Global Recession and Inflation Macroeconomic Issues
This paper seeks to analyze two articles from a macroeconomic point of view. These are Keller’s article in “Boston Globe Business Journal” and Washington’s feature in “The Economist.” The articles are on global recession that hit the world a few years ago. The paper is on inflation and recession as an international economics issue, which is a topic of study in macroeconomic levels. It is essential to understand the meaning and difference of microeconomics and macroeconomics. This is because glimpsing the meaning and the difference in the two branches of the economy will help either make critique or support the arguments of the two writers. Posner states that economics refer to the study of how individuals and firms use their limited resources to satisfy their limitless needs. Economics as a whole has two branches of study namely micro and macroeconomics. Microeconomics is the field that deals with the small view of economics that are at the individual decision-making and market conditions level. On the other hand, macroeconomics is broad and looks at the national and international economic issues.
The main economic issue that Keller discusses in the work is the global recession. Inflation is the persistent increase in costs with no accompanying increases in earnings. The global recession refers to a period of world’s economic slowdown. The International Monetary Fund (IMF) states that there are many factors that determine whether a slowdown qualifies to be a global recession or not, but an economic growth below three percent is equivalent to a global recession. This article shows the effects of recession to Europe which are similar to impacts in other nations. Apparently, because of the continued recession in Europe, Organization for Economic Cooperation and Development slashed the forecast of its economy saying it will probably shrink by 0.6 percent, this year, after another drop of 0.5 percent in the year 2012. This is clear evidence that the inflation in Europe has made the economy of Europe feeble. The drop is most likely because many investors either pull out or avoid further investments in the Euro zone because of fears that their businesses may fail to peak. To them inflation and recession are a threat to their businesses.
Inflation is an issue that closely relates to macroeconomic concepts and models such as employment, national and international economy, monetary policies, and international trade. At the macroeconomic level, some impacts, such as unemployment after companies lay off workers to reduce the high costs of production, affect individuals directly. With few working people and few commodities, trading governments generate little income from taxes. Unemployment refers to the percentage of workers in the country, state, or city who are not at work, or, we could say, do not have jobs. Ideally, in the free-market economy, persons would have utilized all worker resources. However, many people want to work but cannot find jobs. For many, lack of skills or education is an impediment to finding jobs. In some cases, businesses can fail, and people may lose their positions. Most of the time, they find some job elsewhere in the state or in another part of the country. Nevertheless, there had been periods when economic failure was more widespread. In part to an environmental phenomenon called the dust bowl, in the 1930s, the United States experienced massive unemployment reaching twenty-five percent. A less serious economic downturn is a recession. This is a picture of unemployment in the United States for much of the twentieth century. Note the high unemployment during the depression of the 1930s. Unemployment dropped rapidly during World War II, leveling off around seven percent. This shows how an economic downfall affects economies, especially through causing high unemployment.
Inflation affects international trade between nations and investments in countries. International trade is a macroeconomic issue, and as such, inflation relates to macroeconomics. An issue like recession made it virtually impossible for people to export and import goods because the costs such as fuel cost has risen. This made trade expensive, and international traders feared they might end up importing or exporting goods at a high cost only for the prices to lower thereafter. This is an effect of price speculation where people anticipate changes in the price of commodities and, as a result, they delay buying or selling the commodities. This largely reduces the amount of goods in supply in the market, which only aggravates the inflation.
Washington argues on the mind provoking analysis on changes in the apparent relationship between inflation and unemployment. He also states that The IMF remarks the steadiness of inflation anticipations and reckons that people ascribe to centered bank credibility. From the early 1980s, centered banks convinced the public that inflation in the future would be usually reduced and steady. Inflation anticipations became so well anchored that even the worst months of economic performance from the 1930s could not produce deflation. In the year 2008, a major demand shock hit the American economy. We can depart the delineation of “demand” since it is vague for now. It should suffice to state that yearned keeping spiked firms and households shocked for their financial future. Today, here are one-article talks of the Great Recession. In the last decade’s former to it, inflation anticipations have solidly targeted at reduced grades that families ceased to believe worldwide price and wage shifts as economically significant. Whatever occurred in the economy, broad inflation would be reduced and steady, and reduced and steady inflation thus came to have little to do with anything occurred in the finances (Washington).
