The international Stock Market Slump of October 1987 saw markets all over the world tumble. The crisis began when Japan and West Germany raised interest rates, causing US rates to rise as well, resulting in a major sell-off of US stocks. The global stock market sank by an average of 25%, whereas Australia’s stock market fell by 40%. In the early 1990s, 17 of the 18 major OECD economies were in recession.
Due to severe unemployment, inflationary pressures, and government debt, Singapore Prime Minister Lee Kuan Yew famously predicted that Australia would become the “white trash of Asia” in the 1980s. Bob Hawke, Australia’s Prime Minister at the time of the remarks, acknowledged that the remark was “not an exaggeration.” The phrase “white trash” is still used today.
In 1983, Bob Hawke’s Australian Labor Party was elected to power in Australia. The Hawke-Keating government altered Labor’s historic devotion to economic protectionism, deregulated Australia’s finance industry, and reorganized trade unions’ roles.
The Reserve Bank of Australia’s Governor from 1996 to 2006, Ian Macfarlane, has stated that the 1980s financial excesses were of such magnitude that the 1990s recession was “inevitable,” describing Australia’s economy towards the end of the 1980s as overstretched and sensitive to contractionary shock. High borrowing rates exerted constant pressure on firms, many of which were “borrowed to the hilt.”
The dispute regarding the origins of the Australian recession in the 1990s, as well as the extent to which international forces and domestic government policies contributed to its severity, continues. Former Reserve Bank Governor Ian Macfarlane commented in 2006:
At the very least, the focus on interest rates and deregulation reminds us that we’re dealing with a financial event. Financial failure dominated the 1990-1991 recession. The collapse in asset prices, in most cases, meant that loans could not be repaid, passing the problem to financial institutions.
In 1990, what financial catastrophe occurred?
In 1990, the United States suffered a recession that lasted for eight months, ending in March 1991. Despite the fact that the recession was moderate in comparison to other postwar recessions, it was marked by a sluggish employment recovery, sometimes known as a jobless rebound. Despite a return to positive economic growth the previous year, unemployment continued to rise into June 1992.
Bill Clinton’s victory in the 1992 presidential election was aided by a late rebound from the 19901991 recession, during which Clinton was successful in claiming that weak economic development was attributable to incumbent president George H. W. Bush’s policies.
What triggered the economic boom of the 1990s?
The surplus has swelled to $236 billion in just two years. When the government has a surplus, it can put cash into infrastructure projects like federal roadways and bridges. More jobs are created as a result of this. So, once again, government expenditure was a major factor in the 1990s economic boom.
What were the three possible causes and impacts of the 1990 recession?
Consumers’ pessimism, the debt accumulations of the 1980s, the surge in oil prices when Iraq invaded Kuwait, a credit crisis produced by overzealous banking regulators, and Federal Reserve attempts to control the pace of inflation have all been blamed for the recession.
What caused the recession of the 1980s?
The 1981-82 recession was the greatest economic slump in the United States since the Great Depression, prior to the 2007-09 recession. Indeed, the over 11% unemployment rate attained in late 1982 remains the postwar era’s pinnacle (Federal Reserve Bank of St. Louis). During the 1981-82 recession, unemployment was widespread, but manufacturing, construction, and the auto industries were especially hard hit. Despite the fact that goods manufacturers accounted for only 30% of overall employment at the time, they lost 90% of their jobs in 1982. Manufacturing accounted for three-quarters of all job losses in the goods-producing sector, with unemployment rates of 22% and 24%, respectively, in the home building and auto manufacturing industries (Urquhart and Hewson 1983, 4-7).
The economy was already in poor health prior to the slump, with unemployment hovering at 7.5 percent following a recession in 1980. Tight monetary policy in an attempt to combat rising inflation sparked both the 1980 and 1981-82 recessions. During the 1960s and 1970s, economists and politicians thought that raising inflation would reduce unemployment, a tradeoff known as the Phillips Curve. In the 1970s, the Fed used a “stop-go” monetary strategy, in which it alternated between combating high unemployment and high inflation. The Fed cut interest rates during the “go” periods in order to loosen the money supply and reduce unemployment. When inflation rose during the “stop” periods, the Fed raised interest rates to lessen inflationary pressure. However, as inflation and unemployment rose concurrently in the mid-1970s, the Phillips Curve tradeoff proved unstable in the long run. While unemployment was on the decline towards the end of the decade, inflation remained high, hitting 11% in June 1979. (Federal Reserve Bank of St. Louis).
