World’s Economic and Financial Crisis
Introduction
In the past decade, the economic and financial stability of the world has been moving from worse to worst. The world’s economy has encountered such economic crisis as recession, inflation and credit crunch together with mortgage market bubble, amongst others. Currently, every corner of the world is experiencing hard economic times. The macroeconomic effects of such a crisis are being experienced on a day-to-day basis (Delisle, 2007). This includes unemployment, inflation, and high cost of living, amongst many others. In the past half a decade, things have especially been worse. Stock exchange markets, the oil markets and other financial markets have taken a negative turn. The oil prices have been going up on a day-to-day basis, the stock exchange market has been immensely fluctuating and the exchange rates of some countries especially the developing countries have been losing against the dollar. These changes usually take place in a type of cycle or stages.
Economic/business Cycle
There are four main stages in the economic cycle although they can further be divided and become five or six. The main four stages are expansion/boom, peak, recession and recovery. Trough is sometimes added between the recession and the recovery period. Each of this stage has its causes, effects and survival policies. In the past, it was believed that these cycles were regular. It was believed that they could be predicted and that they could last particular durations. However, this has been proved wrong over time. These cycles are completely unpredictable and do not have to follow certain patterns or particular durations of time. In fact, they have been reduced to be three stages, which are expansion, recession (contraction) and recovery. Although they have been simplified to these four or three stages, they are more complicated than they appear. Other processes and events compose of these cycles (Mattick, 2011). The processes are the expansions and the recessions while the events are the peaks and the troughs.
Expansion
The expansion/boom phase of a business/economic cycle is like the good time of an economy. The economic activities are stable and the GDP (Gross Domestic Product) is improving if not stable. People are confident with the economy and thus they spend more. As in a normal market, increased spending leads to an increased demand of goods or services. This leads to an increased supply of the same (Krugman, 2009). When this takes place, the economy expands more. When the consumers are in so much demand of goods and services, the goods and services’ prices go high. When the prices start going high, the consumers start reducing the spending. The consumers’ reduction in spending makes the companies have extra supply that has nowhere to be taken. In order to avoid wastage, companies cut down on the inventory. They also cut down on the production and if it is too much, they cut down on the employees.
Peak
The peak is the climax of an ongoing expansion. This takes place before the expansion starts going down. As described earlier, this is when the consumers increase their spending after the supply goes up due to a previous increase in consumer spending. This stage is very dependent on the expansion stage. The increased spending leads to a hike of the commodities’ prices. This marks the end of the peak stage and marks the early stages of the recession/contraction period (Knoop, 2010).
Recession
The recession period, also referred to as the contraction period, is one of the lowest periods in the business cycle. These are the real hard economic times. During this period, the businesses are at a slowdown and the unemployment levels are high. The people’s confidence in the economy is quite low. Consumers spend due to necessity and save more in order to be ready for what is perceived as an uncertain future. The governments and the governments’ reserves are greatly needed during this period (Knoop, 2010). They usually bring forth policies and strategies in order to stabilize that downward trend of the economy. The federal/government reserve also plays a major role in stabilizing this period. After some time, this situation stabilizes and the consumers start gaining confidence in the economy once more. This is the start of the recovery process. However, the contraction is the extreme of the recession. The economy has not contracted as many times as it has recessed or expanded. For example, the only time the economy contracted after the Second World War was during the 1981, 1982 recession. The economic activity went below the trough because of the recession that was there in 1980.
Recovery
The recovery phase is the period when the economy’s stability picks after the recession. The consumers start gaining confidence in the economy. They start spending, although not fully, the money they saved for the uncertain future. The demand entices the companies to produce more hence the increase in supply. In some cases, during this period of time when the economy is in an upward motion in the business cycle, it may not expand enough. This means that its production has not increased enough so that there is enough room for the labor that is already in existence and that which wants to penetrate the market. This may lead to laying-off some already employed people. This kind of a situation is referred to as a growth recession. On the other hand, the expansion may lead to a long-run unsustainable growth. If this takes place in a longer period than expected, a boom occurs. Unfortunately, recession mostly follows the boom (Mattick, 2011).
