The End of the World Economy?

Readers Question: I’m not studying economics, just a normal person trying to make some decisions about my future and asking for advice on just how bad things are going to get over the next few years.I have a pessimistic friend who says currencies will collapse and I should be stocking up on tinned food, ammunition and gold! It’s not going to be that bad is it?

The world economy has had a very bad recession, caused by serious problems in the banking and financial sector. These bad debts proved much greater than anyone really anticipated, creating unanticipated problems for government debt and world economies. Certainly things are very bad, especially for countries like Spain, Greece and Ireland. But, it is also worth remembering economies are resilient.

Take Iceland. a year ago, it’s currency was ‘collapsing’ But, despite one of the worst banking crisis in the world, Iceland is slowly starting to recover (Independent). Certainly they are facing drawbacks like more expensive imports, but, living standards are reasonable and there is hope for a better future..

It might be worth changing all your fiat money to gold, if hyper-inflation was a pressing problem. However, given economic situation we are facing, hyper-inflation is not the concern. A greater problem is mass unemployment, deflation, debt-deflation and sluggish growth.

People have been talking about the end of the world economy ever since fiat money was invented. As soon as the first round of Quantitative Easing was introduced in 2008, people talked of hyper-inflation. But, that is not materialised.

Even if you look at really bad crisis like German hyperinflation in the 1920s, you can see how economies can recover. Even with a devastated economy, post war, Germany and Japan went on to be the most successful economies in the post war period.

It is also worth bearing in mind that in advanced European economies, even if you’re surviving on unemployment benefits, it is a significantly higher real income than 50 or 100 years ago.

This credit crisis has shown that economic analysts can get things completely wrong. In particular this was a misunderstanding of how bad things in the financial system were.

But, despite this, I wouldn’t feel obliged to dig up your front garden, plant potatoes, and try to survive on rummaging for nuts and berries just yet… 🙂

By on December 8th, 2010

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