Table of contents:
- A bit of theory
- Regardless of the approach, it is customary to distinguish four phases in economic cycles:
- Market crash of 1873 ("Panic of 1873")
- Great Depression (1929)
- 2008 crisis
Pandemics, falling oil prices and volatility of the national currency are shaking the economies of countries to such an extent that mankind from time to time finds itself on the verge of a global economic crisis. However, precisely because the world is not experiencing a crisis for the first (and not for the last) time, T&P decided to look at the history of the three major global crises from the point of view of unexpected economic prospects, thanks to which it is possible to get out of the crisis situation with positive consequences.
A bit of theory
Experience shows that a period of decline is always followed by a period of growth. In financial theory, this phenomenon is called economic cycles, that is, regular fluctuations in economic conditions, which are characterized by ups and downs in economic activity. As a rule, despite the regularity, cycles do not have a specific time frame (say, every 5 or 10 years) and occur periodically, and they can be both a consequence of objective factors (deterministic point of view), and spontaneous, unpredictable events (stochastic point of view).
Regardless of the approach, it is customary to distinguish four phases in economic cycles:
The upsurge, or revival, occurs after reaching the “bottom”, a period when production and employment begin to grow, innovations are gradually introduced and the demand delayed during the crisis is realized.
Peak - characterized by the lowest unemployment rate and the highest economic activity level.
Recession, or recession, - production volumes decline, economic and investment activity falls, the unemployment rate begins to rise.
The bottom, or depression, is the “lowest point” that the economy could reach; as a rule, it does not last long, but there may be exceptions (the Great Depression, despite periodic minor fluctuations, lasted 10 years).
These phases can be traced by the example of crises of previous years and even centuries.
Market crash of 1873 ("Panic of 1873")
After the victory in the Franco-Prussian War, following the results of the peace treaty, Germany received an indemnity from France for a huge, by the standards of that time, amount of 5 billion francs in gold, which is currently equivalent to just over 300 billion dollars (the amount was ¼ of France's GDP).
The German states were united in the German Empire, the solid foundation of the economy of which was the funds paid by the French. As a result, free capital fell on the stock market of Western Europe, which needed to be profitably used and distributed. In Germany and Austria-Hungary, they began to actively buy up land and build houses for a commercial and residential basis, while large-scale construction of railways was carried out in the United States. In these two areas - real estate and railways - a lot of money was spinning, thereby creating an economic (speculative) bubble.
Vienna became the epicenter of speculation, and, after it became apparent, there was an immediate public reaction. Investors, including foreign ones, got scared for their money, a process of general panic started, and in just a couple of days the largest Vienna Stock Exchange was empty. Construction companies began to go bankrupt, and banks that were still in the game sharply raised interest rates on loans, which ultimately led to a sharp decline in the economy. Following Vienna, there was a stock market crash in Germany, and then in the United States.
The Austro-German crisis canceled all of America's ambitious plans for the construction of railways, in which investors from all over the world poured billions of dollars. Banks and construction companies in the United States were very much counting on financing from Germany, but the rise in interest rates led to the repatriation of funds. America was deprived of funding, and the railways already built did not fully meet expectations. The first to go bankrupt were banks that lend and give loans for the construction of railways, followed by the industrial sector of the economy, especially metallurgical plants.
The crisis has begun. Exchanges closed, companies in Western Europe and the United States filed for bankruptcy, bonds depreciated, and economies collapsed rapidly. The crisis dragged on for a quarter of the 19th century and was called the "Long Depression".
Despite the dire economic situation, they managed to get out of the crisis. The hardest blow fell on the United States, but by 1890 America surpassed Great Britain in terms of GDP by returning to the gold standard, as well as entering the era of monopolies and active colonization of Africa and Asia. Ultimately, stagnation and falling prices led to an increase in production. Low prices stimulated its growth, and production absorbed the excess money supply. The economy began to revive.
