There's currently nothing but economic doom and gloom in the media. How many times have I read "In these uncertain economic times...", or "As the ecnomomy continues its death spiral..."?
Let's get some perspective here. Some national economies have reportedly had a 10% drop in GDP. This is typically quarterly results projected to an annualised basis. In other words, it's a forecast based on one data point, a guess, nothing more than the work of an unqualified soothsayer.
But let's assume that whatever country you live in will have a year where GDP drops 10%. Let's also assume that for the previous few years, GDP growth was 4%/year. What will be the result of that 10% drop? A return to feudal states? A post-apocalyptic waste land?
My calculations tell me that a 10% drop in GDP will result in total GDP being equal to the levels it had 2-and-a-half years ago. Was life really so intolerable back in 2006? Apart from there being no iPhone, I think I could cope with those oh-so-hard days of 2006 over again.
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Tracking the development of Poker Copilot, Mac OS X software for poker analysis and statistics.
Thursday, 19 February 2009
Economic Catastrophe?
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5 comments:
Great perspective. So sick of the addiction to compounding growth rates that's driving this panic. Maybe our economies simply need to reset to a more sustainable level.
It's a good perspective, although it's the rate of collapse that's more worrying.
It's not a 10% drop in GDP that would be the problem. It's the impact that the 10% drop has. Notably, companies shedding workers in order to regain some profitability in the downturn. Those workers not spending, some losing homes.
Most importantly, there's the whole essence of the financial crisis. Irresponsible trading, short trading against non tangible assets, insurances on those assets, insurances on the trades on those assets, and so on.
These toxic debts have effectively "written off" investor cash.
Which equates to no pension for Mr. Jones, no healthcare for Mrs. Saunders and no house for the next guy.
It's not as simple as GDP levels, but the rate at which we've been dropped to it - and the effect this is having on the "real" economy that's worrying.
Unfortunately the economy doesn't just 'roll back' - GDP is a relatively simple stat that is a proxy for a whole lot of economic activity. The pain comes from the things that cause GDP to drop, not from the drop in GDP per se: things like foreclosures on mortgages combined with drastic drops in superannuation and other shares, and a raft of job losses. Add to that the difficulty of obtaining capital for things like starting small businesses, etc. All of this adds up to a very different economic climate to 2.5 yrs ago, even though the GDP stat would be the same.
It highlights a problem with using proxy measures for analytics. Naive decisions are made on data that's not properly understood, and this happens a lot in economics/financial analysis, especially when quick decisions need to be made. The problem, though, is that a lot of the things that we 'measure' through proxies are impossible to measure quantitatively and directly.
That's not to minimise Arthur's point about the addiction to growth - in a finite world, infinite growth is impossible, and it would be nice if we could perhaps come up with an alternative system for the allocation and use of resources.
I have an idea: stop living off of debt.
Like anyone will listen.
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