Economic Collapse

Updated on April 30, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Economic Collapse?

Economic collapse or economic meltdown refers to a prolonged financial crisis ranging from a few years to many decades. It is backed by social turmoil, civil chaos, and a breach of public order. Moreover, the world economic collapse might bring widespread panic, and thereby, suitable preparation for survival may come in handy.

Economic Collapse

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Its immensity can certainly decelerate the governmental intervention procedure for economic revival, thus creating serious economic disorganization. Furthermore, the Russian financial crisis in 1998 and the Argentine great depression of 1998-2002 are two prominent instances of economic meltdown.

Key Takeaways

  • Economic collapse is the continued disintegration of the national or regional economy for a long duration, followed by a recession or financial crisis.
  • It is normally caused due to stock market crash, hyperinflation, or stagflation. Moreover, economic recession and economic collapse are two different terms.
  • The two famous economic meltdown examples are the Russian financial crisis (1998) and the Argentine great depression (1998-2002).
  • Its effects incorporate widespread panic, surged interest rates, possible unavailability of electricity and water, bank closures, increased debt defaults, and inclination toward other currencies.

Economic Collapse Explained

Economic collapse is attributed to the sovereign debt crisis, magnified interest rates, local currency crisis, and global currency crisis. It certainly induces lost credit access, bank closings, demand exceeding supply, potential inaccessibility of electricity and water, and burgeoning interest rates.

The US economic collapse is improbable since the administration has all the preparations in place to avert such a catastrophe. Above all, the US federal government possesses numerous supplies and equipment to hinder a financial crisis. Please note that economic crisis and collapse are two distinct situations. An economic or financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors.read more conveys a dramatic decline in the financial state of a region or nation. On the other hand, the world economic collapse symbolizes an extended period of a fiscal breakdown requiring major official changes for its survival. The government may write offWrite offWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets.read more debts to handle this type of situation.

In the same vein, the following are some real-life incidents of the former:

  1. The credit crisis (1772)
  2. The great depressionGreat DepressionThe Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939.read more (1929-39)
  3. The Organization of the Petroleum Exporting Countries (OPEC) oil Price shock (1973)
  4. The recession of 1981-82
  5. The savings and loan crisis (1989)
  6. The Asian crisis (1997)
  7. The recession post 9/11 (2003)
  8. The financial crisis (2007-08)
  9. Coronavirus pandemic (March 2020 and continuing)

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Economic Collapse Causes

To clarify, let’s check the crucial sources of world economic collapse:

Economic Collapse Causes

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#1 – Stagflation

It indicates a sluggish economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more rate accompanied by higher unemployment and inflation. Moreover, the economic phenomenon puzzles legislators as safety measures for inflation might soar the unemployment rate.

#2 – Hyperinflation

HyperinflationHyperinflationHyperinflation is merely an accelerated level of inflation that tends to quickly destroy the actual value of the local currency since there is a rise in the cost of all products and services, and it causes people to lower their holdings in that particular currency as they opt to participate in foreign currencies that are relatively more stable.read more specifies quick and uncontrolled price increments (generally above 50%) within an economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more throughout a stipulated period. As a result, it dissolves the currency’s value, preventing taxpayersTaxpayersA taxpayer is a person or a corporation who has to pay tax to the government based on their income, and in the technical sense, they are liable for, or subject to or obligated to pay tax to the government based on the country’s tax laws.read more from acquiring even an essential commodityCommodityA commodity refers to a good convertible into another product or service of more value through trade and commerce activities. It serves as an input or raw material for the manufacturing and production units.read more or service.

#3 – Stock Market Crash

It is a social phenomenon denoting an immediate steep decline (mostly double-digit reduction) in stock rates. Additionally, this generates a bear market extracting money out of firms. The stock market crashStock Market CrashA stock market crash occurs when stock prices in all sectors begin to fall rapidly. It is often the result of global factors such as war, scam, or the collapse of a certain industry. In such a crash, panic acts as a catalyst.read more happens after an extended period of surging stock quotes.

