Discuss about the Economics for Global Financial Crisis.
The term global financial crisis inferred the fact that it is an economic difficulty through the period of worldwide which is experienced by the consumers and markets. In the words of Shiller (2012), this type of financial crisis is a barrier for achieving foster growth of the country in terms of business environment as the potential consumers want to minimize their purchasing power until the situation improves. In the year 2008, due to the collapse of Lehman Brothers, the financial services of world economy go into depression. As a result, suddenly the banks, Wall Street, stock markets and important financial firms are stopped and plummeted. According to Taylor (2013), this sudden shock increases the unemployment level along with the collapsing of trade volumes and stickiness of the liquidity market. Both developed and developing countries are badly affected in this case, and Australia implements the G20 policy which is an injection of reducing the global crisis (Lowy Institute for International Policy. 2016).
In this essay, the impact of GFC on Australian economy has been analyzed critically. Furthermore, the roles of the Federal government and the Reserve Bank of Australia have been discussed in this context along with the proper economic analysis. Apart from this, the impact on foreign trade and the current condition of unemployment rate are also critically discussed here.
In the global economy market, Australia exports its goods and services to the other countries. The current survey of WTO statistics inferred the information that the trade value of Australia is just half of the national income of this country (ABC News. 2009). In this context, during the time of GFC crisis, the world trade affected severely which drags down to the main trading partners of Australia namely Japan and the US. Moreover, due to the crisis of global finance, China also recorded the slowest growth which is the root cause of falling down the demand of its products. As a result, the export amount of Australia falls in a huge amount along with the negative impact on trade value.
Apart from this, the Australian economy is well known as a member of the group of the highest amount of debt in respect to income ratios throughout the world. The nature of the Australian people is to save more amount of money today for using in the future time. These people get into fear of losing their job which would lead to increase the saving amount of their earning part. Moreover, the Australian people lower their consumption and borrow less amount of money for minimizing their debt. According to Sirkeci, Cohen and Ratha (2012), the incidence of cuts the budget of production along with an increase in the unemployment rate would lead to move downward fall of the Australian economy in the recession market.
The global financial crisis severely damaged the credit markets and prospective growth of the Australian economy. In this perspective, the Federal government of Australia takes suitable measures in terms of providing the guarantee in wholesale funding and deposits of the bank and the economic security of $10.4 billion by which improvement is done in the recession market (ABC News. 2009).
In this perspective, to generate and boost up the economy of Australia, the Federal government wants to increase the investment amount in the market through selling the bonds to the people. In the words of Fratzscher (2012), as per the Loanable Funds theory, the government of this country wants to boost up the economy through money flow and to lower the interest rate. This strategy would help to move forward the economy from the slow down conditions.
Figure 1: Loanable Funds theory
Source: (As created by author)
According to the above figure, in this current condition the Federal Government of Australia sells more amount of bonds but due to the slowdown of market growth demand also falls which ensures to drastically fall the price level of the economy (Galí 2013). In this perspective, the concerned government implements a monetary policy such as OMO, RAR, Target CR and money growth for improving the current monetary condition of the economy. Moreover, the Australian government wants to fulfill the inflation gap and out gap by applying the above-stated strategy.
Furthermore, as commented by Mavroeidis, Plagborg-Møller and Stock (2014), as per the Phillips curve theory; there exists an inverse relationship between the unemployment rate and inflation rate. To maintain stability in the economy from recession situation, the government needs to lower the unemployment rate by increasing the rate of inflation (Coibion and Gorodnichenko 2015). The deflationary monetary policy moves the economy in a positive way by controlling the unemployment rate through the leftward shifts of the PC.
