’s not happening before 2010 for sure so let’s just get through 2009 for now.
Despondency …
Wikitionary defines despondency as “the loss of hope or confidence; despair or dejection; A feeling of depression or disheartenment.” Clearly despondency is a label for a certain emotion and when one is in that state, even if something is positive, one does not feel happy. If you have ever been despondent then you know that it takes a long time to get out of that mood, however hard you try – even when things are actually improving.
There is one place that has despondency all over the place and that is the stock market! Historically, despondency in financial markets has been known for centuries and is well documented in serious literature of the stock markets. And it is precisely because of despondency that the stock market will NOT go up soon.
It will take a lot of consistent positive news for the stock market to rise significantly and here’s the important thing, stay at those higher levels. Any of us hoping that we will recoup our stock market losses or make lots of money by buying stocks low in the hope of a market rally soon should really moderate our expectations. There are going to be rallies for sure, but then another down move will start. This will happen several times till such time that despondency exits the market and a fresh positive mood sets in.
I have briefly discussed some terms here. In the coming articles, I look forward to discussing current economic issues in some depth from an individual & family’s point of view and what each one of us can and should do to safeguard and improve our economic futures.
And by the way, if you ask language experts, they will tell you that if one tracks the changes in language of a society, then one can figure out how that society is changing, what its current concerns are and in which direction it might be heading.
In the meantime, I would really appreciate inputs from the readers on what they would like to know more about. Do send your comments to askmusa@gmail.com
With Wishes & Riches,
Musa
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The author, Dr. Musa R Kaiser is a Bangalore-based doctor, equity investor, derivatives trader, investment advisor and most importantly, a financial educator who is passionate about supporting individuals and families achieve their dreams. He is the founder of http://www.bangaloreinvestorsclub.com