In my previous article, "The Looming Storm: Understanding and Overcoming the Next Financial Crisis (Part 1)," I discussed how the global economy is slowing down and potentially heading toward a recession. In the second part of this article series, I aim to contemplate the potential consequences of an economic meltdown. From my perspective, this crisis has the potential to surpass the magnitude of the Global Financial Crisis of 2008.
A global economic crisis can have far-reaching consequences that impact various aspects of society. Some of the potential consequences include:
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Recession and Unemployment: Economic crises often lead to recessions, characterized by a significant decline in economic activity. This can result in increased unemployment rates as businesses struggle, leading to layoffs, lower wages, and reduced hiring.
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Financial Market Instability: During a global economic crisis, financial markets can become highly volatile. Stock markets may experience significant declines, leading to losses for investors and diminished confidence in the financial system. Currency values may fluctuate, impacting international trade and investments. Readers can refer to UK's pension fund crisis in late 2022, to have an idea.
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Business Failures: Economic crises can lead to an increase in business failures, especially among small and medium-sized enterprises. Such companies often experience declining sales, cash flow challenges, and difficulties in obtaining credit, which can ultimately lead to closures and bankruptcies. Consequently, this will contribute to a rise in non-performing loans within the banking sector, potentially triggering a domino effect of collapses. It is important to note that relying solely on insurers (FDIC for example) may not always be a reliable solution, as the effectiveness of your insurance is dependent on the strength and reliability of the counterparty.
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Government Deficits and Debt: Governments often experience decreased tax revenues during an economic crisis due to lower economic activity. At the same time, they may need to increase spending on social safety nets and economic stimulus measures. This can lead to budget deficits and a significant increase in public debt levels. This has to be done fast and the only way to achieve this goal is more QE, at an unprecedented level. This will again erode the purchasing power of your hard-earned cash.
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Social Deterioration: Social deterioration refers to a decline in social conditions, values, or standards within a society. It can manifest in various ways, such as increasing crime rates, rising poverty levels, deteriorating healthcare systems, weakening education systems, or a breakdown in social cohesion. Social deterioration often occurs in times of economic hardship, political instability, or societal unrest. Governments and communities typically address social deterioration through policies and initiatives aimed at improving social conditions, promoting inclusivity, and fostering economic growth.
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Political Unrest: Economic crises can create social and political unrest as people experience financial hardships and a decline in their standard of living. High unemployment rates, income inequality, and reduced access to public services can contribute to social tensions and protests.
I shall discuss further points in part 3 of this series.
(I am not a financial advisor and this is my personal opinion. This is not financial advice and is only for educational purposes only)
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Older Articles:
1) The Looming Storm: Understanding and Overcoming the Next Financial Crises (Part 1)
