The COVID-19 pandemic, which has brought about a downward revision of economic growth prospects and asset prices is a good reference point of how an economy can be thrown off plan.
So far, the aggregate push on efforts to reverse the tide of economic shocks brought about by the COVID-19 pandemic seems to be tilted towards policies aimed at broadly improving government finances, to serve as a catalyst for economic rebound.
This is understandably so because governments play a lead role in economic activities of every country, and even provide the financial backstopping function when the economy hits a spot of bother.
It is the significant leadership role by governments that drives the recovery process whenever an economy is in recession. Thus, positive actions by the government is always the catalysts for household and business activities.
That catalytic effect is necessary in all situations, and even more so during a period of depressed economic activity, such as the social and economic effects brought about by the current coronavirus.
In the main, COVID-19 has proven, once again, that economy is not deterministic. Economic agents, which include you and l, and all the other actors you can think of, do not act the same way all the time. Therefore, in effect, the rational man underpinning economic actions (inactions) and decisions cannot be rational at all times.
So, that moment of “madness” can have profound adverse effects on an economy; it could affect financial stability, and in some extreme circumstances also provide challenges to policymakers.
Examples in this area are not hard to find, if you consider the bigger challenge of human credulity. It is for this reason that “all things will not always be equal”, and further explains why it is difficult for an economy to be deterministic.
Look at the other challenge to the broader economy, which is more to do with the influence markets exert on its power.
Markets have their own ways of defining cause and effects. Sometimes, this unseen hand corrects direct interference, and other times too, punish those who fail to heed its power.
The COVID-19 pandemic, which has brought about a downward revision of economic growth prospects and asset prices is a good reference point of how an economy can be thrown off plan.
Even with the best modelling and forecasting techniques (add the touted Artificial Intelligence), nobody was able to predict, accurately, the onset of the pandemic – its possible cause and effects.
Nobody. Rather, at the start of the year, economic forecasts predicted a firm global growth this year; certainly to be better than the growth of 2.9 per cent recorded last year.
COVID –19 has affected the finances of all economic actors, and it is for this reason that there is the need for some “home economics” to address the bigger household challenges.
Presently, there is no doubt that households lost income due to some of the measures introduced by governments to stop the spread of the virus.
The lockdown, for instance, made it difficult for the informal sector workers to receive any income during the periods that they were at home, except where the government had made specific provisions to lessen their plight. Even so, the reliefs would not be able to fully offset the income lost during the period.
Significantly, households have been financially exposed by this pandemic, because of the lack of financial resilience. And, to be fair, the unexpected nature of the pandemic means that even the middle-and-wealthy households would suffer as a consequence.
The lessons are clear though, and to move on in the right direction, post-pandemic, you must recalibrate your finances. Do away with past consumption patterns and conserve some liquidity because at this point in time we are all not sure how the pandemic will eventually end.
There is a new normal, and that calls for a paradigm shift. I know that paradigms are so powerful that even highly educated professors and finance gurus will dismiss evidence that contradicts their present worldview. Hei, the man in the mirror is you, and no one else!
When in a fix, always remember this anonymous quote: “Insanity is doing the same thing over and over again and expecting different results”! You, therefore, need to shift your paradigm to deal with current financial problems or opportunities.
Nature doesn’t take one approach to a problem. For instance, the tortoise and porcupine are both small animals yet each has a distinct strategy for keeping predators at bay.
The ability to think beyond the current state of your finances is going to become an essential skill in creating the perfect financial freedom, beyond COVID-19.
Be tight on the finances at this time, and be prudent!
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