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Jul 18 2012
New Great Depression: Opinions Divided

The opinions are divided on whether the current financial crisis has ended or not. But the risk of a new depression has struck additional fears into the markets and has been driving monetary policy in developed economies.

When economies around the world broke the link between money and gold, it removed all constraints on credit creation. The flaring-up of credit created the current world that we live in, but now it seems that credit cannot expand anymore because the private sector is incapable of repaying the loan, and if credit begins to contract sooner rather than later, there is a chance of a collapse of the world economic order in a new Great Depression.

Many analysts opine that if the credit bubble bursts, the depression could be so severe that the civilization could not survive the disaster. In the past few years, the central banks of major economies including USA, EU and England have injected further liquidity into their financial systems through a number of ways. In many ways, you could ignore the fact but you cannot that the world economy is heading into another bout of depression.

The basic reason for injecting money into the financial system at a rate much in excess of the requirement of the real economy is to encourage people to borrow and spend. But they are participants who have opposed this notion by approaching the markets cautiously. On the other hand, when the central banks, realizing the problem, raise the interest rates, it sends the world economy into depression.

The crux of the matter is the increase in government debt is making total debt grow otherwise the world economy would have collapsed to a debt-deflation death twist. Some analysts argues that the governments in the developed world should borrow massive amount of money at the current low interest rates to invest in new technologies like renewable energy amongst others.

On the contrary, some economists believe that governments should focus on cutting their debt, particularly where repayments on that debt are threatening to reach unsustainable levels, vis-à-vis Greece.

No matter what the central banks do to divert their deviating economies into the correct path, one thing is for sure- either they will be known in the history books as the ones who further plunged the economies into further turmoil or the ones who lend a helping hand in the building processes. Only time will tell!

 
Posted by Mex R&D at 18/7/2012 2:12:40 PM
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