What is happening to the economy and how governments are fixing it

Since the last recession that started in 2008, the economy has been booming. Making money in the stock market was easy and almost everyone felt capable to do so. However, the Coronavirus outbreak has hugely affected companies, consumer spending, and overall economic expectations.

What is happening?

At the time of writing, Europe and the US are being overwhelmed with the spread of the Coronavirus. This comes with many uncertainties and a huge economic impact.

First things first

As we all know by now, the virus started in Wuhan, therefore spreading first through China. China’s industry was the first to be affected by this virus, however, also many European and US-based companies heavily rely on China, both for the assembling and the supply of vital parts of their product. This meant that even in the early stages of the Covid-19 spread, many companies were already affected.

Spread through Europe and the US

Eventually, the virus started Spreading through Europe and the US. The effects of the virus are so severe that many companies have to stop their activities, some countries are going into lockdown and only the most vital businesses remain active.

Effect on the economy

People are panicking, not only for their health and the health of their loved ones but also for their finances. The GDP (Gross Domestic Product) is expected to shrink a lot. Meanwhile, the ECB (European Central Bank) and the FED (US Federal Reserve) are pumping billions into the system to stimulate the economy.

How will the fiscal stimulus affect the economy?

Fiscal stimulus can be done in several ways. Some examples include tax-cuts, fed buying government bonds to provide money to governments, debt cancellation, or even handing out money to the people. The fiscal stimulus package is targeted to stimulate the economy. The stimulus is therefore used to stimulate incomes and output in the short run.

It’s important for this stimulus to be timed precisely, targeted right and to be temporary. If this isn’t the case, the stimulus could have some negative side effects.

The stimulus must be targeted at the right businesses or parts of society. Its intent is to stimulate the economy, thus, the money must be spent in order to stimulate the production of goods and services and, therefore, grow the GDP (Gross Domestic Product). Often, lower-income families are targeted to get the benefits of a stimulus package. The reason for this is that lower-income families usually are most affected by economic downturns. While high-income families likely will have to decrease their savings, low-income families often have to decrease their spending. If the stimulus isn’t targeted right, the money will be saved and only have an inflationary effect over time.

Another important aspect of the stimulus package is that it needs to be temporary and timed precisely. If this isn’t the case, growth, or inflationary issues could occur.

In order for an economy to work, there must be a balance between GDP and inflation. In other words, there must be a balance between the supply of goods and services, and the supply of money.

Summary

The lesson to learn is that currently both demand and production are down. This means the GDP is currently shrinking. If after this crisis we want the economy to repair itself, we need to increase the production of goods and services again. To do that, people and businesses need money. If they don’t have it, the demand for those products and services won’t increase. That’s why governments are stimulating the economy.

In other words, currently, the government is printing money and giving it away.

The governments are both fighting a Pandemic and a recession. If the monetary actions are working as planned, the economy might recover fast, however, there is also a risk of inflation and instability.

 

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*DISCLAIMER: The content on this website is made in good faith and I believe it is accurate. However, this content should be considered informational and not for making financial decisions.

How to react to stock market declines : DO’s & DO NOT’s

It’s safe to say 2020 has started pretty rough. The Coronavirus seems to keep spreading, schools, businesses, and even some factories are shutting down. And on top of that, the stock market saw one of it’s biggest declines of the last decades, followed by extreme volatility.

Continue reading “How to react to stock market declines : DO’s & DO NOT’s”

What is Gross Domestic Product (GDP)? The basics

GDP stands for Gross Domestic Product and is used to measure a country’s economy and wealth. There are many variants of GDP, each measure a different aspect of the economy.

What is GDP?

Gross Domestic Product is the market value of all finished goods and services produced within a country within a specific time frame (usually a year).

Why is it important to measure GDP?

GDP is important because it is used to measure a country’s economy and how much it is growing or shrinking. A growing GDP also indicates a healthy economy what usually means, wealthier inhabitants and less unemployment. During recessions, GDP’s tend to stagnate or even contract.

What is used in the calculation of GDP?

Only the finished goods and services produced in a specific country will add to its GDP. This also includes products that are exported to another country where it will be consumed or used.  Normally only goods and services that are sold in a market are counted in GDP. Because products without a market value can not be calculated at an accurate price.

Finished goods & services

Finished goods are those goods that are ready to be used or consumed and that will not be used as a part of another good.

Intermediate goods

Intermediate goods are goods that are not finished goods yet but that will be used in the production of finished goods. Some things, however, can change from category depending on who buys it. If for example, a factory buys potato’s to make chips, it’s considered an intermediate good. In this case, the bag of chips would be the finished good. If a consumer buys potatoes in the supermarket to make a meal at home, it’s considered a finished good and therefore calculated in the GDP.

Capital goods

Capital goods are used to make finished goods but are also considered finished goods. For example, a blender that’s used to make orange juice is also considered a finished product. The reason for this is that the blender will be used to make other goods instead of being part of a finished good.

The reason that goods and services are split up in categories is to avoid that the same good is counted twice in the calculation of GDP.

bernd-dittrich-eCc7FjMoR74-unsplashPhoto by Bernd Dittrich on Unsplash

How GDP is used to measure growth

To measure whether or not our economy is growing, and by how much, we need to compare today’s GDP to that of a previous point in time. However, When comparing current GDP to the GDP of the past, there is a problem. The GDP that we just described is the nominal GDP, calculated based on the product prices of today. If we want to get to the real GDP, we need to adjust it for inflation.

