Wise Economic Decisions Part 2

This is the 2nd part in a 4 part series which discusses the ideas of recessions and there devastating effects.  It points out that well most people are destroyed in  these terrible recessions some people actually thrive and become exceedingly wealthy.  This paper tries to look at similarities between these entrepreneurs and hope to gain some insight from the past.  My hope is that the reader will find this series interesting and helpful.  If you have question, comments, or even suggestions on future topics please feel free to comment on the blog or email me on my Contact Me page. The works cited page will be included on the 4th part in this series:

Throughout America’s history it has had a habit of markets being built up and accumulating capital and developing, and then eventually hitting bad times and crashing.  This leads to an economic recession.   This has happened in almost every market and throughout history.  There is really no specific industry or a time when it can happen.  Economic downturns usually carry over into the other markets and cause the entire economy to do poorly, not just the specific industry (Ebeling, 69-71).   Signs of an economic recession are a decline in employment, production, personal incomes, and total manufacturing and trade sales.  It is also considered an economic downturn when the Gross Domestic Profit (GDP) has decreased two quarters in a row, but that is not actually part of the technical definition of a recession.  The economic downturn must also be deep enough or long enough to be classified as “significant and substantial.” (Feldstein and Feldstein, 2-3)  If the recession is severe enough it can eventually be called a great depression, when the GDP has decreased by 10%.  This has only happened once in America’s history during the Great Depression in the 1930s and 40s.  Some have said that the current recession we are in could turn into a great depression but it has not happened yet.

 

Recession can hit any industry. The oil industry is extremely susceptible to recessions because so much of the market is not actually run by a free market.  There are monopolies like OPEC that can change the price or the amount produced on a whim (Litan, 84).  Most of the world’s oil is also produced in the Middle East or developing countries in middle or South America. Both of these areas are not very stable in their governments and are subject to takeovers and war.  The transport of all the oil also sometimes gets held up because of the weather.   All of these factors have lead to several recessions, because prices spike dramatically and the market cannot handle such a price increase of a needed commodity.  An example of this is the 1973-75 oil shock recession.  OPEC placed a trade embargo on the oil they were sending America, Europe, and Japan, because these countires were supporting Israel in a conflict it was having with Egypt (Litan, 85).  This caused a huge price increase in oil.  The economy was not able to handle this increase in the price of oil and it led to a decrease in America’s GDP as well as a huge rise in unemployment to about 8.7%  due to the increase in traveling expenses (Hammoudeh, 24).   The government tried to help bolster the economy but it didn’t really work and the money actually inflated by about four percent.  Through conservation and development of oil in other countries the price of oil began to fall again.  OPEC also started to lose part of its market share and wanted to gain it back so it began to produce more oil. All of this led to the end of the recession which lasted about 16 months (Litan, 86).

 

Another example of a more recent recession is the dot-com recession that happened in 2001.  This happened when the number of internet users increased in 1995 and all of a sudden the internet became viewed as a huge opportunity to make money(Baker, Sains, and Edmondson, 202 ).  This lead to thousands of web based companies being formed from the mid to late 90s. These companies engaged in unusual and daring business practices with the hopes of dominating the market.  Most engaged in policies of growth over profit (Smith).  They assumed that the most important thing was building their costumer base and dominating the market.  They assumed that once they had cornered the market the profits would follow.  Many dot-com companies also spent a great deal of energy in dominating a market of a particular type of customer.  The investors responded by investing large sums of money in these companies’ stocks and this enabled companies to grow even faster.  The American stock market rose dramatically during the dot-com bubble, with hundreds of companies being founded weekly.  People began to think that it was impossible to lose money in the stock market (Baker, Sains, and Edmondson, 202).  People who had never invested in the stock market before started investing.  Since it was believed that everything in the technology bubble was going up and it was so easy to make money, people did not even really research where they were investing their money (Smith).  The stock market just kept soaring until the bad business plans and extravagant living of most of the dot-com businesses caught up with them.  Businesses started going under and the federal government started going after bad companies.   Terrorists attacked the World Trade Center, and people’s confidence in the technology industry fell.  This led to the stock market crash in 2001, which was the start of an economic recession.  The recession was mostly focused in the technology industry and the rest of the economy was able to recover moderately quickly.  The recession only lasted about eight months and had a very shallow impact on the economy (Hammoudeh, 25).

 

The economy is definitely a complicated connection of interrelations of investments.  Just throwing money at it and hoping that a profit can be made will have a disastrous result.  It is important that people realize that nothing is a guaranteed money-making venture.  Everything has a certain amount of risk, and people should only risk what they can afford to lose.  Profit is made when one takes advantage of something that was not being fulfilled in the market.  There was something in the market and people had overlooked it, and when the need was met, the person who filled it received a profit as his reward (Baumohl, 40).  The point in this is that finding a profit or making a profit in its very nature is supposed to be moderately difficult.  It is only a fool who thinks that profit can be made easily and without much thought.  Secondly, profit is only made when it is filling a legitimate need of the market, which means the need will eventually be filled.  So how one gets or makes profit is constantly changing.  Once that need has been filled, it is no longer needed and anyone who would try and still provide that service will actually be providing a disservice to the market (Sachs, 159).  The company will be punished by the market by losing money and probably going out of business to make room for a company that will actually give the market what it wants.  A good example of this is the continental railroads.  People thought that the railroads were a good investment, because of the government subsidies and the booming economy during railroad construction.  When all the railroads were finished, there were five continental railroads and the businesses were able to scrape out a modest profit, but as soon as the boom turned to bust and the initial profit from the government subsides were used up, the true inefficiencies of over-building the railroads’ capital structures were shown.  The market had to adjust.  By the end of the boom, only two of the five continental railroads still existed (Sachs, 163).  So three of the five railroads were completely inefficient and unnecessary and were a waste of the market’s resources.  They were eventually converted into something the market wanted but at a great loss to the original investor because he had to suffer the conversion cost.

 

Figuring out which investments are good and which are bad can be a difficult.  The mistake for guessing wrong is very costly.  In Hebrews 12:1, the author writes, “Therefore, since we are surrounded by such a great cloud of witnesses, let us throw off everything that hinders and the sin that so easily entangles, and let us run with perseverance the race marked out for us.”  This passage is talking mainly about living a Christian life, but the concept is exactly the same with business.  Figuring out a good business strategy alone is near impossible, but one does not need to do it alone.  People have already tried different methods and have shown investors what is good and what is bad.  Therefore, people looking to invest their money in the market should look at successful people before them and try to implement the methods that have worked.  There are men throughout history who have been extremely successful in figuring out the market and getting a good return on their money (Sach, 163).  They used the wisdom of this verse in their financial expertise.

 

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