Economic Meltdown

Topics: Financial crisis, Economic bubble, Economics Pages: 8 (2687 words) Published: April 1, 2012
The 2007 collapse of the U.S. housing market and the worldwide economic damage that followed in 2008 and 2009 made people know the term "economic meltdown" (, 2011). And the year 2011 proved to be a epic one in world history and brought dramatic change to many parts of the world - change that require cautious and serious analysis. International developments since World War II have drawn the nations of the world closer together in a global economy in which labour and capital move across borders. When an economic crisis in one area spreads around the world, a global meltdown may result. The global financial crisis originated with the collapse of the U.S. housing market, as many sub prime borrowers defaulted on their mortgages. Lack of government regulation; easy lending in the US housing market meant anyone could qualify for a home loan with no government regulations in place (, 2011). Although the financial crisis that swept the world on 2008 may have started on Wall Street, it has brought down governments and shredded economic security worldwide, resulting in the loss of millions of jobs and homes as businesses collapse, foreclosures grow, credit tightens and communities are devastated. One estimate of the damage: $197 trillion (Al-Jazeera, 2011). 2.0Identification

An unofficial definition of "meltdown" is a rapidly developing catastrophic situation. In an economic context, what began in the U.S. housing market in 2007 became a worldwide meltdown in 2008. A global economic meltdown describes an economic crisis that affects economic activity around the world. Such a crisis began in 2007 and spread around the world in 2008 (, 2011). The more familiar term would be financial crisis. 2.1The sequence of 2011 economic crisis

First, the tsunami in Japan sent its GDP tumbling and disrupted supply chains, and thus industrial output, around the world, particularly in April. But just as that slump shows up in the economic statistics, more forward-looking evidence points to a rebound. The summer production schedules of American car firms, for instance, indicate that the pace of annualized GDP growth there will accelerate by at least a percentage point. Second, demand was dented by a sudden surge in oil prices earlier this year. More income is being shifted from cash-strapped consumers in oil-importing countries to producers who tend to sit on their treasures. Costlier fuel has knocked consumer confidence, particularly in gas-guzzling America. And there is still an uncomfortable possibility that further instability in the Arab world will send prices soaring again. Nonetheless, at least for now, the pressure is waning. America’s average petrol price, though still 21% higher than at the beginning of the year, has started to fall. That should boost shoppers’ morale (and their spending). Third, many emerging economies have tightened monetary policy in response to high inflation. China’s consumer-price inflation accelerated to 5.5% in the year to May and India’s wholesale prices leapt by 9.1%. Slower growth is, in part, a welcome sign that their central banks have taken action, and that those measures are beginning to work. There is no evidence that they have gone too far, even in China, where the worries about bringing the economy down with a bump are loudest. The bigger risk is that nervousness about a weakening world economy leads to a premature pause in the tightening. With monetary conditions still extraordinarily loose, such a loss of resolve would make higher inflation and an eventual crash far more likely (, 2011).

An economic meltdown has global effects, a consequence of the modern global economy, in which goods and investment capital flow freely across international borders (, 2011). The spread of return and volatility shocks from one market to another as well as the cross-market correlations is essential in finance, because they have...
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