Economic Crises Case Study

Economic Crisis 2008: Showing Deflationary Blues?

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Abstract:
The housing bubble that erupted in 2007 created a credit crunch and financial crisis in the US and the UK. The crisis further evolved into the 'Economic crisis 2008'. Global economic activity had started deteriorating during 2008, with bankruptcies, wage cuts and joblessness increasing in the US. Amidst this crisis, the US economy fell into recession. Reflecting the darker side of the global economic meltdown, major economies like the UK, Japan and the other 15 Euro zone nations including Germany, also fell into a synchronised recession in 2008. Economies worldwide are experiencing the worst downturn since the Great Depression of the 1930s. Adding to the woes, a weakening global economy diminished the demand for crude oil, metals and other commodities. The consumer price index in the US fell drastically during the months of October and November. A few months earlier the Federal Reserve was worried about skyrocketing commodity prices and inflation. But rising rates of unemployment, low consumer spending and declining prices had created a new threat of deflation, which was far worse than inflation. The case helps to understand the causes and the consequences of the economic crisis, 2008 and the ill effects of deflation on the economy.

Pedagogical Objectives:

• To analyse the factors responsible for inflation and deflation.
• To discuss the effects of a recession associated deflation on the economy.
• To understand the implications of deflation.

Keywords :  Deflation, Economic crisis 2008, Deflationary recession, The Great Depression, Financial crisis, Recession 2008, Money supply and deflation, Chronic deflation, Deflationary spiral, Debt deflation, Dangers of deflation, Zero bound