Is the US Banking Crisis Likely to Lead to a Similar Experience as the Japanese Lost Decade - Essay Example

Is the US banking crisis likely to lead to a similar experience as the Japanese Lost Decade? Before the answer can given in a direct ‘Yes’ or ‘No’, an overview of the Japanese Lost Decade and the US banking crisis should be taken into account. The Lost Decade of Japan The Lost Decade of Japan is referred to the era which marked the end of the economic boost in the early 1990s. After the Lost Decade only four national banks of Japan remained. The reason for the economic boom is that many Japanese financial institutions, security companies and banks were involved in the speculation which increased the economic boom. The banks and other institutions were offering the lowest rate possible for the over-valued land prices which made borrowing easy and cheap. The discount rate or the lending rate for banks was lowered by the Bank of Japan as a result of which the money supply grew. The economy had cheap money floating which was invested by the public. The borrowings were then invested in the stocks and securities in the domestic market as well as foreign markets directly opposite to the reason of borrowing. The banks and other institutions lent the money to be invested in land holding but instead it was invested in stock markets (The Lost Decade - Japans Economic Crisis). According to the article ‘The Lost Decade - Japans Economic Crisis,’ the Finance Ministry after realizing this increased the interest rates which caused the stock market to crash big time. The increase in interest rates caused the banks to go in large debt crisis due to huge bad debts. And even those official numbers dont capture the full size of the flood of cheap money. This was also due to the fact that the banks and other institutions were selling bonds in the foreign market with a low interest rate which when swapped into yen, reduced the cost of money to zero. The Japanese banking sector was in crisis and many banks were bailed by the government or the whole banking sector of Japan would have been destroyed. The name Lost Decade was given because the Japanese banks were in no position to lend more money or do capital investment due to huge amounts of bad debts. The economic situation in Japan is now not as bad as the Lost Decade when the economic expansion had just come to an abrupt stop. Unemployment had rose and is still an issue but it is not at a level of crisis like in the Lost Decade. American Economic Situation: It is argued by many economists that the economic situation in America is on the path of economic crisis like the Lost Decade in Japan. The Federal Reserve of The Fed of US is also lowering the discount rate. As a result of this the growth in the American economy is slowly crawling upwards, the savings are invested in the real-estate which does not make any contribution to the country’s savings and the stock market either goes down or stays unchanged. According to an article written by Jim Jubak, if the economic review of the US economy is done for the past year, it can be seen that the Bank of America was under a lot of pressure for the acquisition of Countrywide Financial after which the financial disaster that was arising might be put to rest. Billions of asset-backed securities and mortgages were written- off by financial institutions and banks. These write-offs helped the banks that were in turmoil due to outstanding loans. Writing-off the securities caused some trouble in the finances for the said banks and institutions. Another bolt from the blue came to the banks and institutions when the Fed reduced the interest rate. The drop in interest rates gave the banks a little hope that the smaller banks with outstanding securities would be able to pay back the giants who would not have to write-off the asset backed securities as before. Another benefit that the banks saw in the lower interest rate was that it would become a little easier for them to raise new capital thus would not have to sell assets at low and volatile prices (Jubak, 2008). The economic slowdown of the US economy could lead to a problem as the financial market that is stock markets will not progress; the corporate world might not get new loans to repay the older ones. This will result in lower production as well as consumption. The Americans are soon going to face a lot of retirement payments which will also cause a problem for the banks and corporations. Therefore it could be said that the American economy in one way or the other is following in the foot-steps of economic slowdown like the Japanese Lost Decade (Patalon, 2008) Word Count: 756 What has been the role of higher oil prices in the recent increase in inflation and slowdown in the global economy? The high oil price is the most important issue that is sweeping the countries of the world in a state of panic. The impact of the high oil price is not only on one country, but the entire global economy is coming to its knees under its pressure. This slowdown in the world economy is combined with increase in inflation for every country whether it is US, UK or small economies of the developing countries. According to a recent newspaper highlight the oil price has reached the new heights as compared to the last decade. The economic slowdown and inflation can also be result of various other factors but the major factor is the oil price hike. Slowdown in Global Economy The increase in oil price is posing a major threat to the manufacturing sectors and industries of the multinational companies situated overseas. The manufactured products are shipped to different countries from one country. The increase oil price has increased the transport cost many folds. To cover this cost of production, companies will charge higher prices for the goods from the consumers as their profit margins will be shrinking. This shipping cost is becoming the biggest barrier in the world trade market. In would be wise to say that although the trading policies of the countries may be liberalized to promote global trade and economy, cost of transportation is now a seemingly barrier between the promotion (Mussa, 2000). An analysis conducted by the International Energy Agency (IEA), it is calculated that the world GDP has fallen by 0.5% due to increase in oil price. The GDP for the individual countries will go lower depending on the impact that the oil price has on it. The developing countries’ economy is most impacted as they use oil as the basis for their production and consumption unlike the develop countries where other modes of energy is being developed and used. Asia is facing 0.8% decrease in economic output (Analysis of the Impact of High Oil Prices on the Global Economy). The oil price is also impacting the financial markets in the global sector. The changes that are occurring and are being anticipated by the economists in the corporate earnings, inflation, economic activities and monetary policies will affect the world exchange rates, equity valuations and bond valuations for the countries. Although it has been observed that the exchange rates are less volatile, the dollar is appreciating as compared to Chinese yen and Euro. Due to increase in oil price there is a transfer of income from the oil importing countries to the oil exporting countries which is resulting in a trade shift. The oil importing countries will face a recession in their economy and would thus result in lower demand of oil. The exporters will then be faced with losses as no one would import oil and the countries’ balance of payments will suffer resulting in lower exchange rates which will affect the national income of the country. It is predicted that the Asian countries will face a decrease of more than $8 billion in its balance of payment. This is because the Asian countries are more dependent on oil for production than other countries. The bills for importing oil for these countries have increase by 16% to 17%. Therefore the overall role of oil price increase is negative which has led to the slowdown of global economy (Analysis of the Impact of High Oil Prices on the Global Economy). Increase in Inflation There is correlation between the oil price increase and increase in inflation. The role of oil price in the increase in inflation depends on each countries monetary policy that is how tight the respective country’s monetary policy is. The impact of oil price on inflation also depends upon the consumers’ perception of the real income and wage levels. It can be assumed that the non-financial sectors such as health care, education and so on might not see increase in inflation but sectors such as transportation, wholesale, manufacturing and so on will experience increasing inflation rate. Relatively the food costs will also be increasing. It is also seen that Asia is expecting the biggest increase in inflation especially the developing countries like Pakistan where the inflation rate is at its highest. The consumer price index for the economy is higher by 0.5% due to the recent inflation. According to recent statistics, the inflation rate in China has increased by 1% while that of Malaysia is 2.6% (Analysis of the Impact of High Oil Prices on the Global Economy). It can be said that the oil price increase leads to spiral inflationary increase which can be controlled if the monetary policies can be tightened and other policies regarding in this matter may be adopted. Word Count: 753 Will the BRICs be able to continue to achieve strong economic growth even if the rest of the world economy slows sharply? The BRIC stands for the Brazil, Russia, India and China. Over the past few years, the BRIC countries have showed rapid economic progress among the emerging markets than the rest of the developed countries’ markets. According the recent statistics, the combined GDP of these four countries is more than $15 trillion. BRIC countries make up 28% of economic world growth. The growth of these countries will continue but not very strong even though the world economy is slowing. The countries will be affected by the economic slowdown but not as much as the rest of the world. The reason for this is that the Brazil and Russia are the strong suppliers of iron ore & soy and oil and gas respectively to China and India. The projections for the economic growth of these countries for the year 2007 are impressive. China has economic growth projection of 10%, Brazil has a projection of 3%, India 8% and while that of Russia is 7%. The overall economic growth of the BRIC is projected to be 8.9% (Ramady, 2007) The growth of the BRIC countries can be associated with the fact that China has now an open economy which has increased its relation with the rest of the world. India is moving towards a free market mechanism internally as is Russia. The introduction of the information technology as well as the investment friendly policies has helped the BRIC countries in attracting foreign direct investment. Even with all the economic growths, the BRIC countries might not be able to maintain a series of steady growth as the world economy is slowing down. The global economy has also affected the BRIC countries causing decline in the economic growth of Brazil, Russia, India and China. Affects on the Economic Growth of BRIC The growth in Brazil has been affected as almost one-fifth of the total’s exports of the country were done to the US. The economic growth of Brazil has declined from 16% in 2007 to 12% in 2008 according to the statistics. The US economy is also facing a low economic growth rate due to various reasons in the global economy. Another BRIC country is not affected by the global slowdown as Brazil is. The reason is that Russia exported only 3% of its total exports to US. If it is analyzed, the short-run affect of fewer exports is very good but in the long-run it might not be so as the Russia’s other remaining exports are also done to the rest of the world other than BRIC countries (Hubbard, 2008). India, a newly emerging market and a concern for most of the countries as it is excelling in information technology, will also be facing a downfall of 2% in its economic growth due to the slowdown in the global market. Exports of India account for 33% of total GDP which will be affected as the importing countries are facing the same situation of oil price increase and inflation increase. The last and the most developed country of the BRIC is China where exports account for almost 69% of the total GDP (Hubbard, 2008). China has its arms spread across the globe which might help it to sustain a decent economic growth relative to the other countries. The reason for this is that the recent event in China, Olympics, has helped the country’s stock market to grow as well as increase foreign investment. All these factors have led the country’s economic growth not to go down where the world economy is headed. The economic growth of the BRIC countries will also be affected to due lower foreign direct investment as countries such as US is facing debt crisis and cannot invest much. The Indian economy was the receiving the biggest share of foreign investment from the world specially US. A look on the positive side of the economic growth of the BRIC countries will give a review that the BRIC countries will in near future be