Because of his anti-inflation ideas, Paul Volcker was chosen chairman of the Federal Reserve in August 1979. He had previously served as president of the New York Fed, where he had expressed his displeasure with Fed actions that he believed contributed to rising inflation expectations. In terms of future economic stability, he believes that rising inflation should be the Fed’s top concern: “It is what is going to give us the most troubles and cause the biggest recession” (FOMC transcript 1979, 16). He also thought the Fed had a credibility problem when it comes to controlling inflation. The Fed had proved in the preceding decade that it did not place a high priority on maintaining low inflation, and the public’s belief that this conduct would continue would make it increasingly difficult for the Fed to drive inflation down. “Failure to continue the fight against inflation now would simply make any subsequent effort more difficult,” he said (Volcker 1981b).
Instead of focusing on interest rates, Volcker altered the Fed’s policy to aggressively target the money supply. He chose this strategy for two reasons. To begin with, rising inflation made it difficult to determine which interest rate targets were suitable. Due to the expectation of inflation, the nominal interest rates the Fed targeted could be relatively high, but the real interest rates (that is, the effective interest rates after adjusting for inflation) could still be quite low. Second, the new policy was intended to show the public that the Federal Reserve was serious about keeping inflation low. The anticipation of low inflation was significant, as present inflation is influenced in part by future inflation forecasts.
Volcker’s initial efforts to reduce inflation and inflationary expectations were ineffective. The Carter administration’s credit-control scheme, which began in March 1980, triggered a severe recession (Schreft 1990). As unemployment rose, the Fed relented, reverting to the “stop-go” practices that the public had grown accustomed to. The Fed tightened the money supply further in late 1980 and early 1981, causing the federal funds rate to approach 20%. Long-term interest rates, despite this, have continued to grow. The ten-year Treasury bond rate surged from around 11% in October 1980 to more than 15% a year later, probably due to market expectations that the Fed would soften its restrictive monetary policy if unemployment soared (Goodfriend and King 2005). Volcker, on the other hand, was insistent that the Fed not back down this time: “We have set our course to control money and credit growth.” We intend to stay the course” (Volcker 1981a).
High interest rates put pressure on sectors of the economy that rely on borrowing, such as manufacturing and construction, and the economy officially entered a recession in the third quarter of 1981. Unemployment increased from 7.4% at the beginning of the recession to nearly 10% a year later. Volcker faced repeated calls from Congress to loosen monetary policy as the recession worsened, but he insisted that failing to lower long-run inflation expectations now would result in “more catastrophic economic situations over a much longer period of time” (Monetary Policy Report 1982, 67).
This perseverance paid off in the end. Inflation had dropped to 5% by October 1982, and long-term interest rates had begun to fall. The Fed permitted the federal funds rate to drop to 9%, and unemployment fell fast from over 11% at the end of 1982 to 8% a year later (Federal Reserve Bank of St. Louis; Goodfriend and King 2005). Inflation was still a threat, and the Fed would have to deal with several “inflation scares” during the 1980s. However, Volcker’s and his successors’ dedication to actively pursue price stability helped ensure that the 1970s’ double-digit inflation did not reappear.
In the 1990s, what happened?
The fall of the Soviet Union ended the decades-long Cold War, and the rise of the Internet ushered in a radical new era of communication, business, and entertainment.
In 1998, how was the economy?
The fundamentals of the US economy remain strong, with low inflation and low unemployment. The economy grew at a healthy 3.9 percent in real terms in 1998, mirroring its performance in 1997. (see Figure 1). This was a far better result than economists had predicted a year ago. Several times throughout the year, it appeared as if global economic conditions would stifle the economy’s momentum, but this scenario never materialized. The economy is forecast to grow at a respectable 3.3 percent in 1999, albeit at a slower pace.
What did inflation look like in the 1990s?
Inflation grew from 3% in 1983 to around 5% in 1990 during the 1983-90 boom. However, since 1991, when the current economic expansion began, inflation has remained very stable, at around 3% or less.
Which of the following factors contributed to the 1990-1991 economic crisis?
Currency overvaluation triggered the crisis; the current account deficit, as well as investor confidence, had a key part in the severe exchange rate depreciation.
The 1980s saw enormous and worsening budgetary imbalances, which contributed to the economic disaster. In the mid-1980s, India began to experience balance-of-payments issues. As a result of the Gulf War, India’s oil import bill increased, exports decreased, credit dried up, and investors withdrew their funds. Large fiscal deficits eventually exacerbated the trade deficit, resulting in an external payments crisis. India was in serious economic distress by the end of the 1980s.
