China’s stock crash and Greece’s debt crunch have been dominating news in the last couple of weeks, but these two stories have been making large waves, it seems, because they are the global outliers, not the norm.
Thanks to increasing domestic demand, and continued support from central banks, economies around the developed world have been picking up steam at a strong rate over the last year, and top analysts expect them to continue to do so. This growth is driven, in large part, by increases in domestic demand; producers and consumers at home have been demanding more goods and services, which in turn has driven increases in output and employment as firms seek to fill all the increasing orders.
So what keeps the Greek and Chinese problems from spreading everywhere else, when the banking crisis from 2008 spiraled out to affect almost everyone? The simple answer is that the parts of the economies affected by these crises are fairly separate, so it is very hard to spread outwards. Chinese stocks may have lost a lot of value, but they only account for around 20% of household wealth, and even less of corporate wealth, in China. Outside China, the percentage is even less, due to capital controls China has historically used to prevent foreign companies from taking too much control of Chinese firms.
Compare this to the Banking Crisis in the US, Iceland, UK, and many other Western European countries in 2008: most of the “wealth” held by many individuals has historically been tied up in housing, so when housing prices crashed, the wealth and savings of a very high percentage of the population was slashed. Banks themselves also had much of their equity tied up in home loans, which drove them into dire straights as value dropped, which caused the crash to start snowballing into a global problem.
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