Chapter 4: Financial Crises and Recession
Page 99 4.Financial Crises and Recession Based upon the structural changes and causeeffect material of Chapters 1, 2 and 3, this chapter presents case studies of the 1982 world recession, the 1987 world stock market crash, the 1980s and continuing world debt crises, the slumps of the early 1990s, the 1994–95 Mexican crisis, the Japanese crisis after 1989, and the crises in various Asian countries beginning in 1997. Various common patterns are found, especially with regard to the increased international transfers of investment based upon interest rate and financial strategy parities (Chapter 1), the subsequent adjustments in international trade (Chapter 2), the decline and increased variability of monetary velocity, and the creation, loss, and transfer of monetary wealth (Chapter 3). I. COMMON PATTERNS Recent episodes of financial crises and recession in the global economy have common patterns. In most cases, a country or region initially benefits from expanded supplies of base money, new ‘quasimoneys’ which are created from base moneys, and credit supplies — a financial liberalization phase. The financial sector expands as it captures profit from new efficiencies and opportunities allowed by globalization. The country or region, for a time, may be favored by international investors; thus the banking system, including government, is wellcapitalized and able to expand moneyliquidity. Assets increase in monetary value and interest rates are low, and this wealth effect encourages consumption, borrowing, business investment, and perhaps government spending. Productive resources are more fully utilized and economic growth is well supported. There...
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