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Global Crisis/InnovationBlog

What is Going on?  In One Short Paragraph

By Shlomo Maital

 Today’s Financial Times (Saturday August 13) claims that the ‘flight to safety’ (a euphemism for panic sale of stocks and other assets)  last week exceeded the panic following Lehman’s Brothers catastrophic collapse on Sept. 15/2008.  Other items discuss the rioting in Britain, Greece’s deep recession, France’s crisis, Israel’s protest movement, and other types of social unrest.

   What in the world is going on?

   Here is a very short explanation.  The financial crisis of 2007-9, beginning with the U.S. and spreading to the world, led expectedly to an economic crisis, because when people lose their savings and homes, they spend less, the economy declines and joblessness rises.  Governments everywhere reacted to the economic downturn by spending more, even though tax revenues were falling. The resulting deficits created a new financial crisis, in America and in Europe, as mounting government debt panicked investors.  Central banks reacted by slashing interest rates and flooding money into the market, but that did not help, because banks and companies held the money rather than spend it, fearing future crises.  So the new financial crisis (just a continuation of the previous one, with govt. debt playing the role bank debt played before) led to renewed economic stagnation, which in turn has now become social unrest.  Governments are powerless, because a) they are now slashing their social programs, owing to deficits, so they cannot respond with more resources, and b) money policy has no room left for maneuver. The young middle class, and the poor, are revolting,  in different ways, some peacefully, some with violence – and some, as in America, with continued quiet desperation.  The tragedy is, this drama unfolds predictably, because social unrest always follows economic depressions, which always follow severe financial downturns. Yet as always our leaders were taken by surprise by it.  And that deepens the financial panic. It is a series of feedback loops.

     It is unclear how the world can emerge from this mess.  If you, dear reader, have some ideas, please pass them on. 

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Blog entries written by Prof. Shlomo Maital

Shlomo Maital
August 2011
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