Of late, I have been reading and hearing too much about the recession, the negative growth rate and increasing unemployment. All these developments in the global economy has left all the economists rattled and confused. Some are predicting a double dip recession while others are talking about the recovery by Q1, 2010. All this economic mayhem and the debate following it has left me with many mind boggling questions, which I am sure are going to sound so trivial and unintelligible that nobody would even attempt to answer them. I would be really grateful if someone could help me find answer to these.
Q1) Is the negative growth really bad?
From the past 2 years, journalists across the globe are turning their throat hoarse while bringing out the stories about the negative economic growth rate, fall in GDP and so on. I do see their point but one thing which keeps bothering me is that is it really practicable to have a positive GDP growth rate forever. GDP of a country is is nothing but the total market value of services and goods produced within that country. Consider the scenario that if the GDP of whole world were to always have a positive growth rate. To achieve this, the net consumption of raw materials like iron, cement, minerals and petroleum products would also grow at a similar rate. So I always wonder is really feasible of our tiny planet earth to forever supply the required raw materials at an ever increasing rate.
Q2) Is only the moderate positive inflation desirable?
Sometime back people were real scared first to see double digit inflation rates in most of the economies and then a negative inflation rate. According them a moderate inflation is what is needed for a healthy economy. I am again confused. Consider a basic question related to demand and supply. According to my knowledge the rate of increase production (call it supply) of things has definitely outstripped the rate of increase of market size (demand) i.e. increase in the rate of production is definitely more than the rate of increase of customers (because of increase in population and change in economic conditions).
So according to me if the things are left for free markets (i.e. in absence of central banks and government's intervention) to decide, the natural direction for inflation has to be negative.
Q3) Is a country's higher GDP per capita better for its residents?
I think possessing a BMW or a Merc will not necessarily make a person happy or unhappy. To me it all depends on the reference frame of the person. If a person doesn't possess a BMW or a Merc, he will not be unhappy till the repeated commercials of TV/magazines/newspapers and society brainwash him to believe that being happy and successful means being able to buy a BMW or a Ferrari. My great grandfather never wanted to posses a Porsche because he didn't know about its existence. Probably he was happier with his bicycle.
If my analysis is correct, why ruin the earth due to all this rat race to produce more. Just ban all the damn media houses and their commercials.
Q4) Black Swan or White Swan. About whom we should care more?
After reading Taleb's Black Swan, I am even more convinced that we cannot predict highly improbable events, termed as "Black Swans" by Taleb, though they have a very high consequence. I completely agree with him in all his analysis but again the question is that do we really care of such rare event. May be Tsunami killed over 3,00,000 people in a single assault but if we were to make one choice, should we prepare our self better for terrorist attacks, which happen every now and then or prepare our self for the Tsunami which may NOT come for next 100 years. So I strongly think that the prediction business is very much needed in finance particularly but only thing is that we should not always try to justify our wrong predictions. So indeed we should care more about White Swans and make our economic system robust for them. To me even the current recession is a White Swan only as it was foreseen by many in 2001 itself when Fed reduced the interest rates to zero (Q2 becomes relevant again).
PS: Please see that I am not a socialist or communist. I am a staunch capitalist but I believe in real free markets i.e. markets devoid any external interferences of central banks and governments. Call it Utopia, if you may!!!