Examples

Now, here are some instances for better comprehension.

Example #1

1998: Russian Financial Crisis

The Russian government devalued its official currency ruble on 17 August 1998. Additionally, it declared a coercive re-arrangement of the ruble debt liabilities falling owing to the end of 1999, whose face value was $45 billion at the pre-crisis exchange rate.

The administration also declared a 90-day ban on private external debt payments and short positions upon margin callsMargin CallsA margin call occurs when the stockbroker notifies the trader about the brokerage account balance falling below the minimum maintenance margin.read more and currency forwards on repo operations. The move helped in the economic collapse preparation for commercial banks under extreme governmental debt.

1998-2002: Argentine Great Depression

Argentina suffered a 4-year-long great depression period in 1998, resulting in an economic shrinkage of 28%. Moreover, the major reason behind this situation was unimpressive financial regulations. Three huge tax increments in 2000-2001 inhibited growth and interference with financial management in mid-2001 generated a currency devaluationCurrency DevaluationCurrency devaluation is deliberately done in order to adjust the established exchange rates by the government and it is mostly done in the cases of fixed currencies. This mechanism is used by economies with a semi-fixed or fixed exchange rate, and it should not be confused with depreciation.read more threat.

Example #2

On 15 May 2022, Lebanon conducted the first parliamentary election after its economic collapse in 2018. It achieved economic collapse survival that occurred following a big explosion in 2020 at Beirut’s port.

The collapse marked the country’s most damaging crisis since the civil war in 1970-75, leading to a currency deterioration of over 90%. Furthermore, it surged three-quarters of the populace into poverty and restricted savers of bank deposits. As per interior ministry statistics, the voting turnout was 41%, disregarding 60 of 1752 polling stations, inferring decreased participation than in 2018 (50%).

Economic Collapse Effects

The impact of world economic collapse includes:

Economic Collapse Effects

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  1. Plunging demand for the dollar and US Treasurys
  2. Soaring interest rates
  3. The inclination toward other currencies such as the euro, yuan, or also gold
  4. Hyperinflation due to the loss of currency’s value
  5. Lost access to credit
  6. Shutdown of banks
  7. Unparalleled demand oversupply of even the necessities like gas, food, and other essentials
  8. Prospective unavailability of electricity and water, if meltdown influences local leaderships and utilities
  9. Widespread panic
  10. The collapse of the financial marketFinancial MarketThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more and increased debt defaultsDebt DefaultsDebt default refers to a situation in which a borrower fails to repay loans, causing the borrower's reputation to suffer. However, before the debt is declared a default, a notice is sent to the borrower stating the debt's position and the lender's intention to declare it a default in the event of non-repayment of the debt.read more

Frequently Asked Questions (FAQs)

Is An Economic Collapse Coming and How Close Are We to It?


The US economic collapse is highly unlikely, but there are signs of a probable economic recession in 2023. However, the Federal Reserve is prepared to tackle any financial unrest with sufficient resources and tools. Moreover, the US military, financial organizations, and other concerned authorities ensure full readiness for any such situation.

How To Prepare and What to Stockpile for Economic Collapse?


The economic collapse preparation comprises the stockpiling of basic supplies like food and water, useful tools (medication and first aid), and

1. Growing food
2. Practicing living with little or no electricity
3. Learning basic skills (car and home repairs)
4. Strengthening the financial status
5. Sharing
6. Building good relationships
7. Maintaining the current passport

What Happens in An Economic Collapse?


There is instant financial chaos during an economic collapse with intensive recession and soaring debt defaults. Also, it leads to the shutdown of banks, lost access to credit, more demand than the supply of basic goods and services, and increased interest rates.
 
Moreover, the citizens must stockpile the necessities and learn to live with minimal facilities for economic collapse survival.

This has been a guide to Economic Collapse and its Meaning. Here we discuss world economic collapse, its causes, effects, & preparation methods for survival. You can learn more from the following articles –