Friday, June 8, 2012

Make a wish....

Have you ever heard that if you wish something hard enough it will become true? Well, in the world of economics this is actually the case.

Think about that computer you are thinking about purchasing. Today, it costs 600 Euros but you expect (perhaps due to the crisis) that in a couple of months' time the price will fall to 500 Euros. Would you buy it today? Chances are that you wouldn't unless of course it was some kind of an emergency.

Newsflash! You are not the only one expecting the price to fall to 500 Euros. The other potential buyers also possess the same information (because they also realize that the economy is in crisis). So they will also avoid purchasing the computer today.

Result? Due to inadequate demand for the computer, the price will eventually fall to 500 Euros. And even then, some potential buyers might expect it to decrease even more.

The outcome here is that expectations are strong enough to make or break a national economy. John Maynard Keynes referred to this phenomenon as "waves of optimism or pessimism".

Now is as good a time as ever to become an optimist!

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