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The global economy is in such a fragile state that social safety nets are already being tested to their limits. Already, the health care systems are buckling under the pressure. The debt burdens will place tremendous pressure on the entire financial system. Many middle-income countries are especially vulnerable. Eventually, this will lead to a worldwide recession. The question is: Is economic collapse inevitable? Let’s look at the factors underlying this potential crisis.

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Economics of the North Atlantic Financial Crisis

A recent book, Unfinished Business: The Economics of the North Atlantic Financial Crisis, is a bracing and worthwhile analysis of the global financial crisis. Tamim Bayoumi, an economist and professor at Berkeley, calls the crisis a north Atlantic financial crisis. The United States and western Europe jointly created the crisis, but it had its worst effects on the region. Despite the gloomy outlook, Bayoumi shows that it could have been avoided if policy makers had applied their own monetary and financial knowledge.

A lot has been written about the crisis, but most books have focused on its immediate causes. In his book, Tamim Bayoumi asks, “How did the North Atlantic economies become so interconnected?” He shows that a failure of even a medium-sized US investment bank could topple the entire region and euro area. In fact, the region suffered from several decades of regulatory mistakes that started in the 1980s and lasted until 2003.

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The commingling of US and European financial systems came about through three underlying forces. First, the dominance of US financial markets internationally, followed by the introduction of the euro and subsequent integration of European banks. Second, ‘light touch’ regulation of banking systems in Europe encouraged unsustainable foreign acquisitions and domestic housing booms. Third, ‘light touch’ regulation made US dollar wholesale funding in the periphery largely inaccessible.

Third, the financial crisis caused by the collapse of US housing markets has a direct and indirect effect on the North Atlantic economy. It was felt more keenly in Europe, as the Eurozone’s debt problem has spread to the periphery. These factors have weakened the North Atlantic financial system and led to the crisis. The North Atlantic economy comprises two regions: the US and Western Europe. Further, the close Transatlantic financial relationship was the primary conduit of US shocks into European markets.

The recovery from the NAFC was a K-shaped curve. First, the wealthiest 1 percent returned to pre-crisis levels within a few years, while the bottom half of the wealth distribution took much longer. As a result, wealth distributions were more polarized before the crisis, and will likely remain polarized in the decades to come. The results suggest that the current global financial system is in need of a deep rethink.

The economics of the crisis can be further complicated by the lack of proper regulation. The IMF’s Coordinated Portfolio Investment Survey provides data for a wider group of countries and includes official holdings. The heat maps start in 1994 and report through 2007 (the eve of the crisis), and report into 2009 and beyond. The book will prove invaluable for policymakers and economic historians. However, it must be borne in mind that these crises are still a long way from being solved.

Impact of COVID on the global economy

The impact of COVID on the global economy has not been fully quantified, but it is clear that the virus has caused serious damage. This virus has reduced the growth of world GDP by more than 2%. The virus is spreading fast, and the impact on the global economy will be felt in several ways. Globally, the virus has affected the manufacturing industry, causing a shortage of inputs and limiting aggregate demand.

In 2020, the global economy could suffer a severe recession from COVID. In a recent report, the IMF estimated that the global economy would shrink by 3.5 percent, despite a lack of warnings. In a more dire scenario, the global economy could decline by as much as 11.7 percent. Meanwhile, in 2020, most countries covered by the IMF will have negative growth, albeit with some relief measures.

With the rising case numbers of COVID, global business executives are becoming more worried about its impact on the global economy. However, executives are cautiously optimistic about the coming year and are still more positive than pessimistic. The survey by McKinsey Global indicates that this uncertainty is still largely temporary, and the global economy will recover over the next few years. The survey also indicates that inflation will remain a pressing economic concern for respondents in Latin America.

Survey results also suggest that the perception of a COVID pandemic is changing. Most executives choose scenarios A1 or A2, which assume containment of the virus but have a minimal effect on global growth. While executives continue to be pessimistic about the impact of a virus on the global economy, they are more optimistic about containing the pandemic’s impact on public health. In fact, the A1 scenario was selected by respondents in previous surveys.

In Europe, the crisis has already affected the travel industry. Spanish airlines announced a 75% cut in their flights, while other major airlines followed suit. The virus has also severely affected the tourism industry. The outbreak of COVID has threatened over half of all jobs in Africa, according to the UN’s International Civil Aviation Organization. As a result, businesses have been forced to reduce hiring and implementation of mass layoffs due to a lack of tourism.

The cost of the pandemic may total $2.6 trillion to $34 trillion in the next two years, with the burden on low-income countries increasing dramatically. Since low-income countries mostly owe their debts in U.S. dollars, they may struggle to pay these debts. Global cooperation is critical to end the COVID epidemic and ensure a sustainable recovery. To combat the disease, governments must look to green bonds, social bonds, and other financing methods to help countries finance the costs of the pandemic.

Probability of a major recession in the U.S. and across western financial markets

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Recent economic data suggests the risk of a major recession in the US has increased, as has the number of forecasters who see it coming. The Fed has been gearing up to raise interest rates in order to combat high inflation. This is an unusual outlook for a time when the economy remains robust. In the past year, employers have added 6.5 million new jobs, and unemployment has fallen to 3.6%. But the recent Russian invasion of Ukraine is adding to the disruption and hurting exports.

A global recession may be inevitable if the war in Ukraine escalates. Germany is resisting calls to cut off Russian oil and gas, and China has struggled to maintain positive growth. Already, Covid-19 lockdowns have brought Shanghai to a halt, and the threat of similar measures threatens Beijing. China may already be in recession. Meanwhile, consumer prices in the US are increasing at the fastest pace in over 40 years.

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The Great Recession began in 2007 and lasted for many years. Europe’s financial markets also weakened, with several countries defaulting on their national debts. The European Union stepped in to rescue the countries, and in return, provided bailout loans and cash investments. As a result, these countries implemented austerity measures including tax hikes and social benefit cuts.

If the Great Recession has an impact on the United States’ economy, it may be time to prepare for it now. After all, a major recession means huge job losses that affect workers and their families. A large number of people in the U.S. are now dual earners, which increases the risk of recession. A major downturn would cause unemployment and a rise in the number of low-paid jobs.

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The Great Recession’s economic and social impacts have spread throughout the U.S. labor market. Although many of these effects have occurred before the Great Recession, they have been repeated since the end of the Great Recession in 2007. Only three countries, Iceland and Jamaica, experienced the first recessions of this cycle. This fact alone makes this period the most uncertain. While the Great Recession was the most severe and prolonged, it should be remembered that some countries are still struggling.

Recessions can have long-term consequences, and the effects of unemployment on individuals are felt by everyone in society. The Great Recession exacerbated an underlying sense of insecurity that had been building for years. Numerous studies have shown that workers’ feelings about their finances increased after the Great Recession, as did their class identification. A severe recession may even lead to a suicide epidemic, and this is why people should be prepared.

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