the ones affecting the global economic growth as they emerge as the biggest economies of the world. The world economy is slowing down, whereas the economy of BRIC countries is not much affected by this phenomenon. The past shows that it was the US and UK economies that affected the changes in the world economy. But now the BRIC countries are big enough to affect this economy. It is predicted that the growth of the BRIC countries will put a stop to the global slowdown. It would correct to say that the BRIC will be able to pull a decent growth rate even if the rest of the world economy slows sharply. Word Count: 767 Will the world economy look very different when the current downturn comes to an end? The world economy will indeed look a lot different after the current economic situation comes to an end. When the economy slows down in any country particularly in this era, people lose jobs and the government decreases the taxes in order to keep the consumption level higher. This results in large deficits in the fiscal budget of the country. Countries should consider countercyclical policies and regulations in a time when rising prices are creating high inflationary pressures. The governments around the globe have placed restrictions on the exports of necessary food items which is creating a disturbance in the global trade. All these economic downturns will in turn leave its effects on the global economy once it comes to an end. The world economy will no longer remain the same as it can be seen today. Since the beginning, countries like US, UK, China with their strong growing economies have affected the global economy on the whole. But with the slowdown in US economy, it is assumed that this country will no longer play a major role in affecting the economy on the global arena. Many US banks will incur losses in the coming years which will result in the failure of the banks. The reason of this loss can be associated to increased outstanding loans that can result in bad debts. The credit crisis both in the European market as well as American market might lead to recession. The global economic slowdown will continue to occur till 2010 as it is predicted by many economists. The hope of the world leaders will now turn to the Southern part of the world. As discussed above, the emerging economies such as those of the BRIC countries will now be the center of focus of all the world economies. It is predicted that the combined economy of the BRIC countries will surpass the economy of US in the coming decades. The US economy will no longer remain the cushion for the world economy as the driver of growth and consumption. China is seen as having the biggest growing economy in the world. With the Olympic Games over, Chinese economy can become the second largest economy in the world after remaining on the fourth place. China has attracted foreign direct investment from around the globe in the past years. Now, it will bring hope to the economies of less developed countries by investing overseas and in new markets which will also ensure its economic growth (Shifts in global Economy, 2008). Brazil and India are seen as the movers of the new economy with each of the country bringing in lots of huge profits from around the world. The returns on investment for each of the two countries are around 30% for the past couple of years. The other growing economy that will be the part of the new economy is Russia. Russia is becoming the biggest oil exporting country and is making high profits with the oil price spike. Both the countries that is, China and Russia are extending their hands towards the third world countries by providing them oil and gas. Another feature of the new economy will be the shifting of the capital markets. The income would have transferred from the wealthier countries to the other eastern oil-producing countries because of the oil prices. People and the countries will soon realize that oil prices no matter how expensive it is, will not change. This accumulation of wealth will help the emerging economies grow and prosper at a height where they can impact the global economy at large. Foreign markets and investors will be investing in these countries rather than US. These new markets will lift the world economy after its era of slowdown. Countries will be diversifying their investment portfolios which will include more percentage of global REITs and securities as compared to domestic securities and commodities. The IMF and WB right now are the engineers behind the global economy. With its power, both these institutions can change and transform the lives and economies of the country. But instead, up-till now this power has been used by the institutions to cater the needs and interests of the multinationals by making the global economy friendly to them. The new economy will be a planned economy. It will be controlled by a central government who would have the authority to resource allocation to countries it deems fit. It would in the end be correct to say that the recent down turn in the global economy will change the economy in the coming years. Word Count: 755 Reference Analysis of the Impact of High Oil Prices on the Global Economy. May 2004. International Energy Agency. August 28, 2008. Shifts in the global economy. July 9, 2008. Public Radio International. August 28, 2008. The Lost Decade - Japans Economic Crisis. Japan-101 Information Resource. August 28, 2008. Whats Ahead for the Global Economy in 2008? January 9, 2008. Knowledge @ Wharton. August 28, 2008. < http://knowledge.wharton.upenn.edu/article.cfm?articleid=1871> Amadeo, Kimberly. “2008 Oil Price Outlook.” Weblog Entry. Kimberlys US Economy Blog. January 3, 2008. About.com. August 28, 2008. Hubbard, Timothy. ETFs Are Tested as Even BRIC Economies Feel U.S. Slowdown. August 8, 2008. ETF Trends. August 28, 2008. Jensen, Thomas and Larsen, Jens. The BRIC countries. Monetary Review. August 28, 2008. Jubak, Jim. Is US entering Japans nightmare? February 1, 2008. Msn Money. August 28, 2008 Mussa, Michael. Global Economic Prospects 2008/2009: Hoping for a Global Slowdown and a US Recession. April 3, 2008. Peterson Institute. August 28, 2008. Mussa, Michael. The Impact of Higher Oil Prices on the Global Economy. December 8, 2000. International Monetary Fund. August 28, 2008. Patalon, William. The Lost Decade: How the U.S. Financial Crisis Resembles Japan’s Ten Years of Misery - And How to Play it. July 17, 2008. Money Morning. August 28, 2008. < http://www.moneymorning.com/2008/07/17/the-lost-decade/> Ramady, Mohammad. The ‘BRIC’ Economies Will Sustain Economic Growth in 2007. April 2, 2007. Arab News. August 28, 2008. Read More