The collapse of Lehmann Brothers brings into focus how fragile modern economics systems have become. In the past value of an article was based on the perception of its utility and availability. The perception of value was much more tied down to ground than merely on a sense of exclusivity. Gold and land were always valued for rarity and utility respectively however all that changed in modern age. Take for example a 100 million dollars Rembrandt original; from purely functional point of view its utility as a work of art to provide a sense of exhilaration is only slightly better than a good fake worth some 500 dollars yet the 100 million dollar price tag for original has basis on value appreciation and our desire for the exclusivity. The same paradigm applies to stock values and currencies. The problem is that perception of value in modern times is a kind of bubble; while it lasts the returns are prodigious and when it collapses the fall is immediate and abysmal.
In old days the economic down turns were mostly due to wars and famines where as in modern age the down turns are cyclical, quite irrelevant to natural causes though may bring forward such a cyclical phenomenon. The basis of cyclical nature of economy is purely in are inability to correctly calibrate our response to supply and demand. When the demand rises investment is poured into manufacturing which with time over shoots the demand and generates surplus inventory and when this happens investment dries up in manufacturing so there is down turn but natural incremental demand again dries up inventory and manufacturing capacities setting off yet another cycle of investment.
We are in an age of cyclical economy!
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