The Global Financial Crisis and Its Repercussions

The global financial crisis of 2008-2009 is an ongoing major financial crisis. It became prominently visible in September 2008 with the failure, merger, or conservatorship of several large United States-based financial firms. The causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global credit crisis, deflation and sharp reductions in shipping resulting in a number of European bank failures and declines in various stock indexes, and large reductions in the market value of equities (stock) and commodities worldwide.The credit crisis was exacerbated by Section 128 of the Emergency Economic Stabilization Act of 2008, which allowed the Federal Reserve System to pay interest on excess reserve requirement balances held on deposit from banks, removing the longstanding incentive for banks to extend credit instead of hoard cash on deposit with the Fed. The crisis led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis, and a decrease in international shipping and commerce. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change, evolving at the close of January into a currency crisis with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund. The crisis was triggered by the subprime mortgage crisis and is an acute phase of the financial crisis of 2007-2008.Russia’s economy hitThe Russian financial crisis of 2008-2009, part of the world Economic Crisis of 2008, is an ongoing crisis in the Russian financial markets which stemmed from the US sub-prime mortgage crisis and has been compounded by political fears after the War with Georgia, and by the plummeting price of Urals heavy crude oil, which has lost more than 70% of its value since its record peak of $147 on 4th July 2008. While according to the World Bank, Russia’s strong short-term macroeconomic fundamentals make it better prepared than many emerging economies to deal with the crisis, its underlying structural weaknesses and high dependence on the price of a single commodity make its impact more pronounced than would otherwise be the case. Swift fiscal management and substantial financial reserves may have protected Russia from deeper consequences of this shock.Reasons Why Gold Will Rise In 2009Secretary of the Treasury Paulson talked of the current crisis being potentially worse than the Great Depression. Alan Greenspan told Congress that the financial meltdown had left him in a “state of shocked disbelief.” Reputable economists are saying “this looks an awful lot like the beginning of the second Great Depression.”U.S. consumer confidence has fallen more sharply than in any period since records began in 1978. Since September 9, we have seen the nationalization of Fannie Mae, Freddie Mac and AIG; the socialization of the auto industry; the disappearance of the investment banking industry; a $700 billion Bailout with another stimulus plan approved recently; the bankruptcy of Lehman Brothers; the “breaking-of-the-buck” of the supposedly rock-solid money market funds; the largest bank failure in history; the implosion of global stock markets; the collapse of home values, retail sales and consumer sentiment; the biggest fall in industrial production in 34 years; and an unprecedented shattering of confidence in both commodities and financial assets. It is increasingly apparent that fear predominates. Individual investors are abandoning anything with the slightest hint of risk. Last year was the worst year for global equity markets since the Great Depression, with the Dow suffering its worst annual decline since 1931. Investors are pulling huge amounts of money from hedge funds, stock mutual funds and bond mutual funds in one of the biggest flights to safety the financial industry has ever seen. Defensive Asset Class have assets that have similar risk/return characteristics, are positively correlated with each other and are traditional inflation hedges that are negatively correlated with stocks – they do well when stocks do poorly. Historically, the principal Defensive Asset has been gold. Of the major assets, only Treasuries and gold have escaped the selling panic that has gripped the markets. Gold rose 5.4% over 2008, ending the year above $850 a troy ounce. Gold bullion reached $1,030.80 in mid-March and Mints around the world ran out of popular gold coins and small gold bars after the collapse of Lehman Bros. in September. The U.S. rate cut to virtually zero lowers the opportunity cost of buying gold and gold ETF holdings have exploded from 7 million ounces to over 30 million ounces in less than four years Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications.Gold’s value rise arises from its use and worldwide acceptance as a store of value and a safe haven. Other precious metals have also been classified as Defensive Assets, but have not performed as well as gold during this crisis. For example, investment accounts for about 90% of the demand for gold, while investment makes up only one-third of the total demand for platinum. Therefore, although gold has done well, platinum’s demand from industrial uses has fallen rapidly, particularly because of the high concentration of uses of platinum in new automobiles – an endangered species in an economy in which automakers are begging for funds from Washington just to keep them afloat. Gold’s price has been bolstered by the view that it is a safe haven in times of economic or political uncertainty, while platinum’s industrial demand has fallen precipitously. Platinum reached its all-time high of $2,267.00 per ounce in March, but fell like a rock from there, as did silver. Platinum fell nearly 60% from its March peak, while silver fell 47%. The last time that gold traded for more than platinum was January 21, 1994, when gold closed at $381.70 and platinum at $380.90.

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