The economic urgent situation that conceived the large recession occurred against the backdrop of some macroeconomic imbalances and deficiencies in the economic regulatory structure of the international finances. The crisis contributed to increasing interest rates and critical disturbances in the function of the economic system, which slowed demand and provision of items and services in the economy. The quality of economic data dropped drastically and impaired relations between players in the economic scheme. Some economic organizations failed, or government administration took them. Household demand dropped in the country after country, contributing to disintegrate of trade goods to other nations. The global finances went into a downward spiral. This is yet another relationship between the international crisis (inflation) and world economy (Keller).
Other arguments are that the global financial crisis originated amidst the neglect of worldwide governance. Lack of success of the world community to give the globally linked finances, credible international rules, led to the increase in prices of commodities. The bursting of the house cost bubble in the US triggered the unwinding of speculative places in the distinct segments of the economic market. Although, all these inflation increases were unsustainable and would have burst eventually. For policy makers who should have renowned better than to bet on drubbing the bank to claim with the advantage of hindsight it is easily not credible (Keller).
The Shelter cost bubble itself was the result of the deregulation of financial markets on an international scale, broadly supported publicly by governments globally. The applying of “securitization” through devices like a residential mortgage backed securities that appear to satisfy the wish of investors to multiply earnings promoted the dispersing risk and the severing of risk and information on inflation. It is just this way that greed and unwisely spending money goes in the stage. Without the financial way of life, befitting regulation, expectations on comes back of solely economic devices in the double-digit variety would simply not have been possible (Reuters).
In economies with single-digit growth rates, those anticipations are deceptive from the starting. Although human beings tend to believe that in their lifetime things may happen that not ever happened before, disregarding, at smallest temporarily, the courses of the past. This occurred in most recent memory throughout the supply market periods of increased economic activity of the new finances. Regardless of the dot.com smash into of 2000, a wide variety of investors started to invest their capital into hedge capital and innovative economic devices. This capital required to boost their risked exposure for the high yields with complicated computations seeking for the greatest wagers, which supplemented to the opaqueness of lots of devices. It should have been clear from the onset that not everybody can be overhead mean. In supplement, for the capability of the real finances to contend with economies restrict overstated real land parcel and product charges or misaligned exchange rates, but it is only now, through the know-how of the urgent situation that this is approaching to be appreciated by numerous actors and policymakers (Washington).
I acquiesce with the arguments on the determinants of the recession since it is factual that demand and provide factors have an allotment to do with the topic. The aggregate demand dropped because of higher interest rates, which decrease borrowing and buying into dropping real wage rate, dropping buyer self-assurance, Credit crunch, which determinants, a down turn in bank lending and smaller buying into a long period of deflation. Keller and Washington try to argue about the identical but in a rather distinct approach. The aggregate demand curve shows the amount that firms will provide in the finances at each cost level. There is an allotment of argument about the accurate form of the curve. Many academic economists and monetarists stress that the form differs between the short and long run some boost in yield if demand boosts, but in the end any increase in demand is inflationary (Keller; Washington).
As an economist, I would contend that the reduced pattern relationship between funds and inflation takes a long duration to establish. The functional characterization of the transmission mechanism from monetary expansions to price expansion is still an issue of substantial argument. However, I would continue this literature in three dimensions it takes an international viewpoint, with a broader set of nations than in preceding investigations and a longer time sequence, thereby internalizing some promise worldwide transmission channels. For example, through commodity charges, it encompasses interactions between monetary variables; that is asset costs specifically house charges and inflation. This permits for a channel of transmission that has been in the latest publications. (Washington).
In conclusion, it is evident that the global financial crisis was a result of demand and supply forces. The recession led to macroeconomic issues: unemployment, slow down in international trade and a general reduction in the government earnings are among them. To date, some countries are still trying to pick up the pieces after the financial crisis. This makes it difficult for investors to set up shops in such regions because they fear the economies are not yet stable to support their businesses.
Keller, Smith. “OECD Says Europe Remains a Threat to the World Economy.” The Boston Globe Business Journal. 29 May 2013. Web. 30 May 2013.
Posner, Richard A. Economic Analysis Vol. 5. New York: Aspen Law & Business, 1998.
Reuters. “US Housing Has Momentum, but Another Boom not likely.” The Economic Times 28 May 2013. Web. 30 May 2013.
Washington, Rowe. “How Does Inflation Matter?” The Economist 23 Apr. 2013. Web. 30 May 2013.