Lehman collapse in 2008 was followed by a fall in the price level. When the credit bubble bursts in the US in 2008 it leaves the economy with falling prices and low economic activity.
But, globally these days the scene is different. We are in the regime of high prices and the central banks world over are raising interest rates to keep a tab on inflation. Therefore, we have the world divided in three parts. Economies that are experiencing high inflation like India, China, and some parts of Europe. Then there are economies which are recovering from the financial crisis like the US. And, then there are economies which are struggling to avert the problem of recession like Greece, Spain, Portugal etc, etc.
Nevertheless, Greece’s problem is not as bad as the US because inflation in Greece is around 3% well above the rate of inflation recorded in the US that sparked concerns about deflation. But the inflation rate for Greece is going down and if its problems are not solved the economy will be gripped in a deflationary situation. During the US’ recession in 2009 inflation was negative whereas Greece’s inflation stood at 1% which suggests that the recession in the US affected Greece, too. We are not sure why we are getting this pattern but we can not deny the impact of foreign trade. To be precise, Greece is in a better position than the US as far as inflation is concerned and if it tries it can pull the economy back on its usual track.
However, Greece’s main problem is debt but debts can be sold-off to other players or we can reduce them by budget austerity. Since Greece is not in that bad situation as the US we can keep the economy afloat. But, the main problem remains same, euro. If government debt is bailed out in Euro it will push inflation up because of increase in the money supply and European Central Bank (ECB) is already increasing interest rate to curb inflationary pressure.
Inflation is always a concern because it affects the real value of money if income is not increasing and since Greece is in recession it is not generating new incomes. However, Greece should push its inflation target to natural rate of inflation and unemployment at 5%.
Moreover, increase in money supply with euro will also benefit countries like Germany and France alongwith Greece through depreciation. But, this time I do not think Greece will be ready to share the fruits of international trade.
But, globally these days the scene is different. We are in the regime of high prices and the central banks world over are raising interest rates to keep a tab on inflation. Therefore, we have the world divided in three parts. Economies that are experiencing high inflation like India, China, and some parts of Europe. Then there are economies which are recovering from the financial crisis like the US. And, then there are economies which are struggling to avert the problem of recession like Greece, Spain, Portugal etc, etc.
Nevertheless, Greece’s problem is not as bad as the US because inflation in Greece is around 3% well above the rate of inflation recorded in the US that sparked concerns about deflation. But the inflation rate for Greece is going down and if its problems are not solved the economy will be gripped in a deflationary situation. During the US’ recession in 2009 inflation was negative whereas Greece’s inflation stood at 1% which suggests that the recession in the US affected Greece, too. We are not sure why we are getting this pattern but we can not deny the impact of foreign trade. To be precise, Greece is in a better position than the US as far as inflation is concerned and if it tries it can pull the economy back on its usual track.
However, Greece’s main problem is debt but debts can be sold-off to other players or we can reduce them by budget austerity. Since Greece is not in that bad situation as the US we can keep the economy afloat. But, the main problem remains same, euro. If government debt is bailed out in Euro it will push inflation up because of increase in the money supply and European Central Bank (ECB) is already increasing interest rate to curb inflationary pressure.
Inflation is always a concern because it affects the real value of money if income is not increasing and since Greece is in recession it is not generating new incomes. However, Greece should push its inflation target to natural rate of inflation and unemployment at 5%.
Moreover, increase in money supply with euro will also benefit countries like Germany and France alongwith Greece through depreciation. But, this time I do not think Greece will be ready to share the fruits of international trade.
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