According to them, they point out that the capacity of capitalism to solve the economy crises that happened in 1990s, at least in a temporary way, was significantly dependent on the crises being solved separately in economies that were affected. Particularly, the three major areas of instability in the 1990s were long-lasting slowdown of Japan economy, the speculative equity market bubble in USA, and lastly the currency catastrophes that occurred in the emerging markets, specifically in southern and eastern Asia, in Russia and also in Brazil.
All these three economic crises never merged together to result in a common crisis for the capitalist system. In contra, economic growth in America starting from 1997 onwards offered a place for capital that was fleeing from Asian countries and other countries. This permitted for an export-based recovery in those other capitalist countries that were experiencing economy crisis such as Russia, Thailand and South Korea. But, presently, the economic crises of various economies of the world seem to be reinforcing each other.
Presently, Japan is still caught up in stagnation; the decline in the United States still goes on, while the increase in euro’s value has resulted in growth in many of western European crushing to a stop. This aspect has thrown the European Union “stability agreement” into a predicament and has resulted to a huge disagreement among the European Union states and the European Central Bank (ECB). Consequently there has been a reduced across the three main sectors of the key industrialized economies; this has reduced exports and trade among European countries and America.
Therefore, the pessimist views this as another reason that will slow down the economic recovery of America in future. The second aspect that the pessimistic are stressing is the huge accumulation of debt that the United States has accumulated over the past. Whereas, there was some reduction in corporate debt, American families have continued huge sums mostly as mortgage loans because of the increase in housing prices. Two more situations make the huge amount of American debt to be more frightening for the capital system.
One, there is anxiety that if American economy decline continues future, the stock price and other commodities would fall further. Such deflation if it occurs increases the actual value of debt that the country is already having. This would result in a vicious circle, since this result in lower consumption and spending from the people and reduces the prices further. This at the end increases the debt. Secondly, there is likelihood that other countries could stop lending capital to America, at this moment that many economies are as well experiencing economic slowdown.
The problem is that America requires the money in order to spur the consumption levels that are very low. As stated, the USA has a huge deficit that is estimated to be more than $450 billions every year (Wired Magazine, 2008). A decline in foreign investment into the United States that presently the US depends on funding this deficit would further push down the value of the dollar. This will result in the Federal Reserve Bank raising the interest rates in order to protect the dollar from make it stable, thus be able to attract foreign investment.
If this happens, together with already high domestic debt levels, this could result in a spectacular effect on consumption as well as investment. Borrowing from the teachings of the “Austrian” school of thought on economics, this is highly supported by Friedrich von Hayek. Friedrich asserts that continued decline in growth, and probably a further depression in USA is needed so as to constrict the accumulated debt that America has out of the economy. In which manner should the socialist react to this disagreement?
Obviously, the pessimists are highlighting to existent structural difficulties within the capitalism that are simply ignored by those who are optimistic. However, Wired Magazine (2008) asserts that, the setback for Wolf and other economic observers is that they do not provide convincing arguments regarding as to why these crises have happened. But, two explanations of the economic problems in US have been suggested. One, there is a perception that economic problems are due to irrational actions of investors as well as consumers.
Whereby, investors as well as consumers borrowed large sums to invest in the stock market with expectation that they will make huge profits from stocks. Another blame is put on the economic planners for improper fiscal and monetary strategies and polices that were taken. Greenspan was criticized for maintaining interest rates at a very low rate in the 1990s. While the ECB is criticized for maintaining interest rates at high rates, while the stability agreement seen as being so restrictive when it comes to government borrowings.