If you look at the recent developments in the world, I feel there is threat of liquidity trap. (Liquidity trap is a condition where in country or state's economy is unable to stimulus by monetary policy easing.) On 5th of this month, Japan decreased its interest rates from 0.1% to 0 or in other words Japan's interest rate is between 0 to 0.1%. And its not over, Bank of Japan is planning to infuse 35 trillion yen to its economy by means purchasing sovereign assets. For brief details click here.
This is not the only case, United states is also thinking of quantitative monetary easing to improve its struggling economy. US is facing problem of unemployment which is almost 10%. The Fed rate is already 0.25% so considering this, Fed may think of fiscal measures by purchasing of some sovereign funds from government.
These are two major countries (except China recently over-passing Japan) which are struggling to improve their economy happened due to recent financial crisis. Apart from these there are issues going on with European countries & recent currency war between US, China (Pegging Yuan), Japan & Euro currencies to protect
Now the biggest question is whether monetary and fiscal policies will influence the economy EVERY TIME & EVERY PART OF THE WORLD, IRRESPECTIVE STRUCTURAL ISSUES!!!
Because in this recent financial crisis, it originated in US because of its social structure & policies influencing that structure. After 3 years of crisis; and after all the possible steps taken by US & FED, but still its economy is struggling.
Same is the case with Japan, it is in the stagnation from last two decades and had been doing all possible steps (like keeping interest rates "0" from 2001 to 2005 and again keeping it "0" now & jumping into currency war) still its index Nikkie is not able to touch its all time high 40000 plus in 1989.
Whereas India, China, Brazil & other developing countries witnessed slowdown in this crisis but giving signals for achieving new highs in their respective economies as time passed.
Will continue in next post...