Definition of the problem
Debt crisis, which was as a result of the credit collapse in 2008, is being experienced by each and every country across the globe. The global credit crisis has caused adverse effects to the global community. For instance, slashing of public services, and selling of public assets has been experienced in an effort towards trying to balance budgets. Regardless of these efforts, the budgets cannot be balanced due to shrinking of money supply. The onset of debt crisis was initiated by financial institutions and not governmental spending as many people tend to believe. Indeed, the rapid bank credit experiences a rapid growth, which is fuelled by excessive monetary expansion, while bank deposits contract, a country usually experience a spread of high domestic interest rates, as well as, large lending-deposit rates thus reflecting distress and problems in the banking sector. A country is largely affected by debt crisis due to unsustainable fiscal policies.
Overview of the current situation
Contemporarily, the US strongly stands at $12 trillion debt. Currently, there is a sovereign debt problem since a majority of countries have continued to borrow huge amounts of money during the most viable times from other countries. However, they experience difficult time paying back their lenders where there is a slump. According to the arguments of most financial analysts, it is worthwhile to infer that the effects of these will emerge in the next five years. With the present debt crisis scenario, there is not much hope for the global economy, which is likely to face a critical debt crisis in some few years to come.
What does economic analysis show?
Economic analysis is used to show the consequences of adding to or even subtracting from the current state of affairs. For instance, an economic analysis of global debt crisis would show the effects borrowing huge amounts of money during the most viable times from other countries.
What does economic theory tell us?
Economic theory advances the that change in governmental spending does not cause an alteration of the economic conditions since such spending must be offset by equally significant, albeit future, taxes. Simply put, economic theorists perceive that global financial crisis is not as a result of government spending.
This is referred to as a systematic process utilized during the calculation, as well as, comparison of benefits and costs of a project and government policies. It is usually done with an aim of determining the viability of a [planned action.
Cost Effectiveness Analysis
This is a form of economic analysis which is used in comparing the relative costs and consequences of at least two planned actions. Often, this analysis is carried out in health services field, therefore, no monetary value is assigned.
What are the key risks?
Economist have identified financial market risks and credit risks as the principle risks giving rise to debt crisis like the one being experienced globally. Market risks is described as the loss that an investor incurs due to movements of market prices. On the other hand, credit risk is described as the potential loss as a result of defaulting a counterpart in a financial transaction or even some of the terms and conditions involved.
Consequences of market and credit risks
If not adequately managed, market and credit risks can combine to cause a financial or a debt crisis not only in an institution but in a country as well. In order to manage them, it is necessary to build on a resilient financial risk management model and allocate necessary resources. Through this, it becomes easy to access all the risk indicators thereby establishing ways to mitigate those risks.
What are the available options?
In order to ensure that market and credit risks are mitigated or eliminated, it is necessary to put a resilient risk management model and allocate enough resources. Alternatively, a financial institution can transfer these risks to insurance industry players. However, this is not a viable decision since financial risks often surface significant losses such a single insurance company cannot make good of the loss.
Alternative policy instruments
After the wave of US debt crisis in 2008, policy makers now have a choice when seeking to address financial problems. Policy instruments are used by central banks, as well as, emerging markets to assist in dealing with the effects of external factors on their domestic systems. Alternative policy instruments include monetary policy and macro prudential tools, balance sheet policies rather than intervention by foreign countries and quasi-fiscal and fiscal measures.
Assessment of the Proposal
Strengths and Weaknesses of the paper
The paper gives explanation of the facts using different economic theories and models. This is essential as it helps the end user of the information to understand better. However, the paper seems not to provide many explanations of concepts and theories. Indeed, the paper is seemingly applying and does not describe. Lack of descriptions or mere descriptions can make an end user question the authenticity or even the integrity of the work regardless of the quality of arguments advanced.
Owing to the loopholes in the current research regarding the issue of global debt crisis, it is essential that extensive research be conducted in order to help solve this issue. To conduct a research that will result to solving the problem, more funds must be engaged. This is because, it requires extensive efforts and time to study economic and financial models in a country. Without adequate resources, a comprehensive or conclusive research cannot be attained.