Impact of Financial and Economic Crisis

The term financial and economic crisis refers to the massive disruption in the financial systems of people, corporations, and governments. This crisis is considered a nightmare resulting in degrading economic activities, hiring financial pressures, and imposing growth obstructions at individual and business levels.

Worldwide populations have faced severe economic devastations from time to time, but they have successfully coped with the associated issues. The lessons from those economic downfalls are significant for dealing with the ongoing and future ones. This context demands a deeper understanding of the impact of financial downturns to develop an action plan with effective and efficient strategies.

What is Called a Financial and Economic Crisis?

According to Claessens, S., and Kose, M. A., “a financial crisis can have domestic or external origins and stem from private or public sectors.” Smaghi L. B. explained in a speech at 21st Century Forum 2010, Beijing, 6–8 September 2010, “It comes in different shapes and sizes, evolves over time into different forms, and can rapidly spread across borders.”

In short, the preliminary definition of the financial and economic crisis is a significant downfall in every country’s financial system or worldwide. In consideration of the practical scenario, this crisis has some primary indications, such as:

• The rapid decline of asset values.
• Reduction of people’s buying power.
• Individuals and businesses start to fail to pay off their debts.
• Banks and other nation-wide financial institutions experience critical liquidity shortages.
• Investors begin to extract their money and refrain from making new investments.
• Massive decline in the stock market for essential industries.
• Currency crisis.
• Government’s failure to pay for imports.
• And many more.

Causes of Financial and Economic Crisis

The orientation of a financial crisis has several reasons. First, if nation-wide or global institutions overvalue the price of a particular product like houses, oil, etc., it can welcome a financial crisis. Second, when many investors become uninterested in investing by losing their trust in a certain market, the economic struggle in that sector gets triggered. With time, the associated issues of one sector start to affect other business sectors, collapsing the whole economy. Third, wrong investments of major banks of a cuntery also can orient economic breakdown of a country’s economy.

Furthermore, wrong policies of government and systematic failures eventually result in financial disruptions. Most importantly, uncontrolled human behavior and the high-risk-taking attitude of many businesses in a country can trigger economic downfall. Finally, some other reasons for the financial crisis orientation are war, corruption, trade conflicts, etc.

Impacts of Financial and Economic Crisis

There are numerous negative impacts of financial and economic crises. The below sections discuss the short and long-term effects of economic devastation.

Economic Impacts

A nation’s economy or global is the first area in which a financial crisis attacks. It orients the below-listed impacts.

Recession

A recession is the very first outcome of an economic crisis. It decreases people’s buying power significantly. Following this, businesses and financial institutions started losing their customers. Due to degraded business conditions, businesses become unable to create jobs, and even they go for workforce reduction, resulting in an increased unemployment rate. The whole financial situation becomes unstable, discouraging investors from making new investments. It worsens the problem. Here, the crucial thing is that all the resulting consequences increase the vulnerabilities associated with the first impact of decreased buying power.

Increased Debts

An economic crisis results in low business activity that decreases the individuals’ earnings and the businesses’ monetary gains. As a result, people and businesses fail to pay off their debts timely. The whole context negatively impacts the cash flow of the banks, and they become unable to allocate new loans considering the high risk associated.

International Trade Declinement

At present, the whole world’s economy is based on globalization, in which every country’s economy is intertwined with others. So, when a country struggles financially, the declined financial activities also impact other related countries. The country facing economic issues lessens its import to tackle the crisis. The less trade directly hits the respective exporting country’s economy. Here, the resultants are job cuts in logistics, SCM, and other related sectors, the factory shutdown, business loan defaulting, the collapse of small businesses, and distorted macro & micro-economies.

Social Impacts

After the impact of the nation-wide and global economies, a financial crisis starts to affect society negatively. The following is a detailed elaboration.

Increased Poverty

As mentioned in the earlier section, a financial crisis triggers low income, increased unemployment, and obstruction to new business openings. All these make people struggle to purchase the required food and services. It concludes in tragedy, leaving many people in poverty, hunger, and a devastated lifestyle.

Boosted Inequality

Historically, financial crises have increased inequality in society. It allows the rich to drag all the money towards them, leaving millions far behind as they spend all their money to tackle the ongoing issues.

Degraded Health & Education

During a recession, many middle and low-income family fail to meet the health & educational requirements of their family. People became unable to pay for their health insurance, and Laos failed to cope with direct health care costs. Additionally, due to the cash shortage and unemployment, many households become unable to pay for their children’s education.

Social Unrest

This consequence usually occurs when the economic crisis reaches its peak. The low and mid-income populations spend most of their savings to tackle the initial stages of the crisis. Without money, they become helpless within a shorter period. To meet their basic needs, people get involved in vandalism, break-ins, theft, robbery, etc., unethical activities. Human morality became diminished, and massive protesting events started to take pace.

Psychological Impacts

A country’s economic crisis also has various psychological impacts.

Stress & Anxiety

To deal with basic needs with little or zero money, people find themselves in no-way-out situations. Their mind becomes filled with stress, anxiety, and depression. Many lose their charm and happiness — all of these result in psychological breakdown and even sometimes suicide.

Degraded Relationships

It is also a core consequence of the financial crisis. Due to having less money on hand, people struggle to maintain healthy family and social lives. They cannot pay appropriate attention to the family and friends welcoming degraded relationships. Here, the result is isolation, and life becomes bitter.

Long-term Impacts

The following long-term impacts of a financial crisis are highly significant in reshaping the national and global economy.

Delayed Infrastructures Development

To help the people with their financial challenges, the respective government takes various programs like tax removal, giving incentives, allocating money for subsidiaries, etc. All these additional expenditures and ongoing lower earnings direct the government to eliminate or halt numerous infrastructure development programs, dragging the nation backward in the long run.

Changes in Policy

The government of a country makes necessary changes in its foreign, national, and economic policies as a prompt response to the financial struggle. Some of the policy changes help the nation, but many backfire. The backfiring ones broaden the negative consequences in the long run.

Broken National Backbone

A healthy national economy is the key to the success of a country. So, when there is a financial crisis, every sector of the country receives negative impacts. The government and institutions cannot take any ambitious plan. They cannot even afford the luxury of developing the workforce’s knowledge, skills, and expertise. As a result, a whole or partial generation becomes ineffective for the nation. Even after restoring the standard financial condition, industries struggle to get an effective workforce. The whole context makes a country cripple, lagging behind many other nations.

Positive Impacts of Financial and Economic Crisis

Well, along with numerous negative impacts, a few positive effects are also associated with a financial crisis.

Increased Resilience

While talking about the unfavorable financial situation, citizens of the country become more tolerant and resilient. These factors help the rebuilding process more effectively than the earlier state of the nation after the financial crisis.

Change in Visionary

A positive impact of economic downfall is the change of policymakers’ visionaries. Policymakers learn new things that help them develop fully secure plants to tackle future financial struggles.

Lessons for Personal Finance

When most of the individuals of a nation earn the standard amount of money, they fail to think critically. This consistent healthy earning allows them not to think about the future. By following the market trend, they spend their money inappropriately. Here, a financial downfall makes them learn to value their money, encouraging personal savings. Later, the saving habit became a blessing for the country’s economy.

Conclusion

The impact of financial and economic crisis runs deep, leaving negative footprints on the country’s economy, society, and individual lives. The monetary struggle also eliminates trust and opportunity within a society. But some positive things direct the people to remain hopeful. Learning about a particular financial struggle assists a nation in effectively coping with many future economic issues.