The freezing of the flow of money is a financial crisis. Today, the global flow of money is at risk. This risk is a result of Debt and Credit imbalances: "Persistent trade surpluses in some countries and deficits in others did not reflect a flow of capital to countries with profitable investment opportunities, but to countries that borrowed to finance consumption or had lost competitiveness. The result was unsustainably high levels of consumption (whether public or private) in the US, UK and a range of other advanced economies and unsustainably low levels of consumption in China and other economies in Asia, and some advanced economies with persistent trade surpluses, such as Germany and Japan." The debt and credit imbalances have created global systemic risk as economic markets have become more interdependent.
It destroys the strengths of currency and increases the inflation rate. Due to the increase in the inflation rate, prices of goods and services will become higher. Consumers will lose their purchasing power. Consequently, they will need to give away more money than they used to for the same goods or services. Economy growth can be disturbed by high inflation, when import of goods and services inside the country become less affordable as the currency of the country has become weaker.
Those who are employed will be severely affected in case of a rise in unemployment in the economy. Noticeably, reduction in wages and salary leads to decrease in the amount of tax collected on the income. This further hinders the scope of availability ... ... middle of paper ... ...l make the same salary that they had previously. This increases the debt owed by those families. Usually the amount of unemployment benefits is not enough to keep this cycle going.
Question 1: (i) Briefly, what is the issue? What impact does it have on different regions’ GDP, prices, exchange rates and Interest rates? The issue is an unprecedented level of world surplus savings (especially in the Asian economies) that faced with weak investment opportunities serve to fund a growing US current account deficit which creates dangerous world imbalances. The Euro-zone and Japan have slow GDP growth and their savings increase due to a lack of confidence in both financial and social security systems as well as the inability of the private sector to find investments. Also we see increasing fiscal deficits, very low real interest rates and low inflation.
In this sense, inflation is a monetary phenomenon. But what effect does inflation have on the economy and on investment in particular? Inflation causes many distortions in the economy. It hurts people who are retired and living on a fixed income. When prices rise these consumers cannot buy as much as they could previously.
However, soon the interest rates began to rise substantially. These rising interest rates meant higher repayment amounts for borrowers. The countries were unable to keep up with these higher payments. This led to default on the repayments. If a country cannot repay its debt then it will default on the loans it took out.
During this time the unemployment rate was at 6.1% and the inflation rate was at 5.84%. So, as means to combat this, Nixon made it so the U.S. dollar was no longer convertible to gold. Now all of a sudden the government is paying its bills while increasing its wealth and the potential increase in inflation has stopped right? Sounds good on paper… until you realize that the paper is worth more than the paper it was bought with. So why does the fiat currency fail each time?
This caused G non-profitable expenditure (G1) to increase and thus caused deficit budgets. This is when Private Investment (I), Economic Growth (GDP) and Private Consumption started to fall tremendously. In later years the G borrowed money from other nations because worsening Fiscal policy. The trouble was that the G was borrowing to pay G1 expenditure not G2. This caused a lack of I multiplier effect within the economy.
For example, Americans in the top 0.1 percent average over 184 times more income than the bottom 90 percent of American workers (Inequality). This is a serious problem that needs to be addressed. In addition, Marx also argues that capitalist systems are very unstable and are characterized by frequent financial crises. Evidence of this is supported by 2008 financial crisis that heavily impacted the world economy. Even though capitalism has allowed the world economy to flourish, it has also increased the sensitivity of other countries’ economies to financial crises around the world (Lotta 31).
The History According to Arnold (2009, p.803-809), subprime mortgage defaults in the United States was the first problem in this current financial crisis, then bubbled damaging cris... ... middle of paper ... ...tion. Firstly, the Fair Value Accounting is not always accurate in the financial market because the value of assets and liabilities always fluctuated. Sometimes, the asset value is overestimate and underestimates. Secondly, the Fair Value Accounting makes financial institution reduce their ability to face the risk because in this current economic situation the value assets are fluctuated. It is a problem to managers to sell or buy the assets.