Lessons to be Learnt from this Economic Depression

This recession will correct the artificial euphoria caused by Share markets and Real asset bubble to the World Economy. But for the economy to recover it has to search for a new driving force first. Green technology is some thing US leadership is hoping to drive their economy but this has very slow pace of development towards viable products and technologies. Unless a good driver of Economy appears on the economic platform, the recession will keep having its sway.

Passive game of making money is over:

One of the best lesson that this recession teaches and I hope would be learnt by the modern society at least for some time to come is that the era of making money simply by trading in stocks or real estate is over. This was a bubble created by them on a very thin layer of water (usefulness or strong logic) which has burst and there isn’t much water left to blow it back. Lets take the scenarios.

Stock Markets

Things were so good that uneducated and illiterate had found investing in stocks an easy way to grow rich. This stampede of investors fueled stock markets world over. People borrowed money on interest and invested in the stock markets. Today the net worth of these shares is only fraction of the money borrowed by them. The in few cases the monthly interest on loans and mortgages are far higher than the value of the stocks held. Such investors are not going to return back to stock exchange at least for some time to come till these sad memories are forgotten and they are ready to gamble again. This is why the share prices right now are so low and continue to under perform for the time being.

Real Estate

Why the price of real estate should be so inflated? Especially in light of the following two facts:

1. Most of the service sector jobs and businesses are location independent. That means for them to operate there is no such thing as prime location. They can operate from locations from Manhattan in New York to Jabalpur in India with equal efficiency & effectiveness. So why pay in excess for a particular location?
2. Singapore has one of the highest standards of Living and one of the best eco friendly housing arrangements made for worlds most densely populated city state. The whole population of the world can be accommodated within area as small as that of South Africa, if arranged in Singapore style. So where is the scarcity of Land for Housing and why such big ticket prices for landed properties??

Thus the whole world bust come to terms with this realization that time for passive trading in money instruments and making money out of money itself without any value creation or without inputting any work are over. Now on (and until the system is corrupted again) only work and higher productivity would be awarded. Hence this should be the time for re-investing in productivity improvement.

Earn before you Spend

The era of spend first then earn, encouraged by the credit card frenzy should be over for most of the consumers now. This spending mania had gone to the extent that it had become spend without even earning, if you had appreciating real estate or stocks, credit could be easily arranged.This is changing so rapidly that it has become the core reason for current depression in World Economy. The US consumer (the driving force behind world trade) spending has been dropping and in the fourth quarter it fell at the fastest rate in 29 years. At the same time the saving rate that was skidding along near zero from 2005 through 2007, has risen to 5% levels in January, the highest since 1995. Thus consumers seem to be realizing the new realities of their times. Which is great as for world economy to transform, the Us consumers need to reform first. It will herald a new era where the citizens of US will earn Us dollars by producing high value added goods for the developing world and the developing world shall supply them consumables in exchange.