Great Depression Again?

The RBI Governor, Raghuram Rajan, has recently warned the global economy of falling into the clenches of ‘Great Depression’ again. While addressing the people in a conference at London Business School, he asked for a set of ‘rules of the game’, that needs to be internationally discussed since the global economy is vulnerable to the problems faced in the period of 1930s.

The root cause indicated in his speech is competitive monetary policy easing by the central banks all over the world. The policies opted are more or less similar to the ones implemented before 1930s. He believes that growth is shifting instead of being created, which might corrode the economies, warning each and every economy of the threat that is approaching and also advised them to revise the policies to limit the ‘spill over’ effects. He fears a ‘currency war’ again due to lack of coordination amongst the policies of the economies. The currencies all across the world might devalue in such a scenario, euro and yen have already been set as examples.

Coming to the problems of Great Depression in 1930s, the economy had then faced low GDPs, industrial slowdown, unemployment and economic as well as political instability. Production had dropped significantly. The circular flow of income had disrupted. Interest rates were erratic and people were afraid of taking loans. People were losing their jobs. The foreign exchange market was a disaster too. Development was negligible and there was no hope of being better.

Well, not long ago, in 2008, the world was knocked down by the global financial crisis and its effects. With this in mind, the approaching threats of Great Depression are breath taking. Not all economies have fully recovered since 2008. Such economies might face a challenge to their existence if at all a global depression arrives.

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