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The Return Of Depression Economics Essay

1251 words - 5 pages

Paul Krugman states that his goal is to develop a theory of how the currency panics of Asia spread around the world, and how to prevent this from happening again The Return of Depression Economics explains how the liquidity trap and currency panics experienced by the Asian and Latin American economies over the past decade resemble the Great Depression. Krugman cautions that we are not immune to the problems experienced by those economies, and that Japan's long economic slump could happen to America as well. This is because the traditional methods to fix economies are no longer enough to counter recessions.Today, most economists regard the Great Depression as an unnecessary tragedy. Economists' wonder why the Federal Reserve didn't print more money, and the conservative President Herbert Hoover enact an expansionary fiscal policy. In truth, they didn't know better. they held to traditionally held views that the market would correct itself, and this was a short-run problem. The New Deal and the WWII energized the economy, and pulled America out of its slump. It proved the worth of Keynesian economics.In the 1990's, we thought that we could avoid the mistakes of President Hoover and the Federal Reserve, and that Depressions were never to be seen again. However, the currency panics and economic crisis's suffered beginning in 1997 resemble the events of the Great Depression. In fact, Japan has experienced a larger and longer stock market slump than America did in the Great Depression. Today, the Nikkei index is just 25% of it's 1989 high. Japan however is not the only economy to suffer in the 1990's. Mexico, Argentina, Brazil, Russia, Korea, and Thailand were among the many countries that saw their currencies devalued, and economies thrown into recession.The basic premise to recessions is that supply exceeds demand. Markets don't always work efficiently, thus need governments to sometimes intervene and correct equilibrium problems. In fact, equilibrium is and illusion. Prices are no longer set at the price for demand and supply, they are now set at the price what people think the price will be in the near future. Investors who participate in the markets base their decisions today on their anticipation of the future, thus there is no such thing as equilibrium.In July of 1997, Thailand devalued its currency the baht, and started a devaluation landslide swallowing much of Asia. In years past, Thailand built its economy by the thrift and savings of its own citizens. That changed in the 1980's when foreign firms began building manufacturing plants. More money poured in during the 1990's as investors were looking for growth, and saw Thailand as a haven for investment. This money fueled a massive expansion of credit and investment.The fundamental problem with Thailand was that its currency mechanism. Interest rates in Thailand were relatively high, thus businesses would borrow from overseas banks. This meant that the baht would be converted either to...

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