THE NATURE OF ECONOMIC CYCLES

Explore the nature of economic cycles and why they occur.

Explore the nature of economic cycles and why they occur.

In early 2000's former FED president Alan Greenspan announced that the interest rate on treasury bills was reduced to only 1% to keep the economy strong. However, in short time, interest rates commenced to decrease all over the world. The investors preferred to put their money on the market rather than investing on government debt-papers. As a result, global liquidity and money supply in the market increased. Most of the emerging and developed countries were declaring budget surpluses year after year. Moreover, more and more money supply on the market created such a great consumption wave, level of consumption, social benefits, wages were increasing and so does the tax revenues of the governments. It was after the global credit crisis that the interest rates started increasing and purchasing power commenced decreasing. The budget surplus of emerging markets because of high level of liquidity was no more in the global spot marke (Pezzuto, 2008).

In Greece, government spending increased due to high level of liquidity on the market. However inefficient allocation of resources took place that the Papandreou government tried to stimulate domestic demand- increase in wages and social benefits of workers. As a socialist political ground, Papandreou government also offered tax- incentive policies. These incentives generated a chronic budget deficit- unsustainable government budget deficits caused the cautionary environment in the European continent. Not only budget deficit took place in Greece but also current account deficit was an indicator of the crisis. Moreover Greece could not generate increasing export demand as single currency (Euro) is utilized (Mattich, 2011).

This enraged Greeks even more and it even went far as the police sprayed tear gas to the protesters outside the Athens parliament. One of the reasons why the rest of the Europe is trying their best to save Greece from this deep hole is because if ever Greece defaults for their debts, financial markets will view this as a negative thing against the high reputation of the euro, it could lead to a significant fall against other key currencies. It can also ignite a break-up of the European Union, since Greece went down in the very own eyes of the union, other participant countries would think that it can also happen to them and the union isn't serving its purpose, and thus ...