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Features of Economic Meltdown
Features of Economic Meltdown
Tags: Gig Economy Economy WTO WTO Public Stockholding MSP Economic Growth Masala Bond Environmental Performance Index Forecast of Economic Growth Functions of the Finance Commission
Economic Meltdown, also called economic collapse, is any of a broad range of bad economic conditions, ranging from severe, prolonged depression with high bankruptcy rates and high unemployment (such as the Great Depression of the 1930s), to a breakdown in normal commerce caused by hyperinflation (such as in Weimar Germany in the 1920s), or even an economically caused sharp rise in the death rate and perhaps even a decline in population (such as in countries of the former USSR in the 1990s). Often an Economic Meltdown is accompanied by social chaos, civil unrest, and a breakdown of law and order. The following are some of the things that characterize an economic meltdown:
1. Increasing Interest rates - Interest rates reach an abnormally high level during times of economic collapse, limiting the amount of money investors can invest. Economic expansion is impeded by high interest rates. The high cost of capital makes it expensive for investors, businesses, and the government to service existing debt and obtain new loans. Investors lose faith in a major company and will be hesitant to trade their money during times of financial distress if the company declares that it cannot finance its debt obligations and resorts to the disposal of its assets in order to pay creditors.
2. Sovereign Debt crises - A government takes on sovereign debts to finance capital-intensive infrastructure projects. However, the risk of the government defaulting on its existing debts and going bankrupt increases when the government takes on too many debts and is unable to pay principal and interest obligations when they are due. A sovereign debt crisis occurs when investors lose faith in the government, when economic growth is sluggish, when there are wars, political unrest, and droughts. A government default is likely to have an impact on the global economy and spillover effects on other jurisdictions due to the size of sovereign debts.
3. Local Currency crises - When investor confidence dwindles, the value of the currency decreases and this triggers a local currency crisis. This occurs when foreign investors who have placed an investment in a nation and provided the government with credit lose faith in the government's capacity to meet debt obligations or generate the agreed-upon returns. Foreign investors withdraw their investments in the country in such circumstances. The move expands the selling of the acquiring country's money in the worldwide market, bringing about cash cheapening. In return, the country's international debts rise as a result of the currency devaluation, reducing its purchasing power.
3. Local Currency crises - When investor confidence dwindles, the value of the currency decreases and this triggers a local currency crisis. This occurs when foreign investors who have placed an investment in a nation and provided the government with credit lose faith in the government's capacity to meet debt obligations or generate the agreed-upon returns. Foreign investors withdraw their investments in the country in such circumstances. The move expands the selling of the acquiring country's money in the worldwide market, bringing about cash cheapening. In return, the country's international debts rise as a result of the currency devaluation, reducing its purchasing power.
4. Global Currency crises - A major currency that is used in cross-border trade transactions between individuals, businesses, and governments loses value during a global currency crisis. For instance, the Bretton Woods institutions use the US dollar as the world reserve currency. This means that if the US dollar loses value, it could lead to a global economic crisis.