Depression Economics

Adam Smith in his book the Wealth of Nations stated that the adoption of free market principles among nations would benefit all. Indeed, we can see that globalization and the liberalization of international trade has brought wonders to world economic growth for the past few decades. Barring recessions in certain countries during this period of extensive development in telecommunications, the world economy has never been better!

Or so we would think.

Many third world countries have adopted freer trade policies and democratic principles to a high degree of success while other nations that restrict international trade and open economic policies have seen a decline in prosperity. Countries like Zimbabwe which went against the principles of market economics by confiscating lands from the white ‘rich’ have paid dearly in recent years. While countries like China that adopted capitalism to certain degree have prospered at an unprecedented rate.

However, the implosion of the sub-prime mortgage crisis in the summer of 2007 brought an end to an era of global economic growth. The sub-prime mortgage crisis sent shockwaves to the global financial system by crippling banks and financial institutions to an extent that many were forced to close their doors. As banks and financial institutions regroup and count their losses, they began to cease lending activities to ensure their survival.

This in turn, brought a devastating second blow to the economies of nations worldwide and threaten to spill over into all business sectors in all countries. Soon after that, historically sound companies like Toyota were posting rapid declines in sales while other players in the automobile industry  like General Motors blackmailed the U.S. Government with threats of bankruptcy (unless they were bailed out).

Over in Asia, the BRIC countries (Brazil, Russia, India and China) which were initially thought to maintain world economic growth, were also hit by a decline in economic activity and saw their growth rates decline. China itself posted lower economic growth due to spill over effects from the ailing U.S. economy.

As world leaders gather together to tackle the global financial crisis in the coming G20 meeting, people around the world are either skeptical or in high hopes. Needless to say, the current crisis is not likely to be solved by just a few meetings, world leaders or not. Besides cutting interest rates, government stimulus packages and currency swaps, all nations are heading to the printing machines.

This is bad.

While printing money is indeed a must in the current situation, excessive uncontrollable printing of money can cause further economic havoc. The German hyperinflation is a stern reminder to all of us of the economic disaster of irresponsible monetary activities. Unless we want another Hitler to come up to the world stage, we should be wise in our voting (and printing).

 

Comments
One Response to “Depression Economics”
  1. Simon says:

    Detailed description, good.

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