How can GDP grow?

GDP grows when a country produces more valuable products and services and in a higher quantity. This is often driven by an increase in demand for products and services.

Let’s take a closer look at the main drivers.

Demand

In times of low-interest rates, increased wages and confidence in the overall economy, the demand for products and services tends to increase. An increase in the demand side means that there is room to produce more, new and better products. This stimulates growth in the economy and therefore also GDP growth.

Productivity growth

Productivity growth of an economy can be stimulated by investments in new technology, think about farmers using big tractors instead of horses for example. Another way to stimulate productivity growth is by an increase in the working population due to immigration or a higher birth rate. Also, better education can result in productivity growth. Better education can lead to better technology and innovative solutions which drive productivity growth as well.

Nominal GDP to Real GDP

So before we can compare our current GDP to a GDP of the past, we need to adjust it for inflation.

In the conversion from nominal GDP to real GDP, we will, therefore, use the same product prices for all the periods.

The graph below shows the nominal GDP growth, thus a GDP that isn’t adjusted for the increase in product prices.

Us nominal GDP
Source: FRED

The graph above would make you believe the GDP has been growing by a staggering amount.

However, If you look at the graph below that is adjusted for inflation (= Real GDP), you can see that the growth was (good but) not as significant as the graph above would suggest.

us real gdp
Source: FRED

How does GDP measure wealth?

To measure the standard of living and by how much it has increased (or decreased), we use GDPPC or Gross Domestic Product Per Capita. This is calculated by adjusting the nominal GDP for inflation to get the real GDP and then dividing real GDP by the number of people living in that country.

GDP per capita = Real GDP/ Total number of Inhabitants

GDP per capita is often used to compare the standard of living between countries or with the past.

 

What GDP growth tells us

GDP growth tells us the rate at which our economy is growing. This rate is very important to measure the health of our economy. The ideal GDP growth has been determined to be between 2.5% and 3.5%.

What happens when GDP grows too fast?

When GDP grows too fast, the demand for goods grows faster than its production. Unemployment levels bottom out, therefore companies have to raise wages to keep their employees. These raises in wages further increase the demand for products which in turn forces companies to increase prices. These events eventually drive hyperinflation.

(hyperinflation = very high and accelerated inflation)

What happens when GDP grows to slow?

When GDP grows too slow, the supply of money becomes bigger than the supply of goods. Therefore prices start to rise and money becomes worth less. It’s also called inflation.

 
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How the economy works and why people are buying Bitcoin

Throughout history, many methods of trading, barter, and paying have been invented. From trading tools to stones, commodities, precious metals and even paper bills. In the time of today, we are already used to not only paying with real bills and coins but also by transferring money online.

The history of money

Before we can get an understanding of how and why bitcoin was invented, we should start to look at the history of money.

Continue reading “How the economy works and why people are buying Bitcoin”

This is how you get high returns in the stock market

When it comes to investing in the stock market, you’ll find a lot of advice. There are many strategies used to try getting great returns. And as it goes with everything, you have good strategies and bad ones. The strategy you want to choose for your portfolio is up to you. Let me share some important basics you should be aware of before investing in the stock market.

 

” The big money is not in the buying and the selling, but in the waiting. ” ~ Charlie Munger

Continue reading “This is how you get high returns in the stock market”

Successful with passive investing

Being a successful investor is often considered as beating the overall market return. But what if you are happy with the market return? What if you don’t want to dedicate your free time to reading financial reports, CEO letters and want to avoid risk as much as possible?

If so, investing in an index fund might be the thing for you. Hang on, I will cover everything you need to know.

” By periodically investing in an index fund, the know-nothing investors can actually outperform most investment professionals.” ~ Warren Buffett

Continue reading “Successful with passive investing”

Shareholders’ equity: What does it mean and why is it so important?

“Book value is the amount you paid for an asset, minus its depreciation. “

Equity

Equity or book value represents the shareholder’s interest in a company and represents the value of its assets that are not financed by debt. Book value is nothing more than equity per share.

Equity = Total assets – total liabilities Continue reading “Shareholders’ equity: What does it mean and why is it so important?”

Quarterly reports: how to read

What is a quarterly report? (10Q)

The quarterly report or 10Q shows a company’s earnings, cash flow and income (or loss) for a specific quarter. In one business year, a company states four quarterly reports and one annual report (10k).

The main parts of a Quarterly report are:

Continue reading “Quarterly reports: how to read”

The cash flow statement: how to read

Key takeaways:

The cash flow statement shows all the cash inflows and outflows occurred during the reporting period.

Cash flow analysis is a critical part of any investment decision as it is influenced less by accounting practices.

On the income statement, a transaction is recognized when the earnings process is completed. This does not necessarily coincide with the time that cash is exchanged.

Continue reading “The cash flow statement: how to read”

The income statement: how to read

Key takeaways:

The income statement shows how much a company earned or lost during the year (or quarter).

An income statement matches the revenues earned from selling goods and services, against all costs and expenses incurred in the operation of the company. The difference is what we call net income (or loss).

On top of the Income statement, we find the revenue (or net sales)  which is called “the top line”. From the top line, all costs and expenses are deducted until we arrive at the net income, also called “the bottom line”.

Continue reading “The income statement: how to read”