DEFINITION of Economic Collapse

An economic collapse is a complete breakdown of a national, regional or territorial economy. An economic collapse is essentially a severe version of an economic depression, where an economy is in complete distress for years, or possibly even decades.

A total economic collapse is characterized by economic depression, civil unrest and highly increased poverty levels. Hyperinflation, stagflation and financial-market crashes can all be causes. Government intervention is usually necessary to bring an economy back from collapse, but can often be slow to remedy the problem.

BREAKING DOWN Economic Collapse

The Great Depression in the United States is a prime example of an economic collapse. The 1929 stock market crash brought on a collapse that lasted for many years and saw high levels of poverty. Well-known economist John Maynard Keynes claimed this was from the total lack of government involvement in the economy or the financial markets.

An Economic Collapse Compared to an Economic Crisis

A collapse differs from a crisis in that the effects are longer lasting and it crosses multiple aspects of society. For example, the 2007-2009 Great Recession lasted less than two years, and the U.S. only experienced six quarters of negative GDP growth totaling just over 5 percent from its peak. Compare this to the Great Depression, which last 3 and a half years and wiped more than a quarter of U.S. GDP. In addition, unemployment during the Depression surpassed 24 percent, while the peak during the Great Recession was about 10 percent. 

A recent economic collapse was in Argentina at the turn of the 21st century. This four-year period included unemployment riots, a collapse of its currency, which saw the emergence of alternative underground currencies, an overhaul of the government and the infamous default on large sums of sovereign debt. The root of the collapse can be traced back to years of military dictatorship and the government deficit created by the Falklands War in the early 1980s.

Other common occurrences during an economic collapse are forced bank holidays to curb withdraws, strict capital controls, and the overthrow of the sitting government.