The economic crisis is one of the persistent phraseological units, familiar to hearing and understandable to a wide circle of readers. History remembers many crises in the economies of different eras and different states, for example, the economic crisis in the Roman Empire at the beginning of the first millennium. But, nevertheless, there are differences between recession, crisis and depression. Let's try to understand this issue in more detail.
What is an economic crisis?
In macroeconomic theory, there are many models that explain and describe the essence of such a phenomenon as the economic crisis. In fact, each school did not ignore this issue, considering it fundamental to understanding the processes taking place in the global economy.
Each theory is interesting in its own way, gives its arguments and causes of crises. But, in one, all theorists and practitioners are similar in opinion - the world economy is developing cyclically, in an ascending line, with inevitable periods of growth and decline. This implies the conclusion that a periodic crisis is natural and predictable, however, like a periodic peak of development.
Cyclicity is inherent in many phenomena in our world - the change of seasons, the ebbs and flows of the oceans, global warming and the ice age, the era of rebirth and decline of culture. The economic development of human society also did not pass a certain cyclical nature.
As a rule, any textbook on economics contains an accessible scheme explaining the phases of economic cycles. On the rise, there is slight inflation, increasing consumer demand, compensation by buyers of deferred acquisitions, the successful introduction of new technologies, an increase in employment and an increase in production volumes.
At the peak, as a rule, the highest level of economic growth is achieved. The greatest business activity and the minimum level of unemployment are Inherent in this phase. But at the same time, competition is growing due to the glut of markets with goods, inflation is increasing its pace. The payback period of investment projects is growing, which entails an increase in the number of long-term loans.
- In the recession phase, the processes that began in the previous phase continue. Business activity is falling, investment in production is decreasing. This, in turn, provokes an increase in unemployment. As a result, consumer income is reduced, and, therefore, consumer spending is also reduced. Consumer demand is falling inexorably.
- The stage of decline can be of varying degrees of “severity”, it can even lead to regression, or even to depression. So, “the crisis of the genre of a famous artist” can last for some time - without new roles, recognition of the audience and, even, livelihood. It may even plunge him into a deep depression.
- Recession eventually reaches the bottom phase. Maximum unemployment with minimum production. Enterprises are gradually getting rid of an excess of goods, lowering prices, some of the goods become worthless. Gradually, a slight revival begins, because the market will need new products, and hence new workers. But trade is still conducted at a fairly low pace, so most of the capital is sent to the bank, causing a low credit rate.
The global economy cannot afford the pimp of a Hollywood star, being at the bottom for too long. Sooner or later, with the help of market mechanisms, state programs for overcoming the crisis or the will of heaven, the crisis ends. The next phase is approaching, the phase of revitalization and growth, as winter gives way to spring for thousands of years.
If we try to formulate the reasons for the cyclical development of the world economy most briefly, then it is worth recalling the main principle of capitalism - an increase in capital, maximization of profit. Striving for this in its essence, the market fills the system with too much goods and services that cannot be fully consumed and paid for - the “Overproduction Crisis” arises. But more than once mankind has faced economic crises, just as it has come out of them more than once, changing something in the system settings.
The most famous economic crises of previous years include the following:
- The crisis of 1857-1858, affecting the economy of both the United States and the largest European powers - France, Germany, Great Britain.
- The crisis associated with the outbreak of the First World War, 1914. The largest world powers are also affected.
- The Great Depression 1929-1933. Started in the USA, but also affected other countries.
- The "energy" economic crisis of 1973. Collusion of certain countries led to a sharp decline in the economies of Europe and the United States.
- Black Monday 1987, the fall of the US stock market.
- The crisis in Southeast Asia in 1997.
- Default in Russia, 1998.
- The global financial and economic crisis that began in 2008, and, according to contemporaries, continues to this day.
Studying the history of the development of human society, thinking people are used to making conclusions. By studying the history of economics, and economic crises, in particular, we can cope with the chaos that has come in the world, and even benefit from it.
Winston Churchill said: “Any crisis is a new opportunity.”
Great “Great Depression”
Speaking of economic crises, we cannot but recall the most famous and protracted crisis of the previous years - the Great Depression. Naughty children are scared by a grandmother, and holders of capital shudder at the mention of the global economic collapse of the thirties of the last century. Even the current situation in the financial world is called “regression”, avoiding the name “depression”.
Starting in 1929, this notorious crisis lasted, according to some estimates, until 1933, according to others - until the outbreak of World War II, and some - until the end of WWII.
Analyzing many factors that led to the collapse, which led to sad consequences, economists and historians agree that it was the combination of all factors that gave an explosive effect to the scale of the crisis and dragged it on for so long. By eliminating or weakening it in a timely manner, the destructive power of depression could be minimized.
Among the other ingredients included in the infernal mixture of the Great Depression, the following main ones are named:
- The crisis of overproduction described in all textbooks. New technologies, scientific and technological progress, new needs of society have encouraged owners to increase production, while reducing production costs. Many goods became accessible to ordinary citizens through consumer loans, for example, cars. Mass production was to be ensured by mass consumption. The advertising industry that arose at that time stimulated demand, but not the purchasing power of the bulk of the population. Still, there were significantly more goods on the market than people could buy.
- The influx of emigrants provided enterprises with cheap labor. The emancipation and struggle for women's rights added them to the ranks of job seekers, at the end of 1929, 10 million women and 38 million men worked in the United States. The development of medicine has reduced child mortality, this has stimulated an increase in fertility. All of these factors have led to significant population growth in the United States. The number of jobs, especially requiring unskilled labor, could not increase so quickly, due to the mechanization of production. Mass unemployment has arisen. Its level reached 24.5% in 1933 against 3.2% in 1929.
