While approaching the second quarter of this year, let’s review current updates on financial crisis below, which helps you to understand its impact on fundamental elements of the global economy.Lower Prices of Essential goods lead to higher prices in future
Prices are determined by demand and supply interaction. Future supplies depend on the present Investments made in particular segment of goods. So if the prices keep falling and future remain uncertain, the situation discourages new investments in particular sector and could result into much higher prices in the future. Presently, we are going through the similar phase.
The falling prices also hit the food products and raise concerns that this may withhold supplies due to eroded margins and suppliers left the market and look out for other alternatives to earn their living.
In its last update, the UN Food and Agriculture Organization (FAO) warned that the prices have been falling so fast, that the world may soon face rigorous food shortages. Under current gloomy prospects for agricultural prices, higher input costs and difficult access to credit, there remain very little incentive to expand supplies.
Global Trade
The credit crunch has deeply rooted in the banking system and affects international economic activities. Global trading, either imports or exports involve some form of credit, for example, A company wants to import products from other company, the importer companies can acquire a letter of credit from the bank, that guarantees specific payment to be made upon receipt of the goods by importer.
Under present economic fiasco, acquiring trade credit has become far more expensive and even impossible sometimes, this happened in view of higher risk perception by banks. The situation, if not improve could lead to unexpected fall in trade flows.
The United States and China Governments seem to recognize the fact as they Announced $20 Billion in Finance Facilities that provide up to $38 Billion in Annual Trade Finances to assist their Trading (source: Press Release - U.S. DEPARTMENT OF TREASURY).
Deflationary Environment
Under deflationary environment with an excessive additional debt, any increase of money supply got lost in a liquidity trap, as debts have to be paid off in money that ironically gaining its real value. For consumers, deflation creates an incentive to delay purchases. For investors, deflation means that holding risk free assets like money now has a positive return.
Briefly, deflation means declining prices due to tougher money supply, that also includes tight credit availability, all these factors resulted into to the prices of the products start falling and purchases get delayed. Consumers postpone their purchases in expectation to buy lower prices in the future; this affects the suppliers, as they have to shut down their businesses and find other alternatives to earn their living. Over burdened economy succumb to a sudden halt.
Developed or Developing economy
The present Economic crisis emerged within the ‘developed economy’ of United States, although its cascading effects are devastating for world economic system.
The countries with developing economies might hurt badly due to capital outflows but this also provide them to reform their economic system by learning from the developed counterparts, these reforms can make them attractive investment destinations for corporations of the developed nations.
The complex phase
The study carried out to analyze actual problems and to determine the real culprits behind crisis helps us to discover the solutions we haven’t recognized before. Similarly the study of Great Depression (1929) has provided vital lessons to Governments and Central bankers on different factors of financial system and regulations required from authorities, U.S. economy currently facing problems that mainly related to money.
Huge money has been spent on politically inspired projects as opposed to economically productive ones and the results are obvious. Fed has the lowest ever interest rate levels to avoid banks keeping their funds idle with them to keep liquidity supply at comfortable levels, before that the systematic plan to reduce interest rates in a predetermining phase could be considered as foresightedness on its part.
Conclusion
The current economic scenario and its analysis with the available inputs not help enough to determine the better course of action. Yet one thing that can’t be overlooked that the feedback on the whopping stimulus provided by the government haven’t yet considered in the analysis as its outcome can only be known in the mid or end of the second half of the current year.
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