Economic Crisis

In the past few years, we have had a bewildering array of different crisis – credit crunch, financial crisis, fiscal crisis, banking crisis, economic crisis, depression economics, oil price shock, currency crisis, housing crashes and more.

Arguably, we should be calling continued mass unemployment a crisis. In many ways it is more serious than a currency or credit crisis.

All crisis are to some extent interelated. Here’s a summary of what they involve.

Types of Economic Crisis

Credit Crisis.

This is a crisis primarily involved in the financial sector. It refers to the lack of money and credit for banks and other financial institutions. For example, in 2008, many banks found it difficult to gain sufficient access to credit. They had come to rely on borrowing money on money markets, but due to loan default and a collapse in confidence, banks were reluctant to lend. Some banks ran out of money completely and went bust (in case of Lehman Brothers) or had to be rescued – Northern Rock. See: Credit crisis

Financial Crisis.

This is really another name for a credit crisis. However, it implies a wider implication. As well as difficulty in getting funds it relates to the implications of banks and consumers not being able to borrow leading to banks suffering from insufficient funds. Financial crisis explained

Economic Crisis.

When people talk of an economic crisis, it could involve a variety of serious economic problems such as currency collapse, hyper inflation. Perhaps the most common crisis, is a steep fall in GDP and deep recession. This is the most serious economic crisis as it leads to the most serious impact on human welfare – in terms of economic inactivity and mass unemployment. The credit crisis played a direct role in leading to wider economic problems a year later. See: Economic Crisis

Fiscal Crisis

A fiscal crisis refers to governments struggling to repay its debt and struggling to borrow enough money to meet its budget deficit. If markets fear governments have borrowed too much, and there is little chance of repayments, there will be a selling of the government bonds, pushing up interest rates and giving government bonds a very low credit rating. It then becomes a difficult cycle to break. Markets won’t lend. Governments have to cut deficit by slashing spending. But, slashing spending can cause a fall in GDP and hence even lower tax revenues. A fiscal crisis, usually involves governments seeking outside help such as IMF intervention. e.g. European Fiscal Crisis.

  • An economic crisis will worsen a governments budget deficit as tax revenues fall in a recession. Also in a financial crisis, markets are more sensitive to risk and may worry if governments look vulnerable. See also sovereign debt crisis

Currency Crisis.

A currency crisis occurs when there is a rapid fall in the value of the currency as investors become nervous of holding a countries assets. A gradual depreciation (like 20% fall in value of Sterling over past couple of years) would not be seen as a currency crisis. However, in the case of Iceland, the value of the Icelandic currency fell very rapidly as people lost confidence in the Icelandic financial sector. A currency crisis can be caused by a fiscal crisis. If governments look to default on bonds, foreign investors will want to sell any bonds they have causing a fall in exchange rate. A currency crisis can also occur in a semi fixed exchange rate if markets feel a currency is overvalued. e.g. Sterling in 1992 when it was in ERM. What causes currency collapse?

Hyperinflation

When there is very high inflation and the value of money collapses making ordinary transactions difficult. Hyperinflation

Supply Side Shock

A rapid rise in oil prices can depress an economy, leading to higher inflation and lower output. (Shift in SRAS to the left). e.g. UK economy in 1970s

Related

  • List of recessions in UK
  • Types of Recession

By on July 17th, 2010

3 thoughts on “Economic Crisis

  1. The best way to produce could be by using mixed economies as both the government and individuals are involved in producing goods and services. Private sectors could produce what consumers want as they are going to determine this by spenting their incomes on what gives the most satisfaction and the government could focus on the merit and public goods that some individuals could not afford.

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