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Optimistic, cautious, pessimistic economies Optimistic, cautious, pessimistic economies
by Joseph Gatt
2020-08-23 13:27:33
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To put things simply. When you're optimistic, you spend more money, because you feel that you're going to make more money.

When you're cautious, you limit your spending, budget as much as you can, and only spend on necessary items. That is because you are not sure that your income is going to keep flowing.

When you're pessimistic, you stop spending money and start selling some of your belongings, because you get the feeling that you are not going to be able to make money in the future.

econom00001_400Optimistic economies

Advantages: higher wages, more labor flexibility, more hiring, more spending, more consuming, higher profit margins, more “alternative” income sources.

Disadvantages: excessive optimism and spending, low savings rates, unnecessary investments, not planning for recessions. 

The United States is an optimistic economy par excellence.

In optimistic economies, people in general, companies, and the financial market tend to predict that things will run smoothly in the future, and do not hesitate to take risks.

The main problem with optimistic economies is that people tend to be a little bit overpaid, tend to take risks by quitting jobs, tend to spend and borrow money, sometimes borrow money excessively.

The debt and high wages cycle: people borrow money, thus negotiate higher wages to repay the debt, then borrow more money, thus negotiate pay raises or look for jobs that earn higher income.

The problem with the debt and high wages cycle is that people are often over-paid, that is the cost of labor is over-valued.

Now this creates a debate in the United States. Some people argue that “there are 700 million fluent English speakers who love America around the world, why don't we bring in the best of those and get them to work.”

These 700 million fluent English speakers are often from countries where debt is hard to access. That is they are people who speak English, have additional skills (foreign languages, computer skills etc.) and who have diplomas and in some cases experience. PLUS, they are debt free, and would be willing to work for less money as they have no debt obligations.

On the other hand there are those who say that these 700 million fluent English speakers wouldn't fit into the American cultural model, that they often come from cultures where lying, cheating, corruption, hiding essential information and other “evil” cultural traits are normal traits, and that they are thus “unreliable” workers.

Cautious economies

A cautious economy par excellence would be the Germany of 2000 to 2020.

Despite decent growth levels over the last 20 years, and a lot of great economic planning (German companies rarely outsource for example, out of patriotism and because they feel comfortable in Germany). Despite great statistics and a rather decent economic model, the Germans are notoriously cautious.

The entire German political and economic system is based on caution and moderation. German companies tend to hire fewer employees than they need, tend to only resort to debt as a last resort, and tend not to celebrate until the deal is signed AND completed.

This level of caution, some would say, hampers economic growth, and Germany could grow a lot faster if it weren't for all the caution.

Cautious employees tend to save, tend to avoid quitting their jobs, tend to avoid going into debt, and tend to spend and consume on a budget.

Americans could find this behavior strange. First off, Germany has a national retirement pension system, so you don't really need to save for retirement. Healthcare is free (mostly) and college only charges a symbolic tuition fee (around 600 dollars a year, no need to save for college).

Yet, when I deal with the Germans, they tend to look on the pessimistic side. What could go wrong, I would think.

Germans have job security laws, yet fear losing their jobs. German companies are built on robust models, the bigger companies are doing very well (Volkswagen, Mercedes, BMW, Siemens, Allianz) yet they behave like they could lose it all tomorrow.

And Germany is one of the rare countries in the world where blue collar workers are still thriving. Not just surviving. Blue collar workers in Germany lead decent lives, with home ownership and car ownership and everything else that goes with a middle class lifestyle. These days, few if any countries have that luxury.

Problems with cautious economies: growth can slow down, and business can be a challenging environment. If everyone is counting their money, doing business is not going to be fun. So people would rather work than start a business, and that can lead to unusually high unemployment figures.

The cycle goes like this: people don't want to start companies, so people want to work 9 to 5 jobs. But businesses have trouble breaking even or having high profit margins, so they will hesitate to hire people.

Pessimistic economies

Traits: people borrow money so they can eat (often with no intention or clear plan to pay back their loans). People start businesses to “look busy” (often so they can get married, when their businesses are really “zombie” businesses, that is have zero business activity and exist in name only). Friendship is rare, people avoid making friends, your friends will be friends with you so you can loan them money. A common saying in those countries is “I have no friends because friends treat me like I'm an ATM. I'm not an ATM.”

Pessimistic economies cycle:

Terrible education system (often corrupt, teachers who are bullies, test-based rather than knowledge based). That leads to individuals who can't think in concrete terms. Very bad “social intelligence” and very bad behavior in society. Because people can often not provide a service or complete a task (for lack of knowledge and training) they often “act” like they know or do stuff, take the money for incomplete services, and run away. And saying the truth can get you killed in those societies. It's all about deception.

So in pessimistic societies people tend to live for the present because they see no future. If you loan the a million bucks, they'll spend it all today, rather than plan business over the next several years.

Development aid is often spent in the form of “consumption” rather than “investment.” That is development aid tends to be used for food and housing and other luxuries, rather than investing in business activities that will create jobs.

How do you solve the problem?

What I do, and I've been trying to do over the last 5 years, is give “pessimistic economies” tips on how to get their economy to grow, fixing one problem at a time.

That is rather than blame and insult their leadership for the woes of their country (most local newspapers and individuals blame everything on the King or Prime Minister or president) what I try to do is work with everyone: government, business, financial sector, education system, citizens.

That is if a citizen blows away a million dollars in one month on a car and two luxury houses, and that the car and houses lose 80% of their value, and then he blames the president for the recession, man, he's gotta take some of the blame for himself.

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