Friday, January 20, 2012 | Dr. Jennie S. Hwang, H-T Technologies Group
Editor's Note: This article originally appeared in the December 2011 issue of SMT Magazine.
What an intriguing year! It was nothing short of unexpected, filled with good and not-so-good events. In this last column of the year, I would like to highlight a few exciting past events that impacted our industry and reflect on forecast points found in my previous column, What Can We Expect in 2011?,published in the February issue of SMT Magazine.
The state of the global economy this year has made everyone feel jittery and the U.S credit rating downgrade caused unprecedented discomfort to all. However, corporate earnings have impressed everyone. Is the world transitioning into a new era--a new economic formula, a new corporate focus and a new political landscape?
Two American economists who won this year’s Nobel Prize in economics have demonstrated that the world of economics is more interconnected than traditional models recognized and that economic policies must reflect those connections. They believe that in a traditional macro-economic model a central bank that wants to reduce unemployment will lower interest rates, encouraging consumers to spend and companies to invest, which drives up demand for goods and services and spurs more hiring. Eventually, that will increase inflation, at which point the central bank can raise interest rates to slow down the economy.
This sounds so familiar since it has been the playbook of political debate over and over again. But the Nobel Prize bestows the award to the new thesis on “rational-expectations theory.” According to this theory, consumers and companies know that lower interest rates will mean higher inflation in the future. Thus workers expect increased wages and investors demand a higher return on capital. These demands and expectations alter human behaviour, which, in turn, affect the state of economy.
In a nutshell, these Nobel laureates’ empirical research on cause and effect in the macro-economy works, in their description, this way: What’s going to happen depends partly on what you think is going to happen. Expectations, not necessarily the immediate effect of policies, control the human behaviour. These forces consequently limit the effectiveness of the central bank’s policies. Is this the reason that there, seemingly, is not a direct correlation between the monetary policy with QE1, QE2 and Operation Twist and real-world results? Is this an explanation as to why the U.S. GDP has scored below the original forecast, as well as below the mid-year revised lower forecast since these forecasts may have taken the traditional effects of low interest rates and the economic stimuli implemented during the year into the GDP formula computation?
Regardless of the low level of U.S. growth and confidence throughout the year, most corporations have performed well in both revenues and earnings and our industry has continued to innovate and advance.