Falling prices, called deflation, sometimes accompany a long-term depression. When prices rise, however, despite the decline in economic activity, the mixture of stagnation and inflation is referred to as stagflation. Other than stagflation's “perfect storm” of negative economic effects, most economic downturns provide a mixture of positive and negative implications for the average consumer. Reduced inflation, which usually accompanies an economic downturn, means that consumers pay less than they normally would during boom times, but is often offset by lower, or nonexistent, salary increases and — in the worst case — significant job losses. As U.S. president Harry Truman once said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.”

Just as the speed of an engine is regulated by its fuel supply, a country's economy is controlled by regulating its money supply — and each country's monetary policy is the responsibility of its central bank. In Britain, it's the Bank of England; in Switzerland, it's the Swiss National Bank; in the United States, it's the Federal Reserve; in the euro zone countries, it's the European Central Bank; and in Japan, it's the Bank of Japan. These quasi-public institutions are set up by governments, but are then given the independence needed to keep an economy under control without undue interference from dabbling politicians.

Despite the tendency of the media to concentrate on the latest major economic statistic, there is no one single indicator that tells us how fast an economy is growing — or if that growth will lead to inflation down the road. And, unfortunately, there is no way to know how quickly an economy will respond to changes in monetary policy. If a country's central bank allows the economy to expand too rapidly — by keeping too much money in circulation, for example — it may cause “bubbles” and inflation. If it slows down the economy too much, an economic recession can result, bringing financial turmoil and rampant unemployment.

Central bankers, therefore, need to be prescient — and extremely careful — keeping one eye on inflation, which is the product of an overheating economy, and one eye on unemployment, which is the product of a slowing economy. In the 21st-century economy, however, regulating money supply has become a much more difficult task. With the amount of capital flowing around the world dwarfing many countries' money supplies, it's almost impossible to know with certainty what the effect of any monetary decision will have on a local economy — let alone on the world.

Add comment

Security code

2018 © Copyright SuccessMill.com | Finance and Investment