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July 05, 2007

Economics abhors excesses

It's said that nature abhors a vacuum -- meaning that natural forces will be set in motion to fill any physical vacuum. And in economics, says Dr. Mike Walden, there's a comparable force.

"What it is is that economics abhors excesses," says Dr. Walden, a professor of agricultural and resource economics at N.C. State University. "Now if there is some monetary excess that occurs in some economic market, what will happen, well, then economic forces will be set in motion to eliminate it.

"A really good example comes from the investment markets. If speculation, for example, pushes up stock prices, and those higher stock prices are not supported by the underlying economic fundamentals eventually what you will have is stock values will fall in order to bring the market back in balance," Walden explains. "We saw this in the early part of this decade.

"We are seeing it again with the housing markets. Housing values in many areas have been pushed higher than supported by the economic fundamentals. So housing prices in some areas are coming down," he adds.

"And we are also seeing it right now in international trade markets. Everyone knows the U.S. has been running a large trade deficit, and that is creating an excess," Walden concludes. "And what's happening is the value of the U.S. dollar is therefore falling, and that will help reduce that excess."

Posted by deeshore at July 5, 2007 08:00 AM