The stock market crash of 2008 caused the Great Recession Theory
The Great Recession, 2008--? Marc A. Zabicki, Market strategy viewpoint – July 21, 2009.; ...
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The Great Recession, 2008--?
Marc A. Zabicki, Market strategy viewpoint – July 21, 2009.; http://budgeting-investing.ameriprise.com/planning-and-budgeting/financial-analysis/market-strategy-viewpoint/2009-07-21.asp
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How did it happen?
• Assume global economic growth• Assume increasing global opportunities• Assume companies are making money• Everyone then assumes it will last forever
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A Simple Model
• The goal: make more profit• So Build factories• Invest in new products, new ideas
$$$$ Create BusinessesProducts
Jobs Customers
Profit/Investments
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CirculationNewmann gets paid!!!!! Newmann gets paid!!!!!!!!!!!!
Employee Newmannenrolls buys bagels,at VCU Chinese food,
Pat Metheny CD, sneakers
Employee decides Employees ofhe/she can pay businessesfor college near VCU
get paid
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Add Some Complexity: The Financial World• Assume economic growth will continue• So Borrow money to make more investments• Financial investments are seen as more profitable
than producing products
Borrow $$$$ Investment firms/funds
Borrow
Other investment firms/funds
Profit Jobs/Products
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“Financialization” of the US
Manufacturing and Financial services as % of GDP
From Kevin Phillips. American Theocracy (New York: Penguin Books, 2006), p. 267.
1950 1960 1970 1980 1990 2000 2003
Manufacturing 29.3 26.9 23.8 20.8 16.3 14.5 12.7
Financial Services
10.9 13.6 14.0 15.0 18.0 19.7 20.4
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Debt: Phase One
Private sector debt: borrowing by private companies and individuals
Trillions of $$$$$$$$
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Collapse of a Bubble Economy
Pay back loans
Loans
Pay back Loans
Banks
Financial Institutions
Companies and
Individuals for homes
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What if No One Can Pay Back What they Borrowed?
• Economies Crash• Banks and Financial Institutions collapse• Businesses Close• People lose their job• Governments can– Let everyone lose their money and jobs– Bail people and businesses out
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Debt: Phase Two
• Public Sector Debt: Money that governments borrow
• OECD Debt Figures
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US DebtFrom: An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011:
http://www.cbo.gov/ftpdocs/112xx/doc11280/03-24-apb.pdf
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Impact on Developing Nations
• Drop in exports• Withdrawal of foreign investment• Currency decreases in value– As foreign investment declines– Imports become more expensive– (but exports become cheaper, so people may buy
them again)
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SolutionsThe G-20 • Argentina• Australia• Brazil• Canada• China• European Union• France• Germany• India• Indonesia• Italy• Japan• Mexico• Russia• Saudi Arabia• South Africa• Republic of Korea• Turkey• United Kingdom• USA