Notices
Results 1 to 3 of 3
Like Tree1Likes
  • 1 Post By gonzales56

Thread: Boom and Bust in Demand side economics

  1. #1 Boom and Bust in Demand side economics 
    Time Lord
    Join Date
    Mar 2007
    Posts
    8,046
    First let's look at what a classic boom and bust looks like in supply side economics.

    Some guys discovers gold in a hill in Nevada. He needs people to mine it. He hires a bunch of people. A whole town gets built around this great mine that's creating so many jobs. People come from far and wide. The pay is so good they decide to put down roots and start families. Maybe they take out a loan to build a house in the area.

    Then the gold runs out. Instant ghost town.

    We all understand that model. It makes a lot of sense. Supply side boom and bust cycles are highly intuitive, but what demand side boom and busts?

    Suppose the Fed has just lowered interest rates to an unprecedented low level and people who previously rented are starting to take out housing loans and buying houses. Now, just as with the previous example of a gold mine, where we knew there was only so much gold to be had, this is just the demand side equivalent. We know new housing customers have been created, but there are a finite number of them and they're not going to regenerate. (People who take out a 20 year loan to buy a house usually don't buy another one until at least 20 years later.)

    Entrepreneurs started construction companies (and took out loans for the tools). Construction workers saw boosts in their pay, assumed them to be permanent increases, and took out loans of their own. And speculators began investing in the real estate market because they saw a trend toward increasing land values and thought it would continue to rise.

    The whole USA went the way of a classic "ghost town". All because we failed to see that demand can be just like supply. Sometimes a new "vein" of "gold" pops up, lasts a little while, and then runs out.


    Some clocks are only right twice a day, but they are still right when they are right.
    Reply With Quote  
     

  2.  
     

  3. #2  
    Suspended
    Join Date
    Oct 2008
    Posts
    1,849
    In theory that's possible, but do you have an example?

    It almost reads as though you think that's what just happened in the US.


    Reply With Quote  
     

  4. #3  
    Forum Professor
    Join Date
    Dec 2011
    Posts
    1,032
    Quote Originally Posted by kojax View Post
    First let's look at what a classic boom and bust looks like in supply side economics.

    Some guys discovers gold in a hill in Nevada. He needs people to mine it. He hires a bunch of people. A whole town gets built around this great mine that's creating so many jobs. People come from far and wide. The pay is so good they decide to put down roots and start families. Maybe they take out a loan to build a house in the area.

    Then the gold runs out. Instant ghost town.

    We all understand that model. It makes a lot of sense. Supply side boom and bust cycles are highly intuitive, but what demand side boom and busts?

    Suppose the Fed has just lowered interest rates to an unprecedented low level and people who previously rented are starting to take out housing loans and buying houses. Now, just as with the previous example of a gold mine, where we knew there was only so much gold to be had, this is just the demand side equivalent. We know new housing customers have been created, but there are a finite number of them and they're not going to regenerate. (People who take out a 20 year loan to buy a house usually don't buy another one until at least 20 years later.)

    Entrepreneurs started construction companies (and took out loans for the tools). Construction workers saw boosts in their pay, assumed them to be permanent increases, and took out loans of their own. And speculators began investing in the real estate market because they saw a trend toward increasing land values and thought it would continue to rise.

    The whole USA went the way of a classic "ghost town". All because we failed to see that demand can be just like supply. Sometimes a new "vein" of "gold" pops up, lasts a little while, and then runs out.
    Speculators/investors, businessmen/women, workers/unions and banks/politicians drive prices to high (a fake and manipulated market) but, common folks (who are the real market) will, in the end, always end up ruling every market (this is because everyone has to cash out at some point and it is common people, in the end, who will set the price at which everything will be bought).

    The housing market demand did not go down, the artificial and manipulated driven prices for a home drove people out of the market because they could not afford to purchase these homes. Now, what did the government and these politicians do about the manipulation and regulations in the housing market that drove these home prices so high? Absolutely nothing.... Other than blame common people for getting loans and banks for giving them loans (as if they were upset with banks).

    Investors/speculators/banks are smart and their firms/companies work very closely with congress and the federal reserve. They also, along with the fed and congress, manipulate the markets with ease, and they make a fortune doing so.

    When investing, it is best to ask yourself who is investing in each individual market, how long have they been in it, and can common people afford it? If you do this you can piggy back on the manipulators, get out when a majority of common folks cant afford it anymore, and even buy great valued stocks and commodities at a price and point that just about every common person can afford.
    Last edited by gonzales56; April 8th, 2012 at 10:53 AM.
    westwind likes this.
    Reply With Quote  
     

Similar Threads

  1. Economics or Business economics
    By Arand in forum Business & Economics
    Replies: 7
    Last Post: October 26th, 2010, 11:26 AM
  2. What is the business most likely to boom in the near future
    By AeDeAeMn0886 in forum Business & Economics
    Replies: 20
    Last Post: January 20th, 2009, 02:26 PM
  3. The bot boom
    By Pong in forum Computer Science
    Replies: 2
    Last Post: August 27th, 2008, 06:23 AM
  4. Replies: 14
    Last Post: August 22nd, 2008, 08:54 AM
  5. Universities that bust paywalls?
    By kanzure in forum Education
    Replies: 9
    Last Post: October 10th, 2007, 07:21 PM
Bookmarks
Bookmarks
Posting Permissions
  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •