Financial Crisis Part II

By | October 21, 2021

4: Real economic effects

The lack of confidence and uncertainty in the markets is often concretized when the stock indices (Dow Jones, Nasdaq, DAX, Oslo Børs, etc.) on the world stock exchanges one day fall like a rock, while the next day they soar like a rocket. The question then becomes to what extent this affects the real economy.

In the real economy , all factors of production are still present; the amount of real capital is the same. There have been no major changes in the available labor force, the labor force is about as well educated and our ability to utilize capital and labor to produce the goods people demand seems unchanged.

Nevertheless, the effects of the financial crisis can have dramatic and self-reinforcing consequences for production and employment in both the short and long term: in the short term, it can suddenly become more expensive, if not impossible, to obtain a loan. Many businesses rely on short-term credit both for day-to-day operations and for paying for trade. Many companies will therefore have to reduce production and some close down due to lack of credit. Despite the fact that the companies were initially “healthy”.

In fact, we are already seeing real economic consequences of the financial crisis: Many countries have entered an economic downturn (recession). Both the United States, the euro countries and Japan report this; others are on the verge of doing the same. In the USA, 1 million jobs have been lost in the last six months, in China even more and also in Norway we see lower activity in a number of industries (construction, boat, car, furniture, real estate). How are the individual, families and communities affected by the new times?

5: Measures

In a time of bad mood, according to definitionexplorer, low confidence and credit crunch – where banks have tightened lending sharply – it is of the utmost importance to restore confidence in the markets. The government in many countries has therefore – individually and as part of an international collaboration – decided to enter into rescue packages in the form of guarantees for deposits, loans and partial nationalization of banks – state takeover. In the USA, 700 billion dollars, Germany 500 billion euros, other euro countries 900 billion euros, Norway 350 + 50 billion kroner, etc. Only if things go really badly in the real economy will the states have to go in with taxpayers’ money.

But since the countries are neither as hard hit nor hit in the same way, it is also not easy to achieve a powerful intergovernmental cooperation. Some countries want less regulation of the financial markets than others. Because they are more dependent on their financial industry than others? Is it conceivable that the United States (New York) and the United Kingdom (London) with their large financial industries are less geared towards comprehensive regulations than other countries? The hope is, however, to get sufficient oil into the machinery so that trust is restored and lending gets off to a good start again.

We know that trust is broken down much faster than it is built up. It is more difficult to get the wheels turning again if the real economic consequences become extensive. In the long run, we risk slower economic growth worldwide. Another major danger is that some countries may try to protect themselves against the economic crisis by introducing more restrictive trade policies (protecting themselves from parts of imports – protectionism) and less active competition policies.

6: A possible consolation

In a time of crisis like this, it may make sense to try to look up and see the long lines . Figures 1 and 2 show the development in value creation per capita in Norway and the USA since 1900. Figure 3 shows the total value creation in the whole world since 1950. The most striking thing about the figures is how robust the growth has been and how small the fluctuations have been. In this perspective, even the depression in the United States is almost imperceptible.

On the other hand: If we could sit back to the 1930s, we would probably be struck by how marked the fall in value creation was and that it felt like an endless time of crisis before the country was back at trend level. This is how it may be even today: We may get lost in today’s drama and lose sight of the long-term trend. On the other hand – many will say – it is now we are living, and what good is it then to know that growth is probably “back on track”.

An important source of increased value creation is technical-scientific advances that come through research and development. Other contributions come from increased human capital (increased competence), better social organization, increased degree of barter and specialization and improvements in markets’ ability to allocate capital and labor to the production of goods and services that people demand. The latter is what we like to refer to as the banking and finance sector.

Today, virtually all countries in all corners of the world participate in the global economy. One reason for this is that for the first time in history, most countries are pursuing reasonably sound economic policies. An example of the latter is that hyperinflation has in recent years (with one exception) been “eradicated”. One reason for this improvement is greater integration into the world economy. There is more trade and investment across national borders than before.

In the last hundred years, we have thus experienced a seemingly robust and long-lasting growth in value creation in the world. This growth has come at the same time as growth in international financial markets has made trade possible and made it possible to finance projects in developing countries that were previously considered too risky. Since 1990 alone, world value creation has doubled and world trade has increased by 133 percent.

7: Geopolitical and other consequences

How does the financial crisis affect the balance of power between the leading countries? Many would say that the United States is already weakened by the wars in Iraq and Afghanistan. The country’s international reputation is also not as it was ten years ago. The financial crisis seems to be contributing to a further weakening of hegemonic power in the United States. In fact, so much so that experts are increasingly seeing a multipolar world in which the superpower United States until recently dominated strongly. But for a long time yet, the United States will probably be the leading superpower.

It is clear, however, that President Obama will have a greatly reduced economic room for maneuver to play with in the coming years. Regardless of the financial crisis, US economic dominance would probably have been weakened anyway. High growth (at least until recently) in large countries such as Brazil, Russia, India and China would have contributed to this.

Financial Crisis 2