Wednesday, May 25, 2011

Stages Of Economic Growth

Understanding the stages of economic growth begins by examining them thoroughly. The stages are made from the natural growth that free markets realize by systematically allocating their resources to their most optimal economic purpose. Shifts in public policy are the reasons that stages materialize in the first place. The incentives that new policies bring make it possible for investors to make more money than the economy usually dictates. The stages we are referring to are the bubble, peak, bust, decline, trough, and then finally, recovery. Every one of these six stages play a vital role in the economy and warrants a detailed examination.

The Bubble
A Bubble is a phenomenon that dictates the price homes or stocks will rise a lot higher than justified by the underlying fundamentals of the product. Bubbles in the stock market frequently are driven by companies that buy on speculations which have not made a profit yet, but are anticipated to grow quickly in the very near future. With real estate, the bubbles are usually driven by changes in financial policies that make it simpler for people to get financing, which results in a lot more buyers, thus higher prices.

The Peak

Bubbles can only get so big, and when they max out that means the market has reached its peak. These peaks really are difficult to predict and become apparent only when looked upon in hindsight. The way in which they usually come about is when part time investors catch wind about all the superb profits that are realized by others and decide to finally buy their way into a particular market.

The Bust
Bubble markets in time will rise up to peak, and there is usually some kind of trigger event which will initiate a sell off. It may be an earnings report that disappoints, or news of political unrest which may disrupt energy or food prices.

The Decline
When this cycle of the market hits, many players come to see the assets that they bought are not worth the market prices at that time. It becomes clear that the new stock will not reach the profits that were expected, and that plays out with sell-offs among the investors who simply cannot afford carrying the asset forever without selling it.

The Trough
When the values reach a point low enough that investors will be willing to face the risks of any losses for the chance to get upside gains, a certain value bottom is reached. Sometimes this trough lasts a long time if the investors are unwilling to start buying with aggression based on fears that any future growth will materialize. Conversely, if banks hold a lot of properties that are foreclosed, they will of course need to sell said properties as fast as possible, given that they don't make market prices go down any further.

The Recovery
When over-priced capital is sold at lowered prices and those new owners start using that capital in ways that produce value, the recovery can start. Depending on many factors, this could take months, years, or decades.

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