Kerala Economic Review 2008

Abstract

The year 2008-09 was marked by momentous developments in the capitalist world economy. First there was a sharp acceleration in inflation. Crude oil prices, aided by speculative pressures, rose to as high as $140 per barrel; and since the response of the Bush administration was to encourage the production of bio-fuels from foodgrains, foodgrain prices too shot up. There was a general upswing in primary commodity prices, but foograin prices rose even more sharply (in India they led the inflationary surge). The financial crisis arising from sub-prime lending hit the U.S. investment banks in the latter half of the year and it has now transformed itself into a major recession, which, while it has brought down the inflation rate, shows no signs of abating. The short term interest rates in most advanced countries are close to zero, the long-term rates are as low as they can possibly get, and yet there are no signs of any economic revival. Indeed the worry is that inflation may turn negative and hence start increasing the real interest rate, accentuating the recession. No counteracting co-ordinated fiscal stimulus across countries is forthcoming either, and protectionism is in the air. Almost everyone is agreed that this crisis is the worst since the Great Depression of the 1930s, and is likely to persist for quite some time.