The Deflationary Tendencies of the Economic Systems in the Case of a Financial Crisis

Abstract

The essay would like to explore the subject of instability, within an economy struggling with a speculative bubble and a financial crisis. In this context, the instability is showing its ambiguity, therefore showing poor growth and low inflation: thus it’s giving a self-portrait of an apparent regularity. However, the possibility to find away to measure this distortion can allow us to certify that an unstable condition is affecting the economic system, even when the main variables are ambiguous. To this purpose, we should examine carefully the inflation trend that, in the case of a pre-financial crisis, is showing a clear tendency to deflation and therefore, has a profile which is inconsistent with the main variables. By the use of self-regressive equations, we will be able to review the trends of the main macro-variables within those countries affected by the recent financial crisis.

Therefore, we seek confirmation that the phenomenon regarding the ambiguous inflation trend (tendency to deflation) in relation to the economic cycle (limited growth) should be general, in the case of speculative bubbles spreading worldwide, as in the past ten years. If so, the sharp correction induced by the financial crisis perhaps could resolve the ambiguity showed in the performance of two variables, the Inflation and the GDP. We can assume that after the financial crisis blows, during the following years those two variables have got a more harmonious relationship, thanks to the instability correction system started by the deep economic depression. We tried to confirm this setting with the same number of self-regressive equations, with positive results for those countries that had already taken the way of a gradual return to stability. Finally, on the basis of this research experience, we have tried to build an Instability Index, as shown in the Appendix: this index has been calculated for many Western countries and for the Far East, as well.