What Makes the Economy Crash?

There are different reasons why the economy of a country crashes. While several reasons can be outlined, sometimes an economic crash can come unexpectedly. An economic crash is not always as predictable as it seems.

It is important to first define what an economic crash is before we start outlining the reasons why this might happen.

An economic crash is a substantial failure in economic activity spread across the economy and when this failure has lasted for more than a few months, it is then visible in the income and earnings, employment, and the whole industrial production and real GDP. Each country has its unique definition and they have a standard that they use in determining whether the economy has reached its limit or not before they can conclude that the economy has crashed.

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Economy crash can also be caused by a loss of confidence in the business by the consumers and when there is a loss of confidence, there is no demand for goods. A more acceptable definition of an economic crash is a point where the gross domestic product (GDP) i.e. the amount a country sells and produces declines for more than a few months. Increased confidence leads to increased demand which in turn leads to higher business productivity. Economy crash starts with a loss of confidence, then it gradually leads to a reduction in demand, then people stop spending their money, then the country’s finance stops growing and if it’s not growing that means that it is shrinking.

Why economies crash

While there is no one particular reason why the economy can crash, there are some reasons we can explore. It is also important to keep in mind that there is no size fit all for all the countries. Each country has its own peculiar rules and regulation that can make its economy susceptible to having a crash and different countries also have different experiences and different history, some have experienced war, while some don’t have, some engage in capitalism, while some don’t, so it is important to keep in mind the country you find yourself in.

 A Stock Market Crash

If the stock market crashes, then an economic crash is looming. This is because the stock market plays a huge role in the economy of most countries, and the loss of confidence can lead to a stock market crash and a downward spiral from there.

Manufacturing Orders Slow Down

If there is a reduction in the demand for the manufacturing of goods, it can be a sign that an economic crash is not far-fetched, this is because the demand doesn’t just suddenly slow down. It could be as a result of inflation or other underlying issues.

 Deregulation

If the lawmakers of a country remove some safeguards that were put in place to secure the economy or they don’t effectively ensure that citizens are following the measures that have been put in place, then an economic crash might be inevitable. Lawmakers make a lot of laws and some might be beneficial to the country and some might be as a result of the bias of the lawmakers, whatever the case lawmakers can trigger an economic crash.

Poor Management

Another reason that an economic crash occurs is bad business practices on the part of the citizens of a country. If most businesses are in the habit of borrowing loans and not managing their business well, an accumulation of bad business practices in a country can make the economy crash.

Wage-Price imposition

Sometimes the government can decide to impose wages and prices on goods and services that are not so favorable, sometimes they do this as a result of inflation. Whatever the reason, wages and price imposition can lead to employees been laid off and a host of other things which eventually leads to an economic crash

Post-War effect

It is always difficult to bounce back after a war or a pandemic and not many countries have policies that are favorable or policies that ensure that they get back up on their feet. If no attempt is made to savor the situation then the economy of that country is heading for the rocks.

Deflation

When the price of goods keeps reducing, it encourages people to hope that the price will keep getting lower because they will spend less money on buying goods. Deflation leads to an economic crash, it even has a worse effect on the economy than inflation does. Many economies have crashed as a result of deflation. There have been countries where for instance the housing market was reduced and a lot of people started buying houses they could not afford by taking loans and after a while, the bubble burst and they could not repay the loan because they realized they would lose money by selling the house for less amount than what they bought it for. Most people defaulted in paying their loans and this led to foreclosure by the banks.

What Will Cause the Next economy crash?

There are many speculations that the global pandemic COVID19 will result in an economic crash because it required most business to shut down in order to avoid the spread of the virus, while this might be true, it is also important to take other factors into consideration because most times an economy crash is always unexpected and it is better anticipated than experienced. Many other unforeseen circumstances can also lead to an economic crash, no warning signs should be ignored.

Conclusion 

An economic crash can happen at any point in time, it is important to anticipate, make strategic plans to ensure that it does not have a heavy impact on the economy of the country. The citizens have a great role to play in ensuring that the economy doesn’t crash, for instance, making good business decisions, investing wisely (and not blindly) are all efforts to take to ensure the economy doesn’t crash. The government and the lawmakers are not left out either, they should ensure that there are measures put in place to secure the economy and guidelines to educate the citizens on what to do and how to avoid an economic crash.

 

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