The second wave of the global financial crisis: myth and reality

Euphoria and economic booms

In brief: What will happen after the start of the second wave of global economic crisis? A few words about the future of the world economy.

Let us recall the history of the emergence of some of the highest in the world of office buildings. Skyscraper Empire State Building in New York was founded in 1929, Petronas Twin Towers in Kuala Lumpur began building in 1993, the Shanghai Construction Dzhaylin tower began in 1995 at the end of 1980 it looked as though half of Tokyo has been blocked with a massive crane. By mid-1990′s. Many of these cranes have moved to Shanghai and Beijing.

Between superneboskrebami and stock “bubble” is strong. These towers of 80, 90 or even 100 floors have become a visual representation of price “bubbles” XX century. It should be noted and the appearance of a large number of concert halls and art galleries and even student clubs on university campuses. The appearance of many of these cultural centers have been funded by donations from wealthy individuals and families whose wealth has increased significantly in periods of economic euphoria. No less a close relationship exists between the price “bubble” on an asset and economic euphoria. In the late 1980′s. One of the best-selling book in Japan called “Japan as number 1.” International Bank published a paper “The East Asian Miracle” just a few years before it exploded bubbles in stock markets and real estate in Thailand, Malaysia and neighboring countries. Talk about “the new American economy,” subsided only after the explosion of the stock bubble and lift the crushing waves of the financial deficit. Changes in the size of their personal wealth by increasing asset prices directly affects the amount of personal and business expenses.

There are two feedback loop between the increase in prices of shares and immovable property, on the one hand, and the rate of growth of national income, on the other. A relationship based on the fact that the increase in personal wealth leads to an increase in personal spending. Households own capital and savings, when a wave of increase in asset prices increases the value of their wealth, households are beginning to defer to the savings a smaller proportion of their income, increasing the volume of consumption. The second is the relationship between the increase in share price and investment costs. When stock prices rise, companies have the ability to attract cash from existing and new investors at more favorable terms and, accordingly, invest in new, albeit less profitable projects. Therefore, the cost of raising capital for the company is inversely proportional to the value of its shares: the higher the stock price on the company’s revenue, the cheaper capital. The cheaper the cost to companies raising capital, the more they invest in equipment and production, as higher stock prices imply that, even at a lower cost, will still be very profitable.

It is often the idea that “stock prices are a leading indicator” of changes in economic activity. But in this case we can say that stock price changes predicted 6 of the last 3 recessions. Quotations in U.S. stock prices began to decline for 4-6 months before economic collapse in early 1930.

The Japanese economy went into recession after the stock prices and real estate began to fall in early 1990, however, a sharp drop in U.S. stock prices that began in 2000 and continued during the next two years, accompanied by only a relatively mild recession .

There is a relationship between increased economic activity in response to rising asset prices and reduced economic activity, when asset prices fall.

In the growth stage companies expand their borrowing, backed by increasing its own capital. Banks increased the volume of loans granted and can go to alleviate the conditions and criteria for their provision. In the case of an explosion of price “bubble” banks incur losses on loans issued, and capital losses for some of them may become so severe that these banks have to stop their activities and to merge with those financial institutions whose situation is more stable. Another way out is to look for support from the state.

200 global financial crisis. Manias, panics and crashes The strong positive correlation between the dynamics of asset prices and the level of economic activity leads to the question of which factor in this bond is dominant, that is, determine if asset prices on the economy, or, conversely, the growth (or decrease) economic activities affect the level of asset prices.

Albania was one of the former socialist countries, which experienced the creation scheme of financial pyramid schemes, shortly after its transition from a planned economic management to build a market economy.

Banking regulations issued by regulatory authorities in that transition period, did not have adequate strength. Dealers promised investors interest income at 30 or even 40% per month. Proposed conditions promised to depositors rapid enrichment, for example, at an interest rate of 35% per month invested at the beginning of year 1000 leks at the end of the year should have been transformed into 64 000. Attracted by this level of return investors were looking to increase the size of investment, rather than take their money and the accumulated profit. Some Albanians in the period stopped work because of their interest income is much higher than the wages they could receive. Other fast growing prosperity pushed to a substantial increase in costs. Entrepreneurs, investors fund managers, sought to ensure that incoming cash flow has increased steadily, allowing them to compensate for the output volume of money and spend huge sums on their own needs.

When the deposit pyramid collapsed, many Albanians were on the brink of ruin. Economic activity quickly slowed down, because households had to switch to savings to compensate for financial losses.

The formation of price bubbles – at least enough volume – almost always associated with economic euphoria. Conversely, blasts “bubble” will usually lead to a slowdown in economic activity and are accompanied by bankruptcies of financial institutions, often in large scale. Termination of such institutions leads to the destruction of credit channels, which in turn may lead to lower economic activity.

Ukrainian Globalist
2010-06-26 18:59, Economics.

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