Figure 2: Phillip curve showing the fall of PC
Source: (As created by author)
Apart from this, the Federal Government of Australia provides a guarantee in deposits to support the confidence level of this country. In addition, the deposited amount below to the threshold is not considered as a chargeable amount. This strategy of Australian government provides certainty to the banks, credit markets, and building societies along with adding positive strength to the financial institutions (Rao 2016). On the other hand, it would help to raise the confidence level of the customer in this consequence. Moreover, in this current scenario, the concerned government offers the wholesale funding deposit which helps to normalize the depression market situations. With the help of this process, the financial institutions of Australia can be able to increase the amount of funds overseas. In this procedure, the foreign funds and financial institutions also support them to acquire the stability of the depression economy (Budget.gov.au. 2016). Moreover, by following this strategy suggested by the Australian government, the financial sectors of this country can be able to lend the corporations, banks, businesses and households for boost up the economy. In this current scenario, the Financial Management of Australian Office gets a message by the Treasure of purchasing $8 billion amount of residential securities of mortgage–backed from the wide range of lenders belongs from Australia. As a result, it would help to expand the quantity of assets along with high quality by which the AOFM can be able to invest more in the market (Budget.gov.au. 2016).
In this context, the strategy related to Economic Security is considered as the discretionary fiscal policy which enhances the GDP rate of the country. The implementation of this strategy by Australian government would accelerate the investment prospect of the country by controlling the budget deficit of the nation. This economic strategy boosts up the level of consumption through the payment to careers and pensioners in a lump sum amount (Corsetti et al. 2016). This procedure would help the home owners to achieve the courage of more investment in the real estate market. Moreover, the development in infrastructure sector stimulates the economy to restore from the situation of recession. This procedure would help to increase the production capacity of the country by which the unemployment rate can be diminished (Wisman 2013).
Apart from this, the above factors implemented by the Federal government of Australia accomplish the aggregate demand of the economy through which the amount of strategic investment can be increased. This also restores the future surpluses of this country. In short, with the help of implementing the strategy of Economic Security by this government in this current scenario, the country can be able to move up from the slow down condition of the economy by improving the GDP growth rate of the economy along with raise in consumption level and investment portion (Budget.gov.au. 2016).
In this perspective, the Reserve Bank of Australia has taken a suitable measure in order to mitigate the issues of the recession of the economy which is acceptable and profitable for this country. The RBA provides a sufficient amount of loans so that the citizens of the nation can make direct purchases that will help to support the market. The government induced the Australian office of financial management to make a purchase of either a mortgage for the residential purpose or an amount of $8 billion that will act as securities (rba.gov.au. 2016). The government of Australia further uses strategies that help to provide the guarantees for stabilizing the internal market raise the debt of the banks and reduce the chances of running on the banking system. The investors are able to withdraw the funds from the bank as the liabilities are of short-term nature, and there are risk factors for the holders of the toxic assets.
In the words of Eichengreen (2015), the financial crisis of an economy ensures the reduction of the negative amount of credit flows towards the business and consumers which enhance the significant amount of diminishing house prices and share indexes. As a result, due to loss of the wealth and properties, the desperate want to invest more amount of money and consume more by the business person and consumers falling severely. This situation would lead to further falls the economy along with a stagnant condition of the market. In this perspective, to mitigate this issue and improve the current economic condition, the Reserve Bank of Australia applies an appropriate strategy such as lowering the rate of interest which may boost up the economy (rba.gov.au. 2016).
As opined by Nielsen (2016), by lowering the interest rate in the economy, the reserve bank of any concerned country can boost up the market as the investors are intended to invest more amount of money for acquiring more profit and revenue. In this context, the RBA has done the same procedure which helps to recover the nation from the slow down growth rate position.
Figure 3: Aggregate demand and supply curve showing the stagnation of the economy
Source: (As created by author)
As commented by Eichengreen (2015), as per the Keynesian theory, the above figure depicts the fact of stagnation of the economy. Due to the stagnation of the economy for existing depression, the aggregate supply curve shifts leftward for which output has drastically fallen along with the higher rate of unemployment and increase in prices of the goods and services (Shiller 2012). In this context, RBA accomplishes the strict monetary policy as well as suitable fiscal measures to control the unemployment rate. The RBA cut the cash rate of 3% and lowers the interest rate on 425 bases of the point. This would lead to reducing the cost amount of borrowing and increase the planned aggregate of expenditure. As a result, the equilibrium point of the short run can be recovered by increasing the output, discretionary income of the household and increased the amount of spending (Fratzscher 2012).
