Globalisation and Credit Crunch

Readers Question: How has the effects of globalisation impacted a spurt in inflation and led to sub prime mortgages being taken up?

Globalisation and Inflation

Globalisation is blamed for many things, but, I don’t think the process of globalisation was   responsible for the increase in inflation we saw this year.

Globalisation refers to the increased integration of the world economies. This process does not cause inflation, per se. In fact the increased competition may help to lower prices. In the 1990s and 2000s, global inflation rates have been low. Many ascribe this to the benefits of competitive exports from China and other Asian economies. Globalisation thus can help to reduce inflationary pressure.

This year, the inflation spike was caused by a combination of cost push factors, such as rising oil prices and rising food prices.

The increase in the price of oil was due to higher growth, especially in China combined with limited supply growth. This increase in demand for oil was also accompanied by speculative demand which pushed the price of oil up.

Globalisation and Subprime Mortgages

The growth in subprime mortgages was mainly concentrated in the US. What happened is that these subprime mortgage loans were bundled up and resold in CDOs to banks around the world. Therefore, because of the interconnection of the global financial system, many banks suffered from the bust in the US housing market. Therefore, you could say the globalisation of the financial sector meant that a problem in the US subprime mortgage sector spread to the whole world.

Globalisation essays