Rameshwar's IAS

Economic Meltdown

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The concept of economic meltdown or, collapse is a period of national or regional economic collapse during which the economy is in trouble for a significant amount of time—from a few years to several decades. A nation's social unrest, bankruptcies, decreased trade volumes, currency volatility, and breakdown of law and order are all signs of economic distress. Because of the scale of the crisis, government interventions to help the economy recover can take a long time to work, which makes the economy even more disorganized. The following are some of the factors that lead to the meltdown in an economy:

1. Hyperinflation - By printing too much money, the government allows inflationary pressure to build up in the economy, resulting in a gradual rise in the prices of goods and services. Hyperinflation States resort to making an abundance of cash and credit determined to deal with a monetary stoppage. When the government raises interest rates as a means of controlling the accelerating rate of inflation, hyperinflation occurs.

2. Stagflation - Stagflation is a state in which the economy is expanding at a sluggish rate while also experiencing high inflation rates. Policymakers face a dilemma in this economic scenario because the measures taken to curb inflation could lead to abnormally high levels of unemployment. The effects of stagflation on the economy can last for years or even decades. Stagflation, for instance, occurred in the United States from the 1960s to the 1970s. The aforementioned time period saw stagnant economic growth and inflation that peaked at 13% per year, compared to 20% per year in the UK. Stagflation is usually hard to control once it happens, and governments have to spend a lot of money to get the economy back into balance.

3. Crash of the stock market - A crash of the stock market occurs when there is a decline in investor confidence in the market and in the prices of the various stocks that are trading on the market. A bear market, in which prices fall 20% or more from their highs to new lows, is created when a stock market crash occurs, draining businesses of capital. Crashes occur when market participants use too much margin debt, price-earnings ratios exceed long-term averages, and stock prices rise for an extended period of time.

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