- Stock market crash. To date, there is no evidence of an empirical relationship between the fall of the US stock market on Black Thursday and the onset of the Great Depression. But October 24, 1929 became that point of no return, a critical moment, the first falling domino, which launched a chain reaction and served as the beginning of a protracted crisis. By the end of 1929, speculative margin trading in securities became popular due to a shortage of money supply. Business activity fell, and stock prices rose, and unreasonably, 30 times. The Dow Jones Index rose to 500%. The unpredictable fall in prices of all stocks, which began on Black Tuesday, continued on Black Thursday and then continuously went on for two weeks, led to a drop in market capitalization of $26 billion, depriving most of the nominal wealth of both the enterprise and individuals.
- The adoption of the Smoot-Hawley Act in 1930 led to an increase in customs tariffs on imports. As a result, import prices rose, which further reduced the purchasing power of the population.
- The US Federal Reserve’s monetarist policy, tied to the dollar’s ​​gold standard at the time of the imbalance of gold reserves between Europe and the United States.
- The Keynesian component of the crisis is deflation and a shortage of money supply to cover the value of goods produced. As a result, a massive default on loans, and then the collapse of the banking system.
- The inability of the state apparatus to influence the situation. President Herbert Hoover’s policies assigned the state the role of night watchman in a market economy. It was assumed that the market “will save itself”, as it was before, and a growth phase will begin after the bottom. But depression lingered on the neck of the American economy, like a poorly tied tie. When this became apparent, everything had gone too far.
In March 1933, Theodore Roosevelt came to power and started the policy of the “new course” and gained great popularity among the population. The set of controversial measures taken to overcome the crisis included organizing free lunches for the unemployed, and supporting unions, closing banks for “bank holidays”, and deposit insurance, and attracting the unemployed to “community work”, and restructuring farm debt, and the removal of gold from the population, and the destruction of excess crops and livestock. All this causes controversy about the feasibility, but the fact remains - the country has come out of the “dead peak”.
Oddly enough, the Second World War entailed a final exit from the crisis - government orders for products increased and new sales markets appeared. The Great Depression, which threw the economy 30 years ago, halved world trade, increased unemployment and reduced fertility, ended.
World economic crisis
The process of globalization of all spheres of human activity has made it impossible to localize any crisis in one place, including the economic one. Therefore, the crisis that began in 2008 has gripped all participants in the global market, and, according to experts, continues to this day.
The current global crisis developed in the United States, and from 2008 to 2013 it affected almost all countries, reducing their GDP to a record level for peacetime and reducing world trade by 10%.
A special commission under the US Congress, which investigated the causes of the crisis, concluded that the main ones are: the general cyclical development of the economy, inadequate regulation of the financial system, mortgage crisis and credit expansion, risks from corporate governance disruptions, an increase in the share of derivatives, the emergence of “shadow banking” systems ”, household debt.
The catastrophe was triggered by the crisis of subprime lending - high-risk mortgages. The real estate market has changed a lot, demand, and accordingly, prices, have fallen. Many loans remained unpaid, banks entered the market for the sale of collateral real estate, which further increased the supply and lowered the price. This was a serious blow for the banking system.
The mortgage market was a kind of “bubble” that burst. The pyramid that collapsed tumbling down the banking system. Refinancing existing mortgage contracts, issuing an excessive amount of derivative securities and speculating on them with the connivance of the regulatory authorities were fatal mistakes.
The imbalance in the structure of the US economy has led to the catastrophic scale of the mortgage crisis. Economist Joseph Stiglitz wrote that by the time of the crisis, 40% of corporate profits were in the financial sector, while the real sector got 60%. When this castle in the sand collapsed, it became obvious that almost half of the funds were invested in the bubble. The collapse of the stock market in October 2008, according to The Financial Times, was comparable to the collapse of the Great Depression. The Dow Jones Industrial Average index collapsed to 7882.51.
One after another, the largest banks went bankrupt and closed. Lehman Brothers, Bear Stearns, Goldman Sachs, Merrill Lynch lost their positions and ceased their investment activities. Support from the Fed has caused an even greater drop in their shares. Having lost insurance of their investments, investors hastened to pick up their deposits. Considering the experience of the Great Depression in terms of shortage of money supply, the US government was now printing cash dollars in excess of the norm, not backed by either goods or gold. Inflation was growing rapidly.
Base interest rates were lowered by central banks in the USA, Japan, Russia, the UK, which in itself became unprecedented and indicated the seriousness of the situation. Despite the summits, protocols and signed agreements on cooperation to overcome the crisis, the world community has not managed to get out of the crisis. Maximum unemployment for all the time of observation of the labor market, the chaotic fluctuation from inflation to deflation, unpredictability in financial markets - all this does not allow to get out of a deep crisis whirlpool. Since 2008, the GDP of leading world powers has experienced a serious recession while increasing public debt.
The situation in the financial markets worsened at the beginning of 2020. The panic associated with the worldwide spread of COVID-19 coronavirus infection led to the stock market crash on February 02, 2020. The collapse in oil prices has reduced the yield on long-term liabilities to a thirty-year low, all basic indices fell by more than 12%.
A few words in conclusion
The global economy has moved from a global crisis into a recession. And at the moment it is difficult to make any forecasts of the development of events. The whole world stood still. Waiting for what? Vaccines for the coronavirus, development of a set of anti-crisis measures, avoiding polarity in the political world, exposing the dollar as a world currency? History teaches mankind to draw conclusions based on experience. And this experience says that if the crisis drags on, it means that the previous methods, tools and levers cannot cope with it, as existing drugs cannot cope with the coronavirus COVID-19. Something fundamentally new is needed. The world will never be the same again. To smooth out the possible tension and panic from realizing the seriousness of the events taking place in the world, we recall the famous words of the ancient king Solomon: “Everything passes. This too shall pass!".
