Gary Marbaniang
A few months ago while on my way home from work an unusual but rather amusing thing happened. A fellow passenger took all of us by surprise when he handed over to the driver a cigarette and only part of the fare. The driver, after the initial shock told the passenger who was a little tipsy that he does not smoke and asked him to pay the full fare instead. The driver narrated another funny incident about how another passenger tried to barter his way out of paying the taxi fare by offering him a quarter bottle of liquor. The poor fellow had spent all his money on booze, so the only way out was to offer his prized possession to the driver. This little incident made me think about the difficulties people have while going about their daily business under the barter system when they had to trade something they had for something they did not need.
The invention of money solved this problem once and for all. In the eyes of many economists the invention of money is in the same league as some of the greatest inventions man has made such as the wheel and fire. Firstly, money acts as a medium of exchange and secondly it is a store of value. A case in point is the life of a vegetable vendor who sells her vegetables at Iewduh.Whatever little amount she earns can be used to buy the necessary items needed to run her family. Secondly, that precious money could come in handy in times of need since money also acts as a store of value. Most economic Variables are also measured in monetary terms since they give an accurate picture of the current economic scenario.For example when the Finance Minister announced in this year’s budget that India’s foreign exchange reserves stood at around 350 billion dollars it shows the good health of the Indian economy considering the fact that at one point of time India’s foreign exchange reserves were barely sufficient to pay for two weeks of imports.
In today’s global economy where economic globalization has taken centre stage it would be impossible to move goods and people from one country to another without the use of money.For all the good things that money has brought to mankind the flipside is that it has increased the evil of greed, an ever present evil in the heart of man since time immemorial but which has grown by leaps and bounds in modern times. It has also created a phenomenon which in its mild form is simply known as inflation but it can turn into a Frankenstein called hyperinflation when it cannot be tamed. A healthy dose of inflation is vital for any economy since it is almost impossible to grow without a proportionate increase in the rate of inflation. In December last year the Federal Reserve (American Central Bank) took a decision which went unnoticed by the general public but which is significant for the global economy. It announced that it would increase the benchmark rate for the first time in nearly a decade. Generally if rates are increased by the Central Bank of any country, it will make borrowing costlier for the general public. This has increased fears in Americans that the recovery that has taken place in the economy since the financial crisis of 2007-08 might be stalled.
The year 2008 was a significant year on the personal front as well as for the global economy. I was one of the lucky few to have the opportunity of appearing for a job interview in a premier financial institution barely a few months after I graduated from college. Surprisingly the job interview went pretty well. A friend also had to appear for the same job interview on that same day and even though his interview was scheduled much later than mine, I somehow found the patience to wait for him. Sitting there in the waiting room we noticed the tension in the faces of most of the candidates much unlike the carefree attitude of me and my friend since we’re both fresh from college and this was our very first job interview. One person caught our attention. She was a girl who had gone through several job interviews without success. I instantly recognised her. She looked dejected and some of the employees of that organisation asked her how the interview went. Her blunt response was that they asked about the financial crisis and she knew nothing about it. It just dawned on me then that had they asked me the same question I would have been as clueless since my understanding of the financial crisis back then was very limited.
The financial crisis that had unfolded in the largest and strongest economy in the world, was not experienced since the Great Depression of 1929. The financial sector of the US was on the brink of collapse. Major financial institutions in the U.S like Freddie Mac and Fannie Mae had to be bailed out by the government. Lehmann Brothers which survived the stock market crash of 1929 collapsed during the height of the crisis in 2008.The collapse of Lehmann Brothers set the tone for the pessimistic economic outlook and the great recession. The U.S Government had to resort to unpopular measures since public money had to be used to bailout these banks. The crash in the financial sector of the world’s largest economy sent ripples throughout the world. Europe was going through a crisis of its own with some countries like Ireland being hit by a crash in the financial sector similar to the one in the U.S. Other countries like Spain and Portugal went through a debt crisis unlike any other, starting in late 2009.
Some prominent personalities in the entertainment world were also affected by events following the crash. It struck a chord with me as it brought to light the magnitude of the crisis .Shane Filan, of the popular Irish boy-band, WestLife was hit hard by the crash in the real estate sector in Ireland. He and his brother had invested millions in the property boom that Ireland experienced in the years prior to the crash but it all went downhill for him following the biggest bust in Europe’s property history. His financial troubles came to light when he filed for bankruptcy in 2011. Kidrock, another famous musician appeared on a popular American news network during the height of the crisis to show support for his hometown,Detroit and the automotive industry.The American automotive industry bore the brunt of the recession and America’s automobile sweethearts Ford and Chrysler had to lay off thousands of workers since demand for consumer durable goods was down. Production was at an all time low,
The U.S government not only bailed out the “Too big to fail banks” but it also did something which has rarely been done before; It bailed out major private companies. Chrysler, one of the major car producers in the world benefitted from the fiscal stimulus that President Obama announced immediately after the financial crisis. The global economy and the U.S economy in particular has gradually recovered from the crisis with job figures in the past six months or so showing unemployment level at their lowest in a long time. The U.S economy added over 2.5 million jobs in 2015,the second best gain since 1999.The announcement by the Federal Reserve to increase rates came at a time when the recovery in the U.S economy is in full swing and inflation is one of the factors that the Federal Reserve had taken into consideration while making the announcement. Fed Officials had set a two percent inflation target and they were so sure prices would eventually rise so they raised the benchmark rate so they wouldn’t have to resort to quick fix measures once inflation rose.
Since the creation of the first central bank in Sweden in 1694, it role has become synonymous with monetary policy which is to boost the confidence in the economy by creating a stable price environment for all stakeholders which includes households, industries, savers and investors. Today most economists favours a low and steady rate of inflation. Low inflation enables an economy to bounce back more quickly from a downturn since it reduces the risk of a liquidity trap preventing monetary policy from stabilising the economy. I will conclude by mentioning a rare occurrence. Hyperinflation, a situation of extreme inflation rates that didn’t exist in earlier periods of commodity money spread like wildfire in the Weimar Republic of Germany and the economy of Zimbabwe in the late 1990’s . I remember a teacher telling us about the episode of hyperinflation in Germany. A million marks (German currency)wasn’t enough to buy a loaf of bread. A man who drank two cups of coffee at 5000 marks each was presented with a bill for 14000 because prices had shot up . in between. Then there’s a story of a couple who took a few hundred million marks to the theatre box office hoping to see a show but discovered it wasn’t enough. Tickets were now a billion marks each!
At the height of the crisis the inflation rate was in tens of thousands per month. Germany has surely left its economic woes behind and recovered from its worst ever economic crisis to become Europe’s strongest and most reliable economy. The whole of Europe seems to revolve around Germany these days and it has set a high standard for all to follow.
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