Monday, December 1, 2008

ECONOMIC RECESSION: IS IT A CRISIS OR OPPORTUNITY?

Proem

Many countries in the world like Japan, Germany, Turkey, etc. have already declared that they are in economic recession. The question is, will the global economic situation bring crisis or opportunity into your life?

In the Chinese language, the symbol for crisis and opportunity is the same. Since ancient times the Chinese have already recognized that economic difficulties will always bring crisis or opportunity into a person’s life. What is important is how an individual will think and react.

Stock Exchange

The event or events that started today’s economic difficulties was the turmoil that begun at the New York Stock Exchange at Wall Street.

The concept of a stock exchange started in New York in 1791. A stock exchange is a market where stocks and bonds may be bought and sold, that is, after their original sale by the investment dealer to the customer. It is a market for secondhand securities. Investment dealers and stock exchanges appeared simultaneously in the United States. The existence of stock exchanges assured the customer that at any time he wanted to obtain cash for his securities, he would have a market at hand in which he could find buyers. This made it easier for corporations and governmental agencies to obtain funds to expand their operations. It also stimulated the growth of capital.

Trouble will begin when dealers, stockbrokers and others become unscrupulous. For example, based on the actual asset of a corporation its stock is only P1. However, at the stock exchange the investment dealer can convince the stockbroker to buy the stock at P2. The dealer then could earn a large commission. The stockbroker in turn will try to sell the same stock at a higher price to earn a commission. After many sequence of reselling, the stock which is really worth only P1 will be sold at a much higher prize, say P10. Eventually someone would recognize the actual worth of the corporation and the last buyer could no longer sell it at the same or higher price. If that person needs cash he must have to sell the stock at a lower price therefore incurring a loss. To prevent this situation from occurring, government regulations are imposed.

Actually the situation is very complex because of so many corporations that are involved. Some stocks are overvalued and others are undervalued. The greatest problem in stock exchanges is the fear of losing. If in the actual situation, majority of the stocks are overvalued and stockholders recognizes it, they will immediately sell. This will create a panic and the stock exchange organization will collapse. This in turn will create problems to the corporation owning the stock and the whole economy will be in depression. The situation will be so complex that solutions are difficult to implement. The greatest worldwide depression occurred in 1929.

The Trigger

During the Reagan Administration in the United States, most of the governmental controls were abolished. The economic situation called “Reaganomics” ensued and immediately economic prosperity occurred. As the years passed, the tendency of human greed reared its ugly head. The stocks traded at stock exchanges begun to be overvalued.

The housing industry in the United States triggered today’s economic recession. For example, a person bought a house at P10,000 through a bank loan because it is the price that he can afford to pay. Some years later, because of the economic prosperity, the price of the same house became P20,000. The bank agent told the house owner that he can make a loan for P20,000 with the house as a collateral. When the house still increased in value the house owner made a bigger loan. However, some house owners realized that he would make a profit if he can make a loan of P50,000 for the house he bought for P100,000. He then does it with the intention of not paying the loan. The house owner gains but the bank losses. Since the bank has invested a big amount it would appear that its stock is worth much but actually the real asset is worth very little. This problem of the bank was then spread to the insurance company, etc. when the buyer of the bank’s stock realized the situation he immediately sells his stock. Soon a panic ensued. At first the reaction of the government was to let the bank collapse, but still the panic continued. The government tried to intervene by investing on the endangered corporations. This action of the United States government created fear in other countries and their stock exchanges also panicked. The problem became worldwide. The situation has become complex and some corporations actually collapsed.

What Will Be Your Reaction?

In the confusion of the economic problem some prices of commodities like gasoline decreased but some commodities also increased in price. There is now some talk that very soon the exchange rate of the peso will be p56 to $1. If this situation occurs, the OFW supported Boholanos will be happy but the locally earning Boholanos will become hard up because the Philippines government will be forced to overprint money and produce an inflation.

However, since you know that the situation is actually caused by fear, opportunities will appear for those who are brave and a crisis will appear to the faint hearted.

This statement of course is simplistic because so many factors will intervene.

Nonetheless, Chinese wisdom say that in times of difficulties both crisis and opportunity will appear that is why they have only one word or symbol for it.

33 comments:

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