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Subprime Mortgage Crisis

Autor:   •  April 25, 2018  •  2,763 Words (12 Pages)  •  602 Views

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Inflation and Deflation

The factor that will cause the economic turbulence is inflation and deflation.

Inflation can be both positive effects on economic recovery and negative impacts on economic turbulence (Klant & Ewijk, 2012). According to the Mokhtar (2013), Managing Director of Fortress Investments was stated that the inflation becomes too high will cause the economy suffer. For example, as prices rise, the value of the dollar declines, as its purchasing power erodes with each increase in the price of basic goods and services (Davis, 2016). In contrast, if inflation is controlled and at reasonable levels, the economy will prosper. Inflation with controlled will lower inflation as well as employment will increases. Therefore, consumers will have more money to buy goods and services, and will have positive effects on economic turbulence.

According to Borg (2015), inflation was picked up in countries that perceived to be behind the curve, and will push currency rates higher as well as reinforce the appreciation of the monetary. Inflation will remain subdued in the countries. A weak consumer recovery and very low resource utilization is unlikely to give a demand-driven inflation push.

Additionally, inflation also will cause misshapes the use of money (Marjankhan, 2014). As money loses, its value will rapidly in cases of high inflation (Wolla, 2013). Individuals are not able to trust money or in other words lose their investment confidence. As a consequence, people prefer to have less money holdings and their trips to banks are more often. Therefore, the inflation will cause leads to non-productive investment as well as cause the economy turbulence of country. For example, the country of Zimbabwe, the inflation rate rose from 24,411 percent in 2007 to 89.7 sextillion percent in November 2008 (Waller, 2011). Hyperinflation was so problematic that people abandoned the Zimbabwean dollar, preferring to conduct transactions in U.S. dollars or South African rands (McGroarty and Mutsaka, 2011). The Zimbabwe currency became nearly useless as money and was removed from circulation in 2009 (Central Intelligence Agency, 2013).

The factor of economic turbulence is inflation because it will increases demand and shortage of supply (Szulczyk, 2015). Businesses must hire more employees, further increasing demand by increasing wages. Increased demand in the face of decreased supply quickly forces prices up. This is because a high inflation distorts consumer behavior due to the fear of increases for prices, people tend to purchase their requirements in advance as much as possible, which can destabilize markets creating unnecessary shortages (Mokhtar, 2013). Therefore, the gross domestic product and inflation both increase at a rate that is unsustainable and difficult to influence and control (Investopedia, 2016).

Furthermore, the deflation also will cause the economic turbulence. For example, the emerging markets that are major commodity-producers as well as exporters are experiencing a severe effect due to the deflation in commodity prices caused by slowing demand from China in year 2015 (Choyleva, 2015). The downswing in China’s economic activity will almost certainly slow global economic growth substantially in year 2015 (Liu, 2015). A number of highly vulnerable economies, most of them being large commodity producers or those dependent on oil revenues, are even tip into recession. Deflation sparked by a collapse in oil and commodity prices could, under some not-too-implausible scenarios, seriously threaten the global economic recovery for a number of years even the risk for this an incident was moderated (Sherani, 2015).

Recommendation

The negative effects of economic turbulence should be overcome and to be sustainable economic. Global economic can be improved by further strengthen and widen the international safety net, bolstering global resilience to whatever may lie ahead, develop policy recommendations be country-specific to support aggregate demand in the face of subdued activity and, in some countries, continuing deflationary pressures, changing the exchange rate system, diversifying its export base, furthering financial and trade deregulation as well as continuing to reform the financial and corporate sectors.

Public External Debt in Africa

With the increasing threat of insecurity arising from terrorism attacks and the attendant ailing tourism sector, the economies in Africa are reeling under the weight of the weakening macroeconomic fundamentals. Falling commodity prices are also taking a tolling on these countries. Investors are pulling out of riskier spots, prompted by the prospect of rising interest rates in America (Lora and Olivera, 2006). The IMF is cutting its growth forecasts further reducing earnings for the countries forcing them to borrow more and service their loans less often. The unfolding public-debt crisis in African countries, which has suffered from all these trends are a harbinger of things to come. Although the IMF and other development partners have a moral obligation to bail-out these countries, some countries like Gambia are likely not to benefit fully. In part, the problems of the tiny West African country of 2 million stem from a decrease in tourism, the source of 30% of its export earnings. Although it has not suffered a single case of Ebola, it is close to Guinea, one of the most affected countries that may further affect its economic performance. Falling commodity prices mean that exports of wood and nuts will also bring in less. These prompted the local currency to fall by 12% against the dollar last year (IMF, 2014). As much as debt continue to rise for most African countries; there is slight hope given that most sub-Saharan countries have a debt service to exports of 20% although these numbers are worsening due to falling commodity prices (Rockerbie, 2014). Though the continent is facing tough times, only a few countries are struggling.

East African Community Debt Situation

Countries in the region are facing rising levels of un-serviced debt with Tanzania's national debt forecast to reach alarmingly high levels by 2015. According to various sources, Tanzania's debt was steadily growing and was close to Tshs 28 trillion by January 2015 a trend that is expected to continue against the dwindling revenue income. A recent economic forecast by the UK-based Oxford Economics, Tanzania's Gross Domestic Product (GDP) stood at Tshs 52 trillion at current prices as of November 2013 (Asogwa, 2014). Debt-to-GDP ratio has exceeded 50 percent surpassing the debt to GDP ratio threshold

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