Great Depression (1929)
The prosperity of the American economy is considered to be one of the reasons for the Great Depression. The growth in production in the United States led to an overproduction of goods, including food, while the purchasing power of the population was at a lower level. The capitalist market began to develop spontaneously and unpredictably, ceasing to be a self-regulating system.
The second reason is fraud and speculation, which were allowed due to the uncontrolled growth of the financial market. Huge financial bubbles were once again inflating in many sectors of the economy. Stocks were issued by anything and everything that was not controlled in any way, and their oversupply ultimately led to a collapse in the market.
The current situation has led the country to another destructive crisis that has affected all segments of the economy. For some industries - manufacturing, farming, the financial sector - the debt crisis became so severe that small depositors and companies withdrew their money from banks, leading to a near complete halt of the US banking system.
Since all the leading countries of the world adhered to the gold standard introduced in America at that time, the crisis instantly expanded to global proportions, reducing the volume of world trade by three times. Germany suffered the most from this, where unemployment rose sharply. Against the backdrop of the ongoing chaos, the National Socialists came to power, which ultimately led the world to World War II.
At the same time, Franklin Roosevelt came to power in the United States, who took a number of anti-crisis measures to restore the banking system, industrial and agricultural sectors. He supported the financing of private structures, issued a series of fair trade laws that forced many companies to merge, and also got rid of surplus goods and products through financial compensation in order to raise prices for them again. Despite the fact that the measures were insufficient and the US economy finally recovered only after the Second World War, Roosevelt's initiatives laid the foundations for a more balanced economic system.
The prolonged crisis spurred the development of Keynesian economic policy, which became the basis for modern capitalist states. According to many economists, the experience of the Great Depression helped to survive the 2008 crisis with fewer losses and panic than it could have been.
The problems of the world economy in 2008 began with the mortgage crisis in the United States, when the real estate market collapsed due to non-payment of high-risk loans. Powerful mortgage agencies such as Fannie Mae and Freddie Mac have lost 80% of their value, and the largest bank, Lehman Brothers, has filed for bankruptcy. As a result, stock indices and oil prices began to fall rapidly and significantly, which caused the entire world economy to be hit. In 2008, Russian production decreased by ~ 10%, and GDP - by 7, 8%, at the same time the European Central Bank introduced austerity regime due to credit insufficiency in the eurozone.
Thanks to the experience of the past centuries, the 2008 crisis was readily accepted by countries, since after the Great Depression it became obvious that the economy would in any case experience both ups and downs. Therefore, the 2008 crisis is associated, on the one hand, with the general cyclical nature of the economic system, and on the other, with failures in financial regulation. World trade again faced imbalances, capital moved uncontrollably from country to country and from industry to industry, and the credit market, after the credit expansion of 1980-2000, entered a state of overheating. Millions of American families risked homelessness, and in the rest of the world, the crisis has largely led to massive layoffs and a significant rise in unemployment.
In fact, economists, until very recently, continued to argue about whether the world came out of the 2008 crisis. However, despite the controversy, they all agree on one thing: the restoration work began immediately and the countries took the maximum number of measures to prevent overheating of the economy and soften the fall to the bottom.
Despite the fact that the unemployment rate in many countries is still high, it still does not compare with the state of 2008-2009, plus we could see very real growth in purchasing power, industry, real estate and general welfare.
Another indirect proof that the 2008 crisis is over, and the economy has recovered, can be considered the fact of predicting a new crisis, which, as follows from historical experience, is possible only on the rise. A new global crisis was promised in 2017, 2018 and 2019, and experts even assumed that it would again be associated with the real estate market and the situation around the excessive amount of loans issued by banks. However, life put everything in its place, and the harbinger of a new crisis, in the best traditions of Nassim Taleb, was a global contingency - the global coronavirus pandemic.
Of course, it is too early to judge what the consequences of the current blow to the economy will be. But, whatever they may be, we can safely count on the fact that sooner or later the period of decline will be behind, opening up many new prospects for development.
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