Jack Falvey's Investor Education Briefs: Economics, the dismal science, has earned its nameBy JACK FALVEY
November 19. 2017 10:40PM
An economy, being made up of millions of global transactions hourly, is not an easy thing to get your arms around — even for those dedicated to that discipline.
The information explosion, while benefiting science in general, has seemed to muddy the economic waters by producing data whose meaning defies those attempting to learn from it.
Because we live in, and must plan for, our personal part of the global economy, we need at least a rough idea of how things work for us to operate accordingly.
When we buy or sell something, all kinds of things happen. First, a price is agreed upon. Next, a trust relationship must develop. Finally, we pay for and take possession of the goods. Why we do this could be as simple as needing something to eat for dinner or as complex as buying a new house. Both transactions, great and small, go into the economic mix. If for some reason we decide on leftovers for dinner or to stay in our apartment for a few more months that will have an economic impact recorded as the absence of growth.
The economist can make educated guesses as to what might be the cause of economic growth or its absence. The rule of law, property rights, interest rates, and confidence in a government, pending regulation, war or peace, a new unknown boss — all can be factors, or none of them can have anything to do with the individual purchase of a bobble or a municipal bond.
All we know is that there is a world economy and its parts are interdependent and we depend upon its growth for our well-being. When it is growing domestically, as recorded in our gross domestic product numbers, opportunity to increase one’s wealth increases. When slow growth is reported, there are fewer new enterprises, fewer new jobs, fewer investment opportunities for us to pursue, and a slowdown in the wealth creation process. This is known as the business cycle, and its ups and downs are the great unknown in economics. Knowing what we don’t know is a good start for us in planning our personal economic growth. The numbers subdivided and in endless groupings are all there to be seen. Your job is to make an educated guess on their meaning and act accordingly. Economics has never been easy to understand. There are far too many variables. Do your best.
Jack Falvey is a frequent contributor to the Union Leader, Barron’s and The Wall Street Journal. He can be contacted at Jack@Falvey.org.