Another Year of Living Dangerously

http://www.economist.com/node/18440781

In the midst of instability and turmoil, the global economy has suffered as a result of the problems in the Middle East and the catastrophes in Japan. The fallout from these two events alone have caused initial damages to the global economy not just in fiscal terms, but also in the long-term in relation to the doubt, fear and insecurity felt by investors and consumers. The level of global output is of great concern. With doubt and insecurity comes a loss in aggregate demand (AD), which is the total or aggregate quantity of output that is willingly bought at a given level of prices, other things held constant (432). With the hit to aggregate demand, the decrease in output, or aggregate supply (AS), which refers to the total quantity of goods and service that the nation’s businesses willingly produce and sell in a given period (377) will doubly affect the global economy.

In Keynesian terms, the decrease in overall supply is not as important as how it has affected the demand of consumers. Even though Japan has steadily been declining in terms of its global output, it is still the third largest economy in the world. So, rather than focus on the loss in production, it will be important for world leaders to increase consumer confidence and find available markets in other locations and possibly look to the expansion of markets that include substitute goods, or goods that serve that same purpose but are produced elsewhere (92). Though were the crises in Japan the only concern, that plan may have a greater effect; however, oil is still a very popular commodity with no real substitute on the market and the upheaval in the Middle East shows no sign of abating. It would seem though that this might be the best time for investors to not become concerned with the Middle East and instead turn their capital toward markets of alternative energies and possibly prevent the sort of catastrophe that the events in the Egypt and Libya have created.

Furthermore, it is important that the manufacturers affected by the loss of production in Japan don’t overreact to the crisis and reduce their workforce in anticipation. With the economy finally in some sort of recovery and the majority of the crisis over, it is important that we don’t overcompensate for these events and cause more damage. We need to allow the economy to take its course and monitor the unemployment rate before corporations decide to take action and take back all the progress that has been achieved over the past several months. Ultimately, it is important that the reaction and policies taken by central banks and governments not be too severe in either direction to prevent a fall out in the event of over expansion to compensate or preventing the momentum of the economy to build as result of fear and uncertainty.