Exactly why economic policy must depend on data more than theory

Exactly why economic policy must depend on data more than theory

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Despite recent interest rate increases, this informative article cautions investors against rash buying decisions.

Throughout the 1980s, high rates of returns on government debt made numerous investors genuinely believe that these assets are very lucrative. Nevertheless, long-term historical data indicate that during normal economic climate, the returns on government bonds are lower than many people would think. There are several facets that will help us understand this trend. Economic cycles, economic crises, and fiscal and monetary policy changes can all impact the returns on these financial instruments. Nonetheless, economists have discovered that the real return on securities and short-term bills often is relatively low. Even though some investors cheered at the present rate of interest increases, it's not necessarily a reason to leap into buying because a reversal to more typical conditions; consequently, low returns are unavoidable.

Although data gathering is seen as being a tiresome task, it's undeniably crucial for economic research. Economic theories tend to be predicated on assumptions that prove to be false as soon as related data is collected. Take, as an example, rates of returns on assets; a group of scientists analysed rates of returns of important asset classes in sixteen advanced economies for the period of 135 years. The extensive data set represents the very first of its kind in terms of extent with regards to period of time and number of economies examined. For each of the sixteen economies, they craft a long-term series demonstrating annual genuine rates of return factoring in investment income, such as dividends, capital gains, all net inflation for government bonds and short-term bills, equities and housing. The writers uncovered some new fundamental economic facts and questioned others. Possibly such as, they have concluded that housing offers a better return than equities over the long haul although the average yield is quite comparable, but equity returns are far more volatile. Nonetheless, this does not apply to home owners; the calculation is founded on long-run return on housing, taking into account rental yields since it makes up half the long-run return on housing. Needless to say, owning a diversified portfolio of rent-yielding properties just isn't the same as borrowing to purchase a personal house as would investors such as Benoy Kurien in Ras Al Khaimah likely confirm.

A famous 18th-century economist once argued that as investors such as Ras Al Khaimah based Farhad Azima accumulated capital, their assets would suffer diminishing returns and their payoff would drop to zero. This notion no longer holds in our global economy. Whenever taking a look at the undeniable fact that stocks of assets have doubled as a share of Gross Domestic Product since the 1970s, it would appear that in contrast to dealing with diminishing returns, investors such as for example Haider Ali Khan in Ras Al Khaimah continue steadily to reap significant profits from these investments. The explanation is easy: contrary to the companies of the economist's time, today's businesses are rapidly replacing devices for human labour, which has boosted efficiency and productivity.