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Why the global economy will recover.

November 27th, 2008 · Greg Atkinson · No Comments

It is hard to remain optimistic at the moment and the attention grabbing headlines churned out by the media do not help people sleep at night. I have lost count how many times I have seen the current economic mess compared to the Great Depression or labelled “The biggest economic crisis in our lifetimes”. (I guess you need to factor in how old you are for that tag to work) The fact is we are in a very nasty economic correction but eventually things will settle down and the global economy will do as it has done for hundreds of years…..grow.

Although the demand for goods and services in most major economies is falling at present, this does mean people suddenly do not want a new car, a holiday or a better lifestyle. Governments around the world also still need to build roads, repair bridges and invest in new schools. This means that even though the global economy is slowing this is not largely impacting the requirements for new infrastructure or the desire people have for that new car.

To get the average consumer to spend three conditions need to be met:

Desire: A person needs to want something. Our desires range from the very basic like wanting to eat to the more exotic such as wanting a holiday on a tropical island. Depending where you live your desires will change (since you probably will not be thinking of a new surfboard if you live in Siberia) but we all desire something. Our income levels also generally affect our desires but not always, and some people for example turn to crime because they are unable to earn enough to satisfy their desires. Desire is the foundation stone of an economy.

Ability: Just because a person desires something does not mean they can have it of course. In an economy normally a transaction needs to take place that involves the transfer of wealth. This means that the buyer needs to have the ability (or money) to pay for what they desire. But just having the desire and ability to buy a something does not mean a person will actually make a purchase, for this to happen we need “motivation”.

Motivation: Simply put this means people need to go and seek what they desire. If it is a car that is desired then a person needs to do some research on what sort of car they want, visit some showrooms and generally do some legwork. Sitting in the living room desiring a new car even if you have money, does not result in you getting a new car!

(An economist would of course put things differently and try to baffle us with jargon, but let’s leave them to tweak their models and see what forecast they can mess up this week.)

Now if we look at how things stand at the moment I would suggest that few of us on the planet have suddenly lost our desire for a whole range of goods and services. This is a good thing, because it means we still want to work so we can obtain the items we want. Perhaps our motivation is a little down but that will quickly return, therefore what is missing at the moment is people’s ability to make purchases or the fear that they will lose their ability to make purchases. (i.e. become unemployed)

Governments around the world are trying to address the “ability” factor and are dishing out tax rebates and tax cuts to get money into people pockets so that they can spend. (Central banks are also helping by cutting interest rates) In addition many governments have also announced plans to spend large sums on infrastructure and this aims to keep people employed and thus also helps people have the ability to go out and spend. Government spending and assistance measures are not perfect solutions and many die hard economists are against such steps. But the government approach is more people friendly than just allowing banks to fail and letting the resultant recession clean out the economic system. (Looks lovely on a computer model but is pretty harsh on children)

Ultimately what we need to get back on the path to global growth is for millions of people to feel they can freely spend again. This will happen in time, as history has shown us again and again the global economy always bounces back. In the last 100 years the global economy has been racked by two world wars, a few other major conflicts, a number of major economic downturns and deadly plagues but here we are. Millions of people are living better and longer lives, and the benefits of a better standard of living are still to reach hundreds of millions of people. Their desire for a better life has not been dampened by the the economic chaos, and thankfully they will eventually gain the upper hand and growth will return.


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