Trough
The trough is an event during these phases. It does not take place for a long period although it is the lowest point of the cycle. In fact, it is one of the worst economic times. It is a period between the recession and the contraction phases. Most economies have not experienced this phase/stage a lot. It mostly follows the recession stage. In other words, it is the period between the recession and the recovery phases. It is also the lowest time of the recession cycle. Most economies move from the trough to the recovery phase. However, there are those that move from the trough and then they start contracting. During this phase, governments/federals work hard to ensure that the right policies and strategies are implemented for the recovery process. In most cases, the economy does recover (Mattick, 2011).
Theories of the economic Cycles
Prior to 1819, economists did not believe in the existence of business or economic cycles. The economists of that time usually blamed the crises on such factors as wars or just made a study of the long term. In that same year, Jean Charles Leonard de Sismmondi, came up with a theory known as “Nouveaux Pricipes d’economie politique”. This was an addition to the existing theory referred to as economic equilibrium. The 1825 economic crises, which occurred when there was peace, made Sismondi find vindication in his theory. Sismondi felt that these economic crises were brought about by overproducing and under consuming. These two were brought by the inequality in wealth. These similar thoughts were expressed by another economist known as Robert Owen, during the same time. However, both thoughts were less systematic (Knoop, 2010).
Both economists gave the solution to these causes as the intervention of the government and socialism respectively. Unfortunately, their works were not of interest to those who referred to themselves as classical economists. However, the under consumption concept was molded in the 1930s into the Keynesian economics after being developed into a heterodox branch. The periodic crisis theory was modified by Charles Dunoyer into another theory known as alternating cycles. Other theories that resembled that of Sismondi were brought about by Johann K. Rodbertus and Karl Marx (Krugman, 2009). It especially formed Karl Marx’s theory, who also suggested that the crises were being more severe each time. He suggested that there should be a communist revolution in order to stop further crises.
Classification of the Cycles
Clement Juglar noted that there were economic cycles that lasted between eight to ten years. However, he was not quick to jump into a conclusion that they were regular. This was in the year 1860. After a period, an economist from Austria known as Joseph Schumpeter came up with another modified cycle. This cycle had the expansion, crisis, recession and recovery phases. The prosperity and recovery were connected to the increase in production, prices, aggregate demand and the confidence of the consumer. During the mid-twentieth century, a couple of economists including Schumpeter proposed a typology of economic cycles in accordance to their periods (Krugman, 2008).
Due to this, some cycles were named after those who came up with them. The Kitchin inventory cycle, which was discovered by Joseph Kitchin, lasted for three to five years. The one mostly known as the business cycle, lasted for seven to eight years. It was given the name juglar fixed investment cycle. Simon Kuznets discovered Kuznets infrastructural investment, which lasted for fifteen to twenty five years. Nikolai Kondratiev discovered Kondratiev wave, which lasts for forty five to sixty years. Since the modern macroeconomics came into existence, these typologies have ceased being of interest to many economists. These typologies advocated the regular cycles (Bajaj, 2008).
Occurrence
The years between 1815 and 1939 experienced many economic crises. One was the post Napoleonic depression, which came after the Napoleonic Wars of 1815. This crisis lasted from 1815 to 1830. It mostly affected the United Kingdom. Another crisis greatly known was the Great Depression, which lasted from 1929 to 1930. This crisis contributed to the start of World War II. The only crisis, which had nothing to do with a war, was the 1825 Panic. The cycles OECD, which came after the Second World War, were more restrained. This was mostly the Golden Age of Capitalism, which was in the years 1945, 1950 to the 1970s (Kirman, 2009).
