Structural Shifts

Abstract

The current crisis is as much a global crisis as was the Great Depression. It emerged initially as the subprime debt crisis but soon snowballed into a global financial and economic meltdown. The financial crises invariably cause monetary implosion whose magnitude depends on the size and coverage of the crisis. The financial implosion is the result of financial losses arising from sharp drop in prices of securities or assets. In the case of forex crisis, the losses arise from sharp drop in exchange rates which is later exacerbated by the capital flight. Working at the accounting and monetary aspects at the microlevel, the financial implosion at macrolevel produces insidious monetary contraction and economic slump. The first attack of the financial crisis is on money supply and liquidity. It happened after the Great Crash of 1929, Black Friday in October 1987, Asian Crisis of 1997, Long-Term Capital Management failure in 1999, and dot-com bust in Y2K. All these crises resulted in financial implosion and carried devastating potential that was quickly diffused except in 1929. In 1929, the monetary contraction was much bigger due to failure of banks affecting nearly half of the banking system. The financial implosion leading to monetary contraction is sure way toward much deeper malady of depression. All the crises in recent years, including the current biggest of them, have averted their culmination into depression signs although they have all caused recessions of various magnitude and longevity.