Transcription
In what phase of the economic cycle are we in 2020? To arrive at this answer, we will look at the following points: How is economic growth measured? Human behavior and the economy. What are the phases of the economic cycle? What happens with theory and reality? In what cycle are we in this 2020? And what should we do in the sites?
How is the economy measured? The economy is measured through the Gross Domestic Product, also known in some places as the Gross Internal Product. In English, it is known as the Gross Domestic Product. The GDP is composed of the sum of household consumption. Here we can have purchases of different goods and also purchases of different services. Business investment. Here we can have, for example, a large investment like an airport or something a bit smaller like a retail store. Public spending. Here we can have something as simple as the construction of a road, a new bridge, or a large investment in a new hospital with the latest technology. And the exports and imports that each country has. Finally, we will have the following formula where C is household consumption, I is private investment, G is public spending, X is exports, and M is imports.
Economic growth. It follows the following aspect where on the X-axis we will have time, and on the Y-axis we have GDP. It oscillates over time. But why do these oscillations arise? Why do these ups and downs arise? This is due to human behavior and the economy. The human being is who directly affects the economy, and it is their confidence, whether positive or negative, regarding what happens around them, as it leads to making different decisions. Some can be good, others bad, and some also irrational.
What are the phases of the economic cycle? The economic cycle is divided into four phases: expansion, slowdown, recession, and recovery, with their respective extremes: the peak or boom, and the trough or valley. It should be noted that we can find these cycles with different names.
Expansion: Household demand is increasing. There is sustainable consumption in households. Business demand is also increasing due to household consumption. There is more investment, more hiring of personnel, so employment increases, and production also increases sustainably. People have more confidence, and there is more employment and a better salary with better remuneration.
Peak: Household demand is at historic highs. People begin to buy cars and houses, and business demand is like never before. More personnel are hired, and private investment is at its peak. People have great confidence, as salaries are at maximum levels. But something happens at this point. Household demand has been so great that prices have begun to rise. People, due to their great confidence, have begun to incur debt, and companies are also making very risky investments, opening new stores or factories to satisfy the great demand. And finally, at some point, all this leads to collapse.
Slowdown: Household demand decreases. Prices are very high, and people begin to buy less. Business demand decreases. Companies hire less personnel than before, so unemployment begins to appear. People have less confidence, and salaries begin to fall.
Recession: Household demand is at its lowest. People only spend what is necessary and save what little they have. Business demand is almost nil. Companies have stopped hiring personnel, close stores, and some begin to go bankrupt. Unemployment is at historic highs, and people have no confidence in the future.
Trough: This occurs at some point where banks have stopped giving loans to people with the risk of default. The number of employees is only what is necessary to cover current demand, and the companies that must go bankrupt have done so.
Recovery: Household demand rises slightly. People resume their purchases with some fear and skepticism. Business demand also begins to increase again. New jobs appear, and they begin to increase their production. Even with fear, people, still with some distrust, begin to have very measured expenses to finally repeat again.
What happens with theory and reality? In reality, cycles do not present themselves perfectly as theory explains them, but rather they have the following form with their ups and downs, not straight lines, and in periods of time that are longer or shorter. But the reality is the following, and just to provide context, let's see what happened in the 1930s during the Great Depression. As we can observe, growth and unemployment were very harsh during these years, and the worst data was obtained approximately two years after the start of the Great Depression in 1929. The worst growth record in history occurred in 1932, and the worst unemployment record in history occurred in 1933. During the 2007 and 2008 crisis, we had the following panorama, and the worst data was obtained approximately one year after the crisis began. This was nothing compared to the Great Depression of the 1930s.
In what cycle are we in this 2020? As we can notice and perceive, we are between a slowdown and recession cycle, and this is very visible in the economy. It is something that people can currently perceive. There are many closed stores or establishments. Large sectors like the airline sector or the cruise sector are totally paralyzed, and we can see a large amount of unemployment. And it is not necessary to show statistics here. Little by little, countries are resuming their activity, but the question here is how long this cycle will take.
What should we do in the sites? During periods of slowdown and recession, we must be very cautious with debts and avoid taking out long-term loans. Take care of employment and be careful with job changes. Look for new ways to earn money. Look for new opportunities for a business. During periods of recovery and expansion, it is the ideal time to start a novel business. Have more conscious and well-thought-out expenses. Look for a better-paying job with a greater margin for debt. Allow yourself to have assets that generate value.
In the next part, we will see the stock market cycle, what happens with the stock market, what the government does during all this, and what we should do from the perspective of stock investments. So, subscribe to the channel and ring the bell to stay tuned for the next video.