Every single day, we spend some of our time catching up with the rise and the fall of the world economy. Even today, months after the world economy simply crashed from its long maintained great heights, people try to learn about its main reason. For a common man, it all happened in just a few days time. But for those dealing with the share markets and FOREX, the reasons take us far behind today’s time.

USA- The key factor for the fall of world economy:

For a clear view, we need to get back to the past of the housing sector of America. Over sometime back, the property value in the housing sector of America was driving the country’s economy to a completely new level. People easily gained the credit conditions to take the home loans from the perfect combination of the low interest rates and that of the large inflow of the foreign funds. Thus, within a very short span of time, the demand for property shot up and thus also fueled the home prices further more than earlier.

At the same time, the loan agencies widened their plans and strategies to lure people take the loans for their new properties. Looking at the demand for properties, they provided huge bonus values to the customers and thus succeeded in attracting a respectable number of customers. But, at this point in the greed for money, they ignored the general checking procedures such as the repaying capacity of the customers. They had blindly provided huge loans to even those people who are included in the NINJA category, No Income, No Job, No Assets. This disregarded all the principle of financial cautions.

Moreover, as the property value was at an all time high, people made the use of the increased property value so as to refinance their homes at a much lower rate and further gained the second mortgage. The loans providers despite of knowing that the interest rates would increase with the passing time, lured the customers with an all time low interest rate thinking that they would quickly refinance their money under more favorable terms. But this is where the things went wrong. Over construction of houses thus led to the fall of the extra accounts of homes from the year 2006. Thus refinancing became extremely difficult and many people, who were unable to refinance their homes, began defaulting the loans which thus raised the interest rates which worsened the matter.

High price of crude oil:

The Middle East war fears that was pushed upwards by the world wide speculations and the increase in the demand for the crude oil across the world increased the price of the energy sources which acted as the inflationary tax. The high priced production thus lowered the profit value and also at the same time reduced the consumption across. This partially affected the funds of countries across the globe.

Devaluation of the dollars:

The value of dollars in the global market is the key factor for its economy. The Iraq blunder along with the Federal Reserve generated excess of dollars which thus caused the continuous decline in the value of dollars in the global markets. This was pushed further into a grave due to a few other factors related to that of dollar values.

The purchase of crude oil across the world takes place through the dollars. Thus, the fall in the value of dollars means hike in the prices of crude oil. This further added to the problems of high value of the crude oil.

Across the international currency system, dollars are the major reserve currency. Moreover, the various dollar paying investments that include of the US treasury bills, etc. deal with excessive amounts of governments and foreign banks. With the decline in the value of the dollars in the world economy, these huge investments become less luring. But, the smallest disinvestment in these investments would directly affect the bond prices and simultaneously increase the interest rate.

Lastly, dollar value simply prevents the dragging of the US interest rates further lower by the Federal Reserve. Thus, any small value of additional Federal Reserve easing would further cause recession. Thus, all that we can do is wait and let the global market force liquidation on the varied mal-investments. Liquidation is the only way to restore the economic conditions of the market for a better future.