The Great Recession, 2008--?

Marc A. Zabicki, Market strategy viewpoint – July 21, 2009.; http://budgeting-investing.ameriprise.com/planning-and-budgeting/financial-analysis/market-strategy-viewpoint/2009-07-21.asp

How did it happen?

• Assume global economic growth• Assume increasing global opportunities• Assume companies are making money• Everyone then assumes it will last forever

A Simple Model

• The goal: make more profit• So Build factories• Invest in new products, new ideas

$$$$ Create BusinessesProducts

Jobs Customers

Profit/Investments

CirculationNewmann gets paid!!!!! Newmann gets paid!!!!!!!!!!!!

Employee Newmannenrolls buys bagels,at VCU Chinese food,

Pat Metheny CD, sneakers

Employee decides Employees ofhe/she can pay businessesfor college near VCU

get paid

Add Some Complexity: The Financial World• Assume economic growth will continue• So Borrow money to make more investments• Financial investments are seen as more profitable

than producing products

Borrow $$$$ Investment firms/funds

Borrow

Other investment firms/funds

Profit Jobs/Products

“Financialization” of the US

Manufacturing and Financial services as % of GDP

From Kevin Phillips. American Theocracy (New York: Penguin Books, 2006), p. 267.

1950 1960 1970 1980 1990 2000 2003

Manufacturing 29.3 26.9 23.8 20.8 16.3 14.5 12.7

Financial Services

10.9 13.6 14.0 15.0 18.0 19.7 20.4

Debt: Phase One

Private sector debt: borrowing by private companies and individuals

Trillions of $$$$$$$$

Collapse of a Bubble Economy

Pay back loans

Loans

Pay back Loans

Banks

Financial Institutions

Companies and

Individuals for homes

What if No One Can Pay Back What they Borrowed?

• Economies Crash• Banks and Financial Institutions collapse• Businesses Close• People lose their job• Governments can– Let everyone lose their money and jobs– Bail people and businesses out

Debt: Phase Two

• Public Sector Debt: Money that governments borrow

• OECD Debt Figures

US DebtFrom: An Analysis of the President’s Budgetary Proposals for Fiscal Year 2011:

http://www.cbo.gov/ftpdocs/112xx/doc11280/03-24-apb.pdf

Impact on Developing Nations

• Drop in exports• Withdrawal of foreign investment• Currency decreases in value– As foreign investment declines– Imports become more expensive– (but exports become cheaper, so people may buy

them again)

SolutionsThe G-20 • Argentina• Australia• Brazil• Canada• China• European Union• France• Germany• India• Indonesia• Italy• Japan• Mexico• Russia• Saudi Arabia• South Africa• Republic of Korea• Turkey• United Kingdom• USA