Is there any truth to the belief that, because the economy is getting worse, we are in danger of a decline in global financial markets? I would have to say no.
You see, although it is impossible to be certain about how the overall state of the global financial markets will change in the near future, the recent deterioration in the US economy does not necessarily mean that the global financial markets will collapse or stagnate. In fact, it may be exactly the opposite.
Let me explain the whole question by way of an example. Imagine you buy a commodity at its highest price and sell it below the bottom of the market.
Would you make a profit in the long run? Of course not. I mean, if the price is too low, you wouldn’t make any money at all.
Now, imagine that you buy a commodity at very high prices and sell it at low prices. Would you make a profit in the long run?
Well, the answer is no, because the price will eventually rise above the low prices and you won’t make any money either. It just won’t work.
So, even though the situation is completely unclear and therefore nobody can guarantee anything, we can try to make some estimates. The problem is that most of us don’t know what will happen next. In order to make an informed guess, we need to make some assumptions about what will happen.
It turns out that we really can’t make any predictions about how politics will affect our ability to predict the long term and short term price of commodities and other financial assets. But we can make assumptions about how politics will affect the asset price.
After the Great Depression, during the time when we were in bad economic times, markets were less regulated than they are today. It was possible for politicians to affect the price of goods by manipulating the supply side of the market.
That was a good thing for farmers, which meant that they could make a lot of money from food. That meant that farmers could pay their workers a living wage, which meant that they had money in their pockets and the price of commodities and other financial assets soared.
During the time of the dot com boom, during the same period when we were in bad economic times, politicians tried to create an artificially inflated stock market bubble, making it look like prices were skyrocketing when in fact prices were falling. That caused even more people to invest, and so the market continued to get out of control.
Since the banks were involved in risky investments, that meant that the prices of stocks, bonds and other financial assets didn’t make any sense. However, when the bubble popped, people lost everything.