So what leads to an Economic Crisis - and How do We Recover from it?

A economic crisis is characterised by low financial growth, high unemployment, sharp drops in asset values, the inability of consumers and businesses to repay debts, and a lack of liquidity for financial institutions. Interest rates reach exceptionally high peaks during economic downturns, which restricts the amount of money available to investors. Because of the high cost of capital, high-interest rates make it more expensive for investors, businesses, and the government to take out new loans and service existing debt. This prevents economic growth. Investor trust is damaged, and money will be reluctantly traded during times of financial difficulty when a large company announces that it is unable to repay its debt obligations and must sell assets to satisfy creditors.

Here are a few reasons, why an economic crisis takes place:

- When the government prints an excessive amount of money, it creates inflationary pressure in the economy and eventually causes a progressive increase in the cost of goods and services. This is known as hyperinflation. In order to control an economic downturn, governments turn to print money and credit. When the government can no longer manage price increases and decides to boost interest rates in an attempt to slow down the rate of inflation, hyperinflation results.

- Stagflation is the term used to describe a state of affairs where there is high inflation and weak economic growth. Policymakers are faced with a conundrum in such an economic climate since the steps taken to curb inflation may push unemployment rates to historically high levels. The impacts of stagflation on the economy could persist for decades or even multiple years. 

- When investors lose faith in the market and there is a sharp drop in the values of all the stocks that are traded on the stock market, there is a stock market crash. A stock market crash depletes money from enterprises and ushers in a bear market, in which prices fall by at least 20% from highs to new lows. When price-earning ratios surpass long-term norms, there is an extended period of rising stock prices, and market players use excessive amounts of margin debt, crashes happen.

A crisis must be recovered with swift analysis and planned action. The following actions can be helpful:

1. Maintain the stability of banks and other financial institutions in order to stabilise the financial system.
2. Support liquidity to stop credit freezes and bank runs.
3. To increase demand, implement expansionary fiscal policies (such as tax breaks or higher government expenditure).
4. Monetary policy can be used to lower interest rates to promote borrowing and investment.
5. Provide targeted support for the sectors of the economy most affected by the crisis (e.g., tourism, hospitality).
6. Use wage subsidies or unemployment benefits to safeguard employment and income.


Bibliography 

Corporate Finance Institute. (2023b, December 8). Economic collapse. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/economics/economic-collapse/

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