Opinion

Some reflections on the post-crisis period

By Zhou Qiren (China Daily)
Updated: 2010-02-03 07:49
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People have already begun to talk about the post-crisis era only a year and some change after the global financial crisis erupted. But what is the fundamental reason why the post-crisis era has come much faster than expected? An accurate analysis of the magnitude of the crisis and its negative impacts will help people better gauge the pulse of the global economy.

Countries across the world have undergone a rollercoaster ride from an initial underestimation to an overestimation due to the global financial crisis. After the sub-prime mortgage crisis began to finally wreak havoc in the United States, widespread opinion was that its impact would be confined to the world's largest economy and would not affect other regions.

But as the crisis quickly spread globally, public pessimism began to escalate and some critics believed it would be worse than the Great Depression. That proved to be an exaggeration.

During the Great Depression that swept the world from 1929 until the late 1930s, the US was hit by an unemployment rate of more than 25 percent. Many US banks went bankrupt; its stock market dropped by 90 percent. In comparison, the recent global financial meltdown is much minor in magnitude, as evidenced by the recovery of the global economy less than two years after the crisis' outbreak.

The Great Depression began amid the gold standard system adopted by main developed countries at the time in which their currencies were pegged to gold. With this system, the possibility was thin that a vicious inflation would break out. But there is always the other side of the coin.

Under the gold standard, countries would have fewer tools available to stimulate their economies, such as increasing currency supplies, provided that deflation emerges. In fact, the world economy managed to pull out of the Great Depression only after the pound and the US dollar, two leading currencies in the world, were disconnected from gold.

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When it comes to the latest global financial crisis, it erupted nearly eight decades after the world's leading currencies were freed from gold. As a result, affected countries had myriad tools and ways to stimulate economic development in case of deflation.

The huge economic advantages produced by developed and emerging economies advancing from the past isolation to the current openness and integration have also pushed the global economy forward and improved its capability to tackle potential risks.

Once a global financial crisis is looming, which will unavoidably trigger systematic horror, recession and depression, affected countries still have some weapons and means, such as relaxing currency supply, to spur economic development. In this sense, the latest crisis is not a parallel to the Great Depression.

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