Central Banks And Globak Crises - Who Really Controls The Global Economy? Flashcards
Difference between a recession and a depression?
Recession (lagging indicator) : Decline in economic output for over two consecutive quarters.
Depression: When a recession lasts for more than a year. Deflation (Falling prices) sometimes accompany a long term depression.
Stagflation: when prices rise (inflation) despite a decline in economic activity (stagnation)
What were the biggest financial meltdowns in modern history?
1929: Great depression caused by severe storm market crash and exacerbated by US decision to erect onerous barriers to work trade
1971: US Dollar crisis, collapsing of the Bretton Woods agreement to fix currency prices.
1973: First oil shock. Oil-producing nations raise price of petroleum sharply, leading to economic downturn of most of the industrialized world
1979: 2nd oil shock. Rampant stagflation
1982: Sovereign debt crisis. Many third world countries default on loan.
1984: Failure of Continental Illinois bank followed by collapse of 43 more US banks
1986: Savings and Loans crisis. Due to speculation on home loans in US
1987: Stock market crash in US leading to other markets crashing
1989: Japanese “lost decade”. Bursting of Japanese real estate and stock market bubble leads to a long period of economic stagnation
1992-93: Currency crisis in Europe. British pound and Italian lira drop out of European monetary system
1997-98: Asian Economic crisis. Currency crises and stock markets crash across South Asia, esp Thailand, Indonesia, South Korea and the Philippines
1998: Russian Economic Crisis. Default on sovereign debt and years of economic decline
1998-99: Brazilian Economic Crisis. Rampant inflation and currency free fall lead to default on international debt
1998: long term credit bank failure leads to instability of US financial market
2000: “dot-com” burst. Internet stocks plummet, leading US federal reserve to lower interest rates drastically.
2001: Argentine Economic Crisi. Currency uncoupled from dollar link and massive default on international debt
2007-08: Global financial crisis. Subprime mortgage meltdown.
What is the relationship between inflation and unemployment?
Unemployment usually goes down with growing economy and rising prices.
Declining unemployment makes it harder for businesses to hire new employees -> raises salaries -> raises cost of business -> higher prices
Central banks try to make balance decisions to reduce unemployment while keeping inflation in check
OECD?
Organization for Economic cooperation and Development (based in Paris)
Country club for rich countries.
Documents all aspects of member countries economies and serves as forum for discussion and coordination of economic policy.
USA, Canada , Mexico, Japan, south Korea, Australia, New Zealand, more EU members (France, Germany, Spain)
Consumer Price Index (CPI)?
Tracks prices of a wide range of goods and services
Attempt to understand how much prices are increasing in the economy as a whole
Often used to readjust fixed incomes
Determined by individual country
How does a central bank control inflation?
Reduce money supply.
1) Since most easily accessed money is in the form of bank deposits, central bank regulates bank lending and bank deposits.
When banks have more money to lend to customers, economy grows.
This works well due to multiplier effect. Money deposits usually used to lend to someone else by bank. Banks just have to keep a small portion of each deposit as a reserve. The effect is to increase the money supply without an extra currency being printed.
2) Control interest rates it charges on loans to banks.
3) Open market operations : central
Bank buys or sells large amounts of securities (eg. Government treasury bonds in the open market)
Central bank “creates” money every time it dips into its vaults to buy bonds from banks. Injects new money into the economy.
Likewise, when central bank sells bonds, reduces economy’s money supply. Payments from banks and FIs goes into central bank’s vaults.
Difference between discount rate and Fed funds rate?
Discount rate: Set by federal reserve. Interest rate US Fed (America’s central bank) charges on loans to member banks
Fed funds rate: Set by banks themselves. Interest that banks charge on overnight loans to other banks. Named as such because money loaned between banks is usually kept at federal reserve.
Bank for International Settlements (BIS)?
Central bank for the country’s central banks.
Provides temporary funds to shore up failing banking systems around the world - provides short term financing called bridge loans to member banks which are paid back as soon as longer term financing can be arranged.
Also serves as platform for establishing new rules for regulating the world banking community. (eg. Basel II in 2007)
Or forum to bring central banks together to discuss financial globalization and role of central banks in the converging world economy
International Monetary Fund (IMF)?
Provides bridge financing to countries in crisis
IMF-mandated structural adjustment process is often a crucial first step before troubled countries are able to receive funding from other longer-term sources.
IMF receives funding from a wide variety of member countries around the world.
Also has its own reserves of gold (>3000 tonnes) that allows it to serve as a counterbalance to the turbulent markets and financially unstable governments during global crises.
Economic medicine prescribed by IMF for countries in crisis is often painful and criticized as being harmful the to the poorest members of society. (eg. IMF often requires debtor governments to reduce subsidies to state industries during crisis - sometimes provoking severe civil unrest as these measures often raise the cost of previously subsidized services such as bread, milk, gas and mass transit. Since many of the developing world poor are already living at subsistence levels, a small increase can mean economic disaster.)
Accepting an IMF prescribed plan is usually seen as a sign that a country in crisis is prepared to seriously address its economic ills, regardless of cost, paving the way for more LT finding from the world bank etc.
Many austerity plans imposed by IMF eventually improve for poor people in developing countries even though the ST burdens of the readjustment plans are extremely difficult to bear.
World economic forum?
Economic “informal” summit where Business leaders and politicians and interested celebrities (Angelina Jolie, bono) gather every winter to try to solve the world’s major social and economic problems in the Swiss ski resort of Davos
Alternative summit called World Social Forum discuss world issues in a less capitalist setting