The years between 1945 and 2008 have not had any downturn until the end of the past decade, which has experienced recession. Monetary policies and fiscal policies have been used in order to stabilize the economic situation. Budgets formed by governments aided in mitigating the cycle without the policy makers’ curious actions. These were some kind of automatic stabilizers. During the period between 1945 and 2008, the problem of depression was declared eliminated in two different occasions. This was in the years of the 1960s, where the Philips curve was believed to be able to maneuver the economy. The 1970s stagflation proved the theory wrong. The Great Moderation was in the 1980s, 1990s and the early 2000s. These were the years of stability and economic growth (Flippetti & Archibugi, 2011).
However, the late 2000s were met by a major recession. Robert Lucas addressed the 2003 American Economic Association and stated that depression prevention problem was resolved. However, particular regions have gone through long periods of depression (Kirman, 2009). Countries that experienced the Soviet Union have gone through this depression. These countries have experienced ling periods of depression since 1989 to 2010. The income level has been lower than what it was in 1989. As proven wrong, there have been recurrent episodes of depressions and recessions in the past couple of years. Even the most stable countries economically have started facing these crises. Countries like the U.S.A, Japan and the United Kingdom, amongst others, have experienced a period of recession and economic difficulties.
What to Learn
The cycles, though not regular are present in the world’s economic structure. There is no time that we are at liberty to say that the phases of the cycle will not affect us again. During this period, though stabilizing in some areas of the world, the economy is in recession. Some of the developing countries are facing hard economic times. The good news is that numerous policies and strategies that are being put in place by economists, governments/federals have started stabilizing the economy. A number of policies can be put in place in order to avoid future further depressions and economic crisis (LaScola, 2011).
As earlier established, wars were a major cause of most of the economic crisis. Governments of nations should ensure that wars are avoided at utmost costs. The aftermath of the wars lasts for years and even generations. Policies should be put in place in order to enable the consumers to manage their spending. Overspending leads to a slow growth of recession, which leads to the major recession. It is also important for the reserve banks to give policies to the financial institutions that will control the circulation of liquid money and money equivalents in the economy.
Conclusion
The economic and financial crises have their cycles but they are not regular as earlier believed. We learn that the economy is not resistant to these cycles. It is important for governments, federal reserves and other economic policy makers put measures, policies and strategies in order to avoid future crises. As earlier illustrated, some crises can last for long periods, which make the particular country or economy stagnate. Wars should be avoided at utmost costs. It is also important for the governments to have policies that limit a consumer in too much spending. It has been illustrated that this finally leads to a recession. The economists of the 19th and the 20th centuries tried to prove that the economic crisis have cycles or phases. A proper study of these phases and how each phase can be prevented or avoided (if negative), is one way of avoiding economic crises.
References
Bajaj, V. (September 17, 2008). Financial Crisis Enters New Phase. New York Times. Retrieved from http://www.nytimes.com/2008/09/18/business/18markets.html
DeLisle, J. R. (January 01, 2007). At the Crossroads of Expansion and Recession. Appraisal Journal, 75 (4), 314-322.
Filippetti, A., & Archibugi, D. (March 01, 2011). Innovation in times of crisis: National systems of innovation, structure, and demand. Research Policy, 40 (2), 179-192.
Kirman, A. (December, 2009). Economic Theory and the Crisis. Real-World Economics Review, 51(4), 80-83.
Knoop, T. A. (2010). Recessions and depressions: Understanding business cycles. Santa Barbara, Calif: Praeger.
Krugman, P. (January 14, 2008). Responding to Recession. The New York Times. Retrieved from http://www.nytimes.com/2008/01/14/opinion/14krugman.html
Krugman, P. R. (2009). The return of depression economics and the crisis of 2008. New York, NY: W.W. Norton.
Kulczak, C. (December 07, 2001). The Great Depression: An ERIC/ChESS Sample. Oah Magazine of History, 16(1), 63-65.
LaScola, C. (January 01, 2011). Lessons Learned from the Recession. Magazine- Printing Industries of America, 3(1), 64-65.
Mattick, P. (2011). Business as usual: The economic crisis and the failure of capitalism. London, UK: Reaktion Books.
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