MSG Team's other articles

10574 Past and Current Directions in ERP

In keeping with technological changes in IT sector as well as evolving business need, there are discernable changes in ERP market as well. The traditional strength of ERP in back office space such as basic manufacturing, financial management, procurement and distribution, is still unchallenged. But the mind set is changing rapidly and ERP system providers […]

11110 Role of Governments in International Businesses

The Need to Encourage Foreign Investment The previous articles have discussed how international businesses need supporting ecosystems and business friendly policies if they are to succeed in emerging markets. Of particular importance is the role of governments in deciding whether they would allow international businesses to setup their operations and encourage them to grow and […]

12541 Building Web-Based and Inter-Organizational Decision Support Systems

Problem solving and knowledge management go hand-in-hand. Together they have become one of the most important aspects of organizational decision making. Managers around the world realize that much of their organizations’ value depends on their ability to gather, analyze and manage knowledge and use it to solve problems. To accelerate the process of transforming information […]

9111 The Emerging Connected Future and Digital Utopia and What it Means for Us

A Glimpse into the Connected Future The future is connected in terms of the networked and integrated digitally enabled modes of living and working. In other words, with cutting edge technologies such as Artificial Intelligence, Big Data powered Analytics, IoT, or the Internet of Things, and Distributed computing integrating our homes and our workplaces, the […]

11043 Risks Covered by the Disaster Recovery Plan

In the highly competitive world of business and marketing, Organizations are pushed to be ahead of the race and walk the talk. Customer and Market expectations are higher where in the Companies are expected to walk the talk and demonstrate their capability to live through the promises. In such situation, Organizations have had to think […]

Search with tags

  • No tags available.

When analyzed in financial terms, it turns out that the world is in a precarious position. However, there seems to be no sense of urgency amongst the people. This may be because of the fact that newspapers, as well as other forms of media, are not warning the people that a recession might be around the corner. After all, an ordinary person cannot really analyze the state of the economy. They are dependent upon the information provided by others. The problem is that the mainstream media has been peddling a lot of economic lies. This has resulted in a lot of myths being believed by the ordinary people.

In this article, we have listed top 5 of those economic myths in an attempt to educate the investors:

Myth #1: Inflation is Low

Governments all over the world have been releasing inflation figures which make it appear like the inflation is low. This is because they calculate inflation based on the prices of a bucket of products. The base price of these products forms the base of the index. Hence, when the price rises, the value of the index is, and the inflation rate is determined.

This is very different from how inflation was calculated earlier. Previously increase was calculated as the change in money supply. If this measure is used now, the inflation rate will appear much higher than what it seems to be now. This is because governments all over the world are indulging in excessive money printing. This money is not being used to buy everyday commodities such as food and essential items. This is the reason why the value of the index is not rising as fast. However, a lot of this newly created money is being redirected to investments. This is the reason why asset prices have increased to astronomical levels.

In most developed countries in the world, the stock markets, as well as the housing prices, have reached record highs. This is mainly because of asset price inflation. As soon as the interest rates are reduced, these markets could come crashing down.

Myth #2: The Banks Are Now Stable

Basel III is a system which has been created to ensure that the banks are well capitalized. This system has been adopted by banks across the world since the year 2010. The problem with this system is that it considers government debt to be risk-free. As a result, if a bank holds large amounts of sovereign debt, their balance sheet does not appear to be bloated or unbalanced in any respect. However, this is not the reality.

We know that many nations across the world are not really in a position to repay their debt. Consider the case of the PIIGS economies in Europe, i.e., Portugal, Ireland, Italy, Greece and Spain. Their governments are almost bankrupt. Similarly, the debt situation of many Latin American nations is also terrible. Since these risks are not really considered by the Basel Framework, the reality of the banking situation is very different from what it is projected to be.

Myth #3: Interest Rates Rise Gradually

The Fed is trying to raise the interest rates in a slow and controlled manner. The objective is to bring the interest rates back to their natural level without really rocking the boat. However, the record of financial history states that this has never really happened before.

Governments tend to keep the interest rates low for too long. This is because raising interest rates is an unpopular decision. However, over a period of time, markets want to correct the discrepancy. Hence, they force the government to raise interest rates suddenly. Right from the Great Depression to the economic crisis of 2008, interest rates have always risen sharply and suddenly. There is no reason to believe that this time will be any different!

Myth #4: Welfare Payments Are Good For the Economy

People all over the world have been clamoring for increased welfare payments. They want the government to pay for their healthcare, for their kids’ education and also pay them an unemployment allowance. On paper, this sounds good, and the government starts to look benevolent. However, in reality, the government does not really have any of its own money. It cannot pay anybody unless it has taken that money from someone else. This is the reason why implementing policies which increase welfare is not really an option. These policies end up increasing the debt burden on an already burdened state. Or these policies spur the government to print more money, raise the money supply and dilute the value of the savings of other people.

Myth #5: The Worst Is Behind Us

The common belief is that the 2008 crisis was a one-off instance. The ordinary person believes that the worst is behind them and the future will be better. This is not really the truth because, in 2008, the crisis was not really resolved.

More and more debt was created to spur new economic growth without solving the underlying problem. Governments have tried to solve the problem of high debt with even more debt! They have only succeeded in postponing the inevitable. There is a good reason to believe that the worst may not really be behind us.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles