When Americans discuss the causes of the recession, they usually mention factors that are specifically domestic.
Yet most of the industrialized world is also in recession. Is the 2008 slump in the United States seen as the main cause for that? What role did the other countries’ own policies play?
I realize that America’s knock-on effect on the world economy is quite large. However, it seems strange to assume that in America the causes were largely internal and that in other countries the causes were largely external.
Also, if we specifically blame bad U.S. economic policies for the recession, then wouldn’t we see a wider range in post-2008 economic results for other countries which, after all, each have their own economic policy?
My **real **question is: Does anyone know of an article online that knowledgeably deals with this issue?
IAMNAE, but I think the 2008 slump is seen as a trigger and, unsurprisingly, as a major factor in the current sitation. The other countries’ own policies played significant roles and those roles are foremost in discussion of the current situation in those countries.
ETA: I expect the best sources for knowledge on this is to look at articles on the individual economies.
The entire world isn’t in debt, but what matters isn’t the money in the world, it’s the movement of money. Optimism and growth makes money flow, which benefits both borrowers and lenders. Pessimism and stagnation restricts the flow, really hurting the borrowers and protecting the lenders from further loss, but also “protecting” them from profits.
There were housing bubbles in Spain and other places that also crashed. They were driven I think by deregulated banks out to maximize profits. Obviously, not everyone is in debt. See China. But since China depends on selling its stuff everywhere else and everywhere else is in recession, that doesn’t help them much.
The world is now economically linked…which means that if the US catches a cold, Europe gets sick also. About the only economy that was immune from global recession was apartheid South Africa-SA company stocks exhibited negative beta-they went up when most world stocks went down.
There are a couple of other things to add to this:
Generally, it’s public debt that we’re talking about when we say things like “Greek debt”, which is not the same thing as the whole country being in debt.
For example, Japan has a huge public debt, and the creditors are largely Japanese citizens.
Indeed, until recently it was pretty much received wisdom that governments should usually run a small deficit because they can use that money to promote growth while providing a very safe means of investment for citizens.
As I say – “until recently”.
You’re right that the world isn’t in debt, but world GDP can increase or decrease as the total value of goods and services changes and did indeed drop in 2008 (cite).
I just say this because people imagine macroeconomics as being in some sense zero-sum so how can the whole world be “down”?
North Korea is (kind of) up a slight upswing, although it has nothing to do with the 2008 crisis, but more to do with the fact that they’re finally beginning to recover slightly from their mid-90s crisis. Slightly.
One problem was this - the Americans bundled and sold the mortgage debt they were creating. They sold it all over the world, and because it was “sub-prime” (i.e. not the best customers) it was higher interest than the regular (prime) debt. The US system lied, or rather misspoke, about the quality of the debt. Banks all over the world bought this paper, since it paid higher interest rates.
The money they paid, was used by the banks to finance more loans. People bought new houses, the builders made money; people took the houses they had and remortgaged them. All that money was spread all over the globe, buying everything from BMWs to plastic crap from CHina to large screen TVs.
When you borrow money, basically you are taking money that you would have to spend in the future, and spending it now instead - “borrowing from the future”. The Americans and Spain, where they had a bubble, and Greece, where they borrowed like crazy to pay exhorbitant salaries and pensions, etc . - all borrowed from the last few years to spend it before 2008.
Banks and other investors all over the world, bought shit disguised as US Mortgage-backed assets. Once the great toilet on Wall Street flushed, all that paper was worthless. Life savings banks all over the world gave money to get what should have been regular payments, but instead got nothing.
So when all that money had to be accounted for, every bank in the world - almost - had lost a bundle and could not afford to lend andywhere near as much money in the last 4 years. All the economies ground to a halt over the same problem.
I’d look at it this way, starting with a very microeconomics example: I buy a house during the bubble at $500,000. I’m happy at that time because I have a debt and an asset, both at $500,000. The bank is happy because they’ve acquired an asset (my debt).
Now the market crashes. I’ve lost my job so I can’t make payments. Even if I could, my house is only worth $300,000 now. The bank recognizes that it’s not going to get $500,000 back, and has to write down the value of its assets to $300,000.
The net effect is that we have both lost $200,000 of value that we thought we had - the total value of this microeconomy is now worth $400,000 less. That money doesn’t go anywhere. You could even argue that this value never existed; we only thought it existed.
Now let’s look at the domino effect, to kind of get back to the OP. I wish I had a good cite to lay all of this out in a single coherent narrative, but I haven’t found it either. Here’s a sort of simplified outline of the issues, though:
[li]The bank’s asset (the mortgage) was chopped up and sold. What the bank actually holds is an obligation to bond holders.[/li][li]The bank thought they were insured against this loss and bondholders thought the investment was safe. AIG (and other insurers) turn out to have more exposure than anyone realized and may not be able to pay out. More people realize that what they own is worth less than they thought.[/li][li]Banks have to hold cash reserves. They scramble for enough assets to fill the losses, and they stop lending. [/li][li]As banks hoard cash and refuse new debt, people who do want to spend money can’t get more.[/li][li]Suppliers to the would-be spenders sell less product, laying off workers, etc.[/li][li]Now people are afraid; everyone cuts spending. Less product. More layoffs. Less spending… and so on.[/li][li]Government are normally able to step in and buffer this cycle by increased spending, bank reserves, etc. but they’re steeped in debt themselves, even as their revenues drop substantially. Some governments can borrow better than others, but even the US has had a small reduction in credit rating.[/li][li]So now the governments start reducing spending - they’re now feeding the cycle instead of buffering it the way people expected.[/li][/ul]
The other countries that were most affected had their own problems, but I think you can’t underestimate the influence of the US economy and financial markets on the world. The last time I looked at the statistic, US stock exchanges had 40% of the world’s financial assets in them. Even if other markets were not linked, a 50% reduction in US markets would still be a 20% reduction in total world market capitalization. There’s no way that kind of swing can be contained in a single country.
One of the less talked about issues is the money China has in mainly $USD, some speculate this could be in the order of 3 trillion dollars. Chinese companies sell overseas and get paid in $USD but they have to exchange that for Chinese money to spend domestically.This money is being and has been lent out fairly cheaply, when we have cheap debt we get a lot of speculation, with speculation there are winners and losers.
To be precise, it is mostly the so-called Alt-A mortgages that are the problem. Those are the ones that were sandwiched between prime and sub-prime and generally given to people with good but unsteady income (think self employed). They also tended to have such features as negative amortization (i.e., monthly payments did not cover all interest due) and a balloon payment would be expected in 5 to 10 years. Of course, by then the home-owner would be ready to move and the house would have grown in value enough to pay off the loan.
The biggest drag on any recovery is that all over the world, major corporations, and the wealthiest people in the world are not interested in capital risk. The money is all on the sidelines, and no one wants to hire new workers.
No new workers, no new influx of earned income, no new purchasing power, no wealth generated for the world economy. But, the Corporations get to take advantage of the stimulous incentives to “create” cash incomes and investments. At one point, banks could get supported loans, then buy stock in created “companies” that purchased government bonds. The small breakage went their went their way.
What I have read is that despite fears about this, unlike Greece, the vast majority of US government debt is held at home. This makes it a lot easier for the government, since they do not run the risk that a currency correction would cause their real debt to double. If the US dollar is suddenly worth half as much on world markets, it does not mean the US owes twice as much. Worse-off economies with debt denominated in foreign currencies are not as lucky or safe.
Greece has the opposite problem. They don’t have a central bank that can print money, so they are in the same boat as the US states and cities; whatever they can’t pay out of revenue, they have to borrow. As the risk of default goe up lenders want higher interest. Their choice becomes, pay loan-shark rates or don’t pay the civil servants.