What is Capital Account Convertibility and How it Affects a Country
April 3, 2025
What is Capital Account Convertibility ? Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions. In other words, Indians can convert their Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called capital…
The global financial system is in the middle of a manufactured boom. Earlier, the economies would boom on their own based on the underlying fundamentals. However, in the present scenario, the boom is 100% manufactured by central bankers that are using every trick in the book and some more to create the perception that the…
The 24/7 Real Time Global Marketplace Makes Firms Live for the Moment The present global marketplace as well as regional and nations marketplaces are uber competitive and in addition, dominated and driven by rapidly changing market conditions where short term thinking triumphs and the scenario is complicated with the incessant buzz of 24/7 news cycles…
For those of us who observe the financial markets gyrate wildly from highs and lows to periodic booms and busts, the analogy of a beast that has periodic bouts of aggression and depression is the most apt metaphor to describe these swings and mood shifts in the markets.
No wonder that many economists liken the financial markets and the economy to that of animal spirits, which drive growth through a process of aggressive wealth creation and at the same time, when they are not tamed properly, lead to busts and market crashes.
The key aspect here is that the economy needs to be stimulated in the same manner that as humans, we have to be aggressive in our careers and at the same time, know when to stop and quit.
In other words, kick starting an economy after it crashes is like an individual who rediscovers his animal side after languishing in the doldrums for a while and starts to rebuild and rejuvenate him or herself. This metaphor of an economy that is powered by animal spirits is the title of a popular book by famous economists, which is indicative of the hold that this metaphor has on popular imagination.
The point here is that economies and societies are comprised of individuals and hence, markets represent the popular mood of the individuals who make up the same system. As any student of economics would tell you, an economy grows and crashes in the same manner that individuals have highs and downs throughout their lives. This is where the metaphor of rejuvenating growth by rekindling our animal spirits is so apt to describe the manias, panics, and the crashes.
In other words, when we are facing a downturn in the economy or in our professional or personal lives, the best way to bootstrap and lift ourselves and the economy up is through reconnecting with our animal nature and hitting the ground running so that we finish ahead of the others.
Of course, the animal spirits metaphor is also used to describe how individuals in societies and economies once they lose their Mojo can flounder, languish, and hence, need a dose of adrenaline to rouse themselves and motivate themselves to perform well and succeed.
However, just like rekindling animal spirits would lead to highs in our careers and by extension the economy can do well when individuals pour all their energies, there needs to be some moderation as well as otherwise excesses can lead to crashes and busts. This is precisely what happened in the decades of 1990s and the 2000s when the excess of speculation and financialization led to the global economic shock of 2008.
Therefore, many economists who use the animal spirits metaphor also say that the beast needs to be tamed from time to time and this is the power of the free markets that correct themselves when the balance is exceeded.
In other words, a well functioning economy based on markets would find the equilibrium between excessive manias and booms and would correct itself when faced with too much of the good thing. This is the central theme that many economists point to when they talk about the economy being rejuvenated through the rekindling of animal spirits.
Further, they also point to the fact that of all markets, the stock market in particular resembles animal spirits in action as the wild swings that we witnessed in recent years are certainly like an animal that is out of control at times but nonetheless provides the much needed energy and momentum for the creative destruction processes of capitalism.
Your email address will not be published. Required fields are marked *