Will inflation lead to a crisis worse than subprime ?


Linda Saber, author of the article with title " Will inflation lead to a crisis worse than subprime ? "

Author: Linda Saber

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Date of Publication: 15/08/2022




Everybody has heard something about the subprime crisis of 2008. However, if we told you that this crisis was nothing compared to the upcoming one, could you believe it ?


Subprimes crisis of 2008


In 2000, people started to buy assets with a low liquidity rate. This led to the increase of subprimes. More specifically, we refer to housing loans to Americans who can’t claim a classical loan. Indeed, in 2007, 13% of housing loans were subprimes while they were about 2,4% in 1998.

However, in 2006, housing prices fell and the liquidity rate increased. In fact, that was the end of the subprime's success. Investors couldn’t assume their loans, so the American debt was considerably exposed.

In 2008, the crisis extended to the whole world because a lot of European banks invested in the housing market. Yet to try to save their solvability ratio, banks decided to restrict access to credit but it wasn’t without consequences. Effectively, people had to reduce their consumption and investment became more difficult to realize.


crisis - inflation - subprime

Is a similar crisis about to appear today ?


The pandemic of Covid-19 has increased countries' debt all around the world. This happened because of the cost of care, test price, development and cost of vaccines. However, above all, it’s the restriction which has stopped the global economy for a while. In fact, in 2019 the global debt was about 227% of the GDP. On the contrary, it was about 256% at the end of the year 2020 which represents $226 trillion (data from IMF).

If we compare with GDP growth, these numbers are very bad and even worse than the subprime crisis. For example, India lost 7.3% of its GDP and the United States has a GDP which decreased about 3.4% (data from IMF).

After the pandemic, the global economy is doing badly but it gets worse with the Ukraine’s war which started in February. Effectively, it has generated a global inflation on energy prices and foodstuffs prices. Moreover, a lot of countries depend on Ukraine’s imports. So, it has a big impact on basic products trades. For example, wheat and petroleum prices have increased 50% in one year. These risks can lead to a crisis similar to the subprime crisis or worse leading to the collapse of the global economy.


How to avoid it ?


The current situation isn’t the best way we can see but it’s not hopeless. The essential key to deal with this situation is international cooperation. Each country should join their forces to put in relation their politics and economics consultants. In this way , they could help countries in need due to the pandemic and the inflation. Also, they could exchange information about how to expect crisis situations like this one. In conclusion, the future of the economy relies on international cooperation.


cooperation - inflation - subprime

 

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