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Definition: Banking is one of the key drivers of the Indian economy. Banking provides a safe
place to save excess cash, known as deposits. It also supplies liquidity to the economy by loaning
this money out to help businesses grow and to allow consumers to purchase homes, cars and
consumer products. Banks primarily make money by charging higher interest rates on their loans
than they pay for deposits.
The Central Bank Of India is the nation's central bank. As such, it creates the supply of money
by lending it to the banking system, requiring the level of reserves banks must keep on hand, and
by regulating the banks charge.
There are several types of banks. Commercial banks are the most common, and
include global banks such as Bank of America and Citigroup. Community banks are
smaller and focus on local service. Online banks operate over the Internet.
Savings and loans target mortgages. Credit unions are usually restricted to
employees of companies or schools. Shariah banking was developed to conform to
the Islamic prohibition against interest rates.
In recent years, banking has become very complicated as banks have ventured into
sophisticated investment and insurance products
"Liquidity"
Definition: Liquidity is a financial term that means the amount of capital, or money, that is
available for investment.
High liquidity means there is a lot of money because interest rates are low, and so capital is
easily available. However, a liquidity glut can develop if there is really too much money looking
for too few investments. This is usually a precursor to a recession, as more of this capital
becomes invested in bad ventures. As the ventures go defunct and don't pay out their promised
return, investors are left holding worthless assets. Often a panic can ensue, resulting in a
withdrawal of investment money. This is what happened during the 2007 Banking Liquidity
Crisis.
Constrained liquidity means that there is not a lot of money around, and that banks and other
lenders are hesitant about making loans. It is usually a result of high interest rates.
• GDP is slowing,
• Businesses are expanding more slowly,
• Employment is falling,
• Housing prices are down 10%.
Many experts state that it is only an economic recession when GDP growth is negative for two
consecutive quarters or more. However, for all practical purposes a recession starts when there
are several quarters of slowing but still positive growth. Often a quarter of negative growth will
occur, following by positive growth for several quarters, and then another quarter of negative
growth.
A good example was the stock market crash and subsequent economic downturn in 2000. This
was not a recession in technical terms because GDP growth was negative in Q3 2000, Q1 2001,
and Q3 2001, none of which were consecutive. However, anyone who lived through it knows
that it felt like a recession during all that time. And in fact, GDP growth did not reach over 3%
until Q3 2003.
About the only good thing about a recession is that it will cure inflation. The balancing act the
Federal Reserve must pursue is to slow economic growth enough to prevent inflation without
triggering a recession. Currently, it must do this without the help of fiscal policy, which is
generally trying to stimulate the economy as much as possible through lowering taxes, spending
on social programs and ignoring current account deficits.
1. 1930 -8.6%
2. 1931 -6.4%
3. 1932 -13%
4. 1933 -1.3%.
5. During the Depression, unemployment was 25% and wages (for those who still had jobs)
fell 42%. Total U.S. economic output fell from $103 to $55 billion and world trade
plummeted 65% as measured in dollars.
6. The Depression was aggravated by poor monetary policy. Instead of pumping money into
the economy, and increasing the money supply, the Federal Reserve allowed the money
supply to fall 30%. The "New Deal" created many government programs to end the
Depression, but government programs alone could not end it. Unemployment remained in
the double-digits until 1941, when the U.S. entry into World War II created defense-
related jobs.
7. A Depression on the scale of that in 1929 could not happen exactly the way it did before.
Many laws and government agencies were put in place because of The Great Depression
with the express purpose of preventing that type of cataclysmic economic pain. Central
banks around the world, including the U.S. Federal Reserve, are so much more aware of
the importance of monetary policy in regulating the economy.
8. However, there is only so much monetary policy can do without fiscal stimulus. The
incredible size of the national debt limits government spending that could be used to
stimulate the economy. Both monetary and fiscal policy are needed to prevent a global
depression.
Answer: Inflation is when prices continue to creep upward, usually as a result of overheated
economic growth or too much capital in the market chasing too few opportunities. Usually wages
creep upwards, also, so that companies can retain good workers. Unfortunately, the wages creep
upwards more slowly than do the prices, so that your standard of living can actually decrease.
Answer: Inflation hurts your standard of living because you have to pay more and more for the
same goods and services. If your income doesn't increase at the same rate as inflation, you will
find your standard of living declining even though you are making more. Also, inflation doesn't
impact everything equally, so that some things (such as gas prices) can double while other things
(your home) may lose value. For this reason, it makes financial planning more difficult.
Inflation is really bad for your retirement planning because your target will have to keep getting
higher and higher to pay for the same quality of life. In other words, your savings will buy less
and less, so you will need to save more and more. However, everything you buy today costs
more, so you have less left-over income available to save.
Inflation has another bad side effect....once people start to expect inflation, they will spend now
rather than later, because things will only cost more later. This consumer spending heats up the
economy even more, leading to further inflation - this situation is known as spiraling inflation
because it spirals out of control.
It is also important if you are holding bonds or Treasury notes. These fixed price assets only give
a fixed return each year. As inflation spirals faster than the return on these assets, they become
less valuable. As they become less valuable, people rush to sell them, further depreciating their
value. As their value becomes lower, the US government is forced to offer higher interest rates to
sell them at all.
Question: What Is the Ideal GDP Growth Rate?
Answer: The ideal GDP growth rate is neither fast enough to cause inflation nor slow enough to
cause recession. Most economists agree that the ideal GDP growth rate is in the range of 2-3%.
Economic recessions are caused by a decline in GDP growth, which is itself caused
by a slowdown in manufacturing orders, falling housing prices and sales, and a
drop-off in business investment. The result of this slowdown is falling employment,
and rising unemployment, which causes a slowdown in retail sales. This creates a
downward spiral in manufacturing and increased layoffs. A stock market decline,
known as a bear market, can either be a result of a recession but is often a cause
itself.
But what usually causes the slowdown in the first place? Each recession has its own
specific causes, but all of them are usually preceded by a period of irrational
exuberance. This is also known as a business cycle.
It became apparent in January 2000 that computer orders were going to decline, since the shelf
life of most computers is about two years, and companies had just bought all the equipment they
would need. This led to a stock-market sell-off in March 2000. As stock prices declined, so did
the value of the dot.com companies, and many went bankrupt.