Conclusion:
By referring to the above analysis, it can be concluded that the global financial crisis has severely affected the world economy along with the Australian economy. The entire world faces recession in the market by which the rate of unemployment increases and lowers the output level of the nation. Moreover, the foreign trade has affected badly. Due to market recession in the economy, the aggregate demand for goods and services fall and the trading partners of the Australia lower their demand for importable goods. As a result, net exports fall and the condition of balance of trade is not so much significant. Apart from this, to correct the situation and boost up the economy, the Federal government of Australia and RBA has taken appropriate measures. In this context, RBA cuts the interest rate which ensures to invest more in the market. It would help to increase the aggregate demand of the market along with raising the power of borrowing and spending. On the other hand, the Australian government has taken the strict monetary and fiscal policy such as economic security, improvement in a financial institution and lowers the unemployment rate. In short, the taken strategies of RBA and the Australian government will help to increase the GDP of the country.
Reference list:
ABC News. (2009). Making sense of the global downturn. [online] Available at: https://www.abc.net.au/news/2009-05-07/making-sense-of-the-global-downturn/1675556 [Accessed 13 Sep. 2016].
Budget.gov.au. (2016). 2008-09/content. [online] Available at: https://www.budget.gov.au/2008-09/content/myefo/html/part_2.htm [Accessed 14 Sep. 2016].
Coibion, O., and Gorodnichenko, Y., 2015. Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation. American Economic Journal: Macroeconomics, 7(1), pp.197-232.
Corsetti, G., Mavroeidi, E., Thwaites, G. and Wolf, M., 2016. Step away from the zero lower bound: Small open economies in a world of secular stagnation (No. 1645). Faculty of Economics, University of Cambridge.
Eichengreen, B., 2015. Secular stagnation: the long view. The American Economic Review, 105(5), pp.66-70.
Fratzscher, M., 2012. Capital flows, push versus pull factors and the global financial crisis. Journal of International Economics, 88(2), pp.341-356.
Galí, J., 2013. Notes for a new guide to Keynes (I): wages, aggregate demand, and employment. Journal of the European Economic Association,11(5), pp.973-1003.
Lowy Institute for International Policy. (2016). The Global Financial Crisis. [online] Available at: https://www.lowyinstitute.org/issues/global-financial-crisis [Accessed 13 Sep. 2016].
Mavroeidis, S., Plagborg-Møller, M., and Stock, J.H., 2014. Empirical evidence on inflation expectations in the New Keynesian Phillips Curve.Journal of Economic Literature, 52(1), pp.124-188.
Nielsen, R.W., 2016. The growth of the world population in the past 12,000 years and its link to the economic growth. Journal of Economics Bibliography, 3(1), pp.1-12.
Rao, B.B. ed., 2016. Aggregate demand and supply: a critique of orthodox macroeconomic modeling. Springer.
rba.gov.au. (2016). education/economics-competition/2009/pdf/first-year. [online] Available at: https://www.rba.gov.au/education/economics-competition/2009/pdf/first-year.pdf [Accessed 14 Sep. 2016].
Shiller, R.J., 2012. The subprime solution: how today’s global financial crisis happened, and what to do about it. Princeton University Press.
Sirkeci, I., Cohen, J.H. and Ratha, D. eds., 2012. Migration and remittances during the global financial crisis and beyond. World Bank Publications.
Taylor, J.B., 2013. Getting off track: How government actions and interventions caused, prolonged, and worsened the financial crisis. Hoover Press.
Wisman, J.D., 2013. Wage stagnation, rising inequality and the financial crisis of 2008. Cambridge Journal of Economics, 37(4), pp.921-945.
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