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What is Economic Crisis?

Meaning of Economic Crisis

An economic crisis is characterized by a period of reduction in the level of production in a country , which is related to the reduction of consumption , the fall in profit rates and the increase in unemployment.

The economy that means “ home management. It is the science that studies the processes of production , exchange and consumption of goods and services.

A crisis, as far as he is concerned, is a sudden change or situation of scarcity (unemployment, for example).

The capitalist system works in a cyclical way, that is, it presents phases of growth and retraction . This means that from time to time, these production systems go through crises.

Another type of crisis known as a financial bubble or speculative bubble , which occurs when stocks trade at a price much higher than their intrinsic value until they are no longer bought, and fall sharply.

Phases of an Economy

Due to the cyclical movement of production levels , the economy can be analyzed within a dynamic of business cycles. These cycles have four main phases:

  • Expansion: Production levels are growing, as well as demand, family income, and the corporate rate of profit;
  • Boom: economic activity reaches its peak. At that time, problems of overproduction and high inflation can occur;
  • Recession: economic activity begins to decline, demand declines, and the unemployment rate begins to rise;
  • Depression: Deepening economic crisis, lower interest rates, high unemployment rates, and bankruptcies.

Thus, we can classify economic crises in a simplified way in phases of recessions and depressions . A recession is a contraction in the economy and is usually characterized by a drop in Gross Domestic Product (GDP) for two consecutive quarters.

A depression, in turn, is a sharp drop in a country’s GDP or an excessive prolongation of a recession . In other words, they are lasting crises, with profound impacts on the economy of a country.

In depressions, economic indicators suffer a great reduction, unemployment rates are very high and it is common for large companies or financial institutions to declare bankruptcy.

When a crisis occurs, the State needs to adopt economic policies to contain the reduction in production and stimulate the recovery of the economy.

Among the possible measures to be taken by the government in a crisis are the reduction of interest rates to stimulate credit and consumption; and investments in infrastructure and social areas, which increase employment and increase income.

World Economic Crises

The two biggest economic crises in the world capitalist system were the 1929 crisis and the 2008 crisis. Understand what happened in each of them:

Crash of 1929

The 1929 crash hit the United States, already the world’s largest economy , and affected most of the world’s countries. One of the main causes of this crisis was overproduction.

After the end of World War I, the United States became a major exporter of industrialized products to European countries, weakening its industry due to the conflict.

But European countries were recovering and demand for American products fell, causing overproduction in the United States. After all, they had far more products than the consumer market to themselves.

Unable to sell their products, many businesses began to close and the unemployment rate reached 27%.

The precarious situation and the threat that the companies could not pay their debts meant that there was a massive sale of the shares on the stock market, which led to the collapse of the New York stock market.

To recover the economy, the state needed to intervene with social assistance programs and measures to stimulate industry.

Crisis 2008

The 2008 crisis also originated in the United States and was the result of financial speculation on real estate loans, which became known as the housing bubble .

Interest rates in the country were low and property prices were rising. Much credit was offered for the purchase of these properties, which became guarantees for these operations.

For the banks it was an advantageous business, because if they did not receive the loaned money, at least they would keep the property.

The number of real estate loans has been growing and has even been offered to people who already had other loans.

To capitalize, banks converted these loans into assets and sold them to investors. The bank received cash on demand, and investors received interest on that asset over time.

These assets were also placed in large asset packs and sold to investors around the world. These assets were highly profitable and classified as low risk investments.

But, in fact, these assets were high risk and loans began to default. The banks then began to foreclose on the houses, which were devalued, causing the assets to lose value.

This situation led to the bankruptcy of Lehman Brothers , one of the largest investment banks in the United States. This crisis is considered the most serious since 1929 and has had consequences throughout the world.

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