The government’s gross budget deficit (central and states) increased from 9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and 12.7 percent in 1990-91. The gross fiscal deficit in the center alone increased from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and 8.4 percent in 1990-91. Because these deficits had to be covered by borrowings, the government’s internal debt grew quickly, rising from 35% of GDP at the end of 1980-81 to 53% of GDP at the end of 1990-91. India’s foreign exchange reserves have depleted to the point where it could only fund three weeks’ worth of imports.
The exchange rate of India was severely manipulated in mid-1991. The fall in the value of the Indian rupee in the years running up to mid-1991 was the catalyst for this occurrence. The Reserve Bank of India took limited action, safeguarding the currency by increasing overseas reserves and slowing its depreciation. However, in mid-1991, with foreign reserves on the verge of depletion, the Indian government allowed a rapid depreciation of the rupee against major currencies, which took place in two stages over three days (1 and 3 July 1991).
What are the two most serious issues that come with a recession?
Readers’ Question: Identify and explain economic elements that may be negatively impacted by the current economic downturn.
- Output is decreasing. There will be less production, resulting in reduced real GDP and average earnings. Wages tend to rise at a considerably slower pace, if at all.
- Unemployment. The most serious consequence of a recession is an increase in cyclical unemployment. Because businesses are producing less, they are employing fewer people, resulting in an increase in unemployment.
- Borrowing by the government is increasing. Government finances tend to deteriorate during a recession. Because of the greater unemployment rate, people pay fewer taxes and have to spend more on unemployment benefits. Markets may become concerned about the level of government borrowing as a result of this deterioration in government finances, leading to higher interest rates. This increase in bond yields may put pressure on governments to cut spending and raise taxes to reduce budget deficits. This could exacerbate the recession and make it more difficult to recover. This was especially problematic for many Eurozone economies during the recession of 2009. See also the Eurozone budgetary crisis.
- Depreciation of the currency.
- In a recession, currencies tend to depreciate because consumers predict reduced interest rates, so there is less demand for the currency. However, if there is a worldwide recession that affects all countries, this may not happen.
- Hysteresis. This is the claim that a rise in cyclical (temporary) unemployment can lead to a rise in structural (long-term) unemployment. During a recession, someone who has been unemployed for a year may become less employable (e.g. lose on the job training, e.t.c) See hysteresis for more information.
- Asset prices are declining. There is less demand for fixed assets such as housing during a recession. House price declines might exacerbate consumer spending declines and raise bank losses. A balance sheet recession (such as the one that occurred in 2009-10) is characterized by a drop in asset prices. Balance sheet recession is a term used to describe a period in which a company’s financial
- Rising unemployment has resulted in social difficulties, such as increasing rates of social isolation.
- Inequality has risen. A recession tends to exacerbate wealth disparities and poverty. Unemployment (and the reliance on unemployment benefits) is one of the most common causes of relative poverty.
- Protectionism is on the rise. Countries are frequently encouraged to respond to a global downturn with protectionist measures (e.g. raising import duties). This results in retaliation and a general fall in commerce, both of which have negative consequences.
Evaluation can recessions be beneficial?
- Some economists believe that a recession is required to address inflation. For example, the recessions of 1980 and 1991/92 in the United Kingdom.
- Recessions can encourage businesses to become more efficient, and the ‘creative destruction’ of a downturn can allow for the emergence of new businesses.
These factors, however, do not outweigh the recession’s significant personal and social costs.
US house prices
House prices decreased just before the recession began in 2006, and declining house prices contributed to the recession’s onset. However, as the recession began, property prices plummeted much worse.
Great Depression 1929-32
The Great Depression was a significantly more severe downturn, with output dropping by more than 26% in three years.
It resulted in a substantially greater rate of unemployment, which increased from 0% to 25% in just two years.
What caused the decade to be lost?
- Japan’s “Lost Decade” was a period from around 1991 to 2001 when the country’s formerly booming economy slowed significantly.
- The Bank of Japan (BOJ) raised interest rates to temper the real estate market, which contributed to the economic slump.
- While a credit crunch was brewing, the BOJ’s policies produced a liquidity trap.
- Using public funds to rebuild bank balance sheets and preventing deflation and inflation from producing stagnation are among the lessons learned from Japan’s “Lost Decade.”