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The Great Depression gave the Second World War and the preceding Bretton Woods, thus set the foundations for a global financial system that lasted 20 short of a Century, until it broke down to child the Depression of 21st Century. Whether this would also lead to wars is not known, but how it is going to alter the panorama of world financial architecture is being seen with great contemplation’ with vast changes bound to alter the realm of economic theories, institutional structures, global architecture of integration and concurrence and the philosophical outlook.
World has been towing the lines and reaping benefits form the promulgation of Neo-Classical theory, a sharp contrast form the Great Depression, that now stands as a failed adventure. The crash has swallowed almost all the gains that the booming decade of growth, wealth and well being gave to the people of this world and ramshackle the once roaring juggernauts by pushing them into retreat, isolation and dire help. Thus arising from the very free market wisdom, the US and EU fallen back again to the Gold Standard, marred with deflation. This was the failure of theory that gave an inducement to Keynesian economics, the notion under which Governments use Fiscal policies to stimulate growth and confidence when monetary measure fail to promulgate gains.
Looking at the Global horizon one can see the conflicting zones of Surplus and Deficit economies (former excessive savings is reasoned to be the cause of low interest rates, the case of massive liquidity and thus an impetus for degenerated credit quality) Thus a vicious cycle of money being poured by the tech adopting, exploding economies into deficit black holes (US being importer of Foreign Capital at $4 billion per day), giving rise to high corporate savings which were unable to balance out the surging deficits, thus leading to a severe Global capital Imbalance. Clearly deficits on such massive scales are unsustainable, since the collapse an estimated $27 trillion has been wiped out of the Global stock market, 40% This crisis undoubtedly is the result of human excesses, it’s an event tough not separate but the preceding reforms, restructuring, and reallocation and realignment is a continuous process that should not get stopped. It tends to make us focus an think of different facades of disruptive trends generated over the years through a very short window of opportunity that lasts until the pain, but soon as it closes so does the resurgence of vested interests that again takes the reformed body over to seep and infect, paving ways for the next paralysis.
Derivates carry in them leverage that harbors risks, and risks get transferred but do not diminish. Problem is the lack of understanding about the very nature of derivates; it is essentially the representation of basal assets those are linked through leverage. Their forms are only bound by imaginations, as it can take up any shape, thus higher the shapes (as happened in the US with the rise of CDS market) more complex its relation with the underlying platform becomes making its pyramid dynamically more profitable but at the same time even more risky. Such that is the underlying assets become troubled, the whole pyramid begins to crumble. And it is this instability in finance that it should be heavily guarded with regulations’ but as happened in US where the whole derivate paradigm was let to swing with the market forces with no regulated frame work to support. Yes the forces acted and made it grow tall enough to shiver and fragment on its own splintery base’ thus smashing it down with others’ on all…
Muhammad Shafqat
Feb 2009
