Monday, March 24, 2008

The New Economic Growth

Since the end of World War 2, thw world has seen a structural change in economic growth. This structural change has accelerated since the dawn of 21st century. Till about 1900 the trend grwoth per capita has been 1% or less. Moreover only a small portion of the planet participated in the then new economic order. However I would say that since the World War 2 that world did change dramatically (atleast in terms of economic growth). I would say that 3 main factors are responsible for this dramatic change in growth:
1. Technological progress contributing to very high productivity
2. Larger part of the planet participating in economic growth (earlier Japan, now India & China)
3. Better understanding of how economy works leading to improved management of economies
Now you must be wondering why am I writing this article. This is because I just now read a book, 'Bull' by Maggie Mahar. It spoke about for how long the Dow stuck to levels of 1000 and how dramatically it has broken levels of 10000 in so little time indicating as though it is some sort of very big bubble. Well bubbles will be formed in the financial markets, this is their nature as prices sometimes get ahead of themselves. However the reason why Dow got stuck to levels of 1000 for so long and now has broken those levels can easily be explained by the 3 factors explained earlier. The growth dramatically increasing in large parts of the world leading to much higher corporate profits specially to global companies, dramatic changes in productivity again contributing to higher profits and the Central bank and government intervention at right moments preventing system from complete collapse (ofcourse will this last factor always playout is a question mark). So I would like to say that the world has changed in the last 50 years and this is reflected in the stocks, ofcourse the markets can collapse back in case we undo much of the good our previous generation has done, let's hope it doesn't happen and I am positive that if the growth in India and China continue one would see not just newer market levels, but much higher standard of living across the world and newer economic theories shall come into the fore trying to explain this phenomena.

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