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How did withdrawal of US loans affect the different economies of the world?

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Many countries around the globe were impacted by the US loan cancellation in various ways. It caused some significant banks’ downfall and weakened currencies like the British pound sterling in Europe. It accelerated the decline in agricultural and raw material prices in Latin America and abroad. Another significant blow to global trade came from the US’s attempt to defend its economy during the Great Depression by raising import taxes. 1930–1933, a rush by people to withdraw their money from banks led to numerous bank failures both domestically and abroad, which reduced the amount of money available for lending. 

Additionally, borrowers of loans were unable to repay the banks. The early rush to purchase stocks during the 1920s led to an excessive increase in stock market values above what the stocks were truly worth. People scrambled to sell their shares in September 1929 as stock prices dropped, which caused the stock market to start to sink. The U.S. downturn was largely transmitted to other nations thanks to the gold standard, which connected almost all of them in a network of fixed currency exchange rates.

Due to high-interest rates, the United States reduced its lending to other nations. The Smoot-Hawley Tariff Act and other protectionist trade policies led to further decreases in trade with other nations. As global trade shrank, the economic crisis expanded from the United States to the rest of the world. All around the world, living standards abruptly dropped.

As the demand for goods and services declined, many businesses were forced to close, which raised the unemployment rate. In industrialized nations, as high as 25% unemployment rates were attained in the early 1930s. The gross domestic product (GDP), industrial production, and unemployment all increased to above 20% in the United States. The GDP declined by 30%.

The banking panics in 1933 caused 20% of banks to fail. The removal of the gold standard by the late 1930s considerably assisted recovery from the Great Depression. The mid-2007 to the early-2009 era of high stress in the world’s banking institutions and financial markets is referred to as the global financial crisis (GFC). A decline in the US home market during the GFC served as the impetus for a worldwide financial crisis that expanded from the US through connections in the global financial system. Many banks experienced significant losses and needed assistance from the government to stay afloat. As the major industrialized economies went through their biggest recessions since the Great Depression in the 1930s, millions of people lost their employment. Additionally, compared to other recessions that were not accompanied by a financial crisis, the recovery from the crisis was much slower.

Frequently Asked Questions

Question 1: What are the Primary Causes of the Global Financial Crisis?

Answer:

  • Excessive risk-taking in an advantageous macroeconomic situation
  • Increased bank and investor borrowing
  • Mistakes in regulation and policy

Question 2: How do stresses work in the financial system?

Answer:

Around the middle of 2007, the financial system’s stresses started to become apparent. Because many of the homes they confiscated after the borrowers missed installments could only be sold at prices below the loan total. Lenders and MBS investors suffered losses as a result of the reduction in MBS prices. Around the middle of 2007, the financial system’s stresses started to become apparent. Because many of the homes they confiscated after the borrowers missed installments could only be sold at prices below the loan total. Lenders and MBS investors suffered losses as a result of the reduction in MBS prices.

Question 3: What are the financial spillovers to other countries?

Answer:

International banks aggressively participated in the US housing boom by purchasing MBS (with short-term US currency finance). There was significant activity by US banks abroad. These links allowed problems in the US housing market to extend to other countries banking and economic systems.


Last Updated : 22 Aug, 2022
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