Tuesday, August 31, 2010

There and Back Again

The usually great Emmanuel Derman has a nice description of how the financial crisis turned into a "real economy" crisis. For all incoming students of the Capital Markets course, this is one of the things we'll discuss in class:

° After the financial crisis everyone got scared about the future and stopped buying the crap they don't really need.
° The companies that make the crap people don't really need, anticipating a decline, laid off people, sometimes preemptively.
° The laid-off people then had to stop buying not only crap they don't really need but some of the things they actually do need.
° That affected the companies who make things people really need, and so they laid off people too.
° If everybody would just start buying stuff they don't really need then pretty soon everyone would be able to buy the stuff they really need.
Even will all the talk of the emergence of the BRICs The world economy stilldepends a lot on a healthy US economy. The last round of indicators showed that the sky is more cloudy than it was last quarter. Will the US come up with another large stimulus package? Is this going to rattle ond markets or are we still going to see the low yields observed today?

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