The world as we know has begun treading downhill on the business cycle chart, and it is only a matter of time before the effects of the crumbling base of USA and Europe cause other relatively closed economies to slide into recession as well.
And in the time of globalization each country, sparing none, in one way or another are influenced by other countries. Hence the effects will spare none.
It all began with the Sub-Prime Crisis, when the cost of estate was over estimated and the regulations applied were not adequate and people were lending borrowed money in the hope of earning a profit. But when the borrowed/invested money turned toxic, the individual suffered and on a macro scale the large investment banks started to fail. There was gap that was created between debt, earnings and payments; this resulted in a deficit in cash, the recovery of which seemed close to impossible thanks to the toxic debts.
In my understanding the Global financial Crisis is still in its initial stages and the worst is yet to come, and the situation will only become dire when the effect of the crisis hits the developing economies that have depended on the developed nations for a large part of their exports. Once the developed nations will be rendered incapable to pay for/buy the respective exports, the income of the exporting economy will be cut, thus an impact of the buying capacity of the exporting company will be felt, reducing the imports it can afford. The cycle is vicious.
This kind of movement does surely causes people to panic, and when they hear that their investments and life savings are in danger they become scrupulous and miserly, which in the long run catalyzes the choking of financial pipelines as the liquidity starts to fall short.
And as the economy shows no signs of recovery, people have curbed their investment inputs and the stock markets as we see have begun to flounder also causing the companies to have no new liquidity to invest and therefore no new profits, as a result of which they seem to be stuck in a quicksand pit of toxic debts.
The adverse effects of the loss of liquidity, causes the trust in the economy and markets to reduce, as people fear an oncoming depression. With the only example of it being 1939, people tend to hold on to every penny left. Assets no longer hold eminent value and liquidity becomes the need of the day.
It is because of this line to thought that the USA Luxury Goods market has also begun to feel the pinch, as their customers don’t want to let go of their cash unless absolutely necessary.
Like this I think, gradually many more sectors will feel the effects of recession.
In the new, the automobile industry has begun to crumble, and have not received the bailout as yet.
In my guess, I feel the software industry and the green companies likely to feel the heat, as people will be unable to afford their green policies, causing the investment to go duff. (Hopefully the crisis will not reach that level.)
Further as the “Wall Street” was being damaged and though the rescue of Freddie Mac and Fannie Mae brought some relief initially, the fate of Lehman Brothers as many economists believe evidently thwarted the trust of many.
And as companies world over struggle to survive the depleting liquidity in the market, they move to cut jobs, the latest being Citigroup, rendering many jobless and in the whirlpool of the oncoming depression.
Though many are keeping an optimistic outlook, to me it seems quite futile, especially since ‘people as a whole are not trying to over come this problem’. This statement may seem strange to the one who reads it, because one may wonder how one how people (common man) can make a difference. In order to see this, it is important to know and understand how this repression is soon going to catch up to the lower levels of the economic strata like SMB’s.
Small/Medium sized industries suffer as they do not get the required loans they need to sustain growth, and even if they get them, the investment turns toxic because all around liquidity is short. This short but fatal cycle causes many SMB’s to shut down resulting in the common man being affected adversely. This is already happening in the USA
The chain reaction will continue unless action is taken not to only boost liquidity available but to bring the levels of the world market down.
Man has elevated the global financial system to a mammoth level and because the middle of it was shaky, it is now crumbling. Hence it is not enough to pump liquidity and expect the financial system to recover. Collectively we need to bring financial levels to a stable low from which it can begin to build up again. And if we do not do this actively and voluntarily, a depression soon to come will break the global financial system.
Economists need to be broad minded and so do the company’s; they need to reduce their selling costs according to the decrease with the respective raw materials and only then will common man be able to sustain their consumption. And only then will the company be able to sustain production. This logic goes according to the supply and demand graph, but a little beyond it, and one must understand that things don’t always remain ceteres paribus; the conditions change because the world of man can be described as nothing less than ‘unpredictable’.
And though economies like Japan, China, and India are desperately trying to sustain the growth and survive the recession, they are not going to succeed unless the economy – micro and macro components, are made to comply with the needs of the hour. A single sided effort and narrow policy making isn’t going to arrest the recession that now seems to be sliding into a depression.
If this is not done the fate of many will be like that of Pakistan, Iceland and others that would soon follow, and the fundamental use of the IMF will be rendered inutile, as funds there too, will run out.
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