What is Economic Collapse

An economic collapse is a breakdown of a national, regional, or territorial economy that typically follows a time of crisis. An economic collapse occurs at the onset of a severe version of an economic contraction, depression, or recession and can last any number of years depending on the severity of the circumstances. An economic collapse can be unwarranted or momentous with several events or signs leading to recessionary characteristics.

Understanding Economic Collapse

Economic theory outlines several phases that an economy can go through. A full economic cycle includes movement from trough, to expansion, followed by a peak, and then a contraction leading back to a trough. An economic collapse is an extraordinary event that is not necessarily a part of the standard economic cycle but can occur drastically at any point leading to contraction and recessionary phases.

Unlike contractions and recessions, there is not necessarily a definitive determination of a collapse but rather labeling of a collapse by economists and government officials. An economic collapse is usually brought on by extraordinary circumstances that may or not be coupled with already contracting economic statistics. When an economic collapse occurs it typically leads to rapidly contracting economic data which then quickly leads to a recession.

An economic collapse is also often followed by several interventions. Banks may close to curb withdrawals, new capital controls may be enforced, and in some countries, an overthrow of the government may happen. Generally, in nearly all cases of an economic collapse, some types of government changes are made by identifying the key factors leading to the collapse and integrating new legislation that mitigate the factors from occurring again. 

Examples in History

History provides some of the best examples for factors that can cause an economic collapse. Different from contractionary economic periods, an economic collapse typically has its own special circumstances and factors. Oftentimes these factors are mixed with many of the macroeconomic factors that occur in contractions and recessions such as hyperinflation, stagflation, stock market crashes, extended bear markets, and unbalanced interest and inflation rates. Furthermore, collapses can also occur from extraordinary government policies or troubled international market activity.

In the United States, the 1930s Great Depression was a prime example of an economic collapse with several extraordinary factors of its own that led to a great deal of reform across the country. The 1929 stock market crash was a key catalyst for the collapse. As a result, what followed was sweeping regulatory reforms affecting the investment and banking industries, including the Securities Exchange Act of 1934. Overall, economists reported that the 1920s collapse was highly caused by a lack of government involvement in the economy and financial markets.

The 1930s Great Depression lasted three and a half years, wiping out more than a quarter of U.S. GDP. In addition, unemployment during the Depression surpassed 24%.

The 2008 financial crisis was a crisis with several economic concerns falling below the radar, undetected until fallouts and bankruptcy began. The bankruptcy of Lehman Brothers was the tipping point. Overall, the factors involved in the 2008 crisis included extremely loose lending and trading policies for institutions which led to large losses from defaults and mismanaged proprietary trading activities. Similar to the 1920s collapse, the 2008 collapse also resulted in legislation reform, primarily in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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% from its peak. The 2008 Recession also saw unemployment reach a high level of approximately 10%. 

Across the global most investors are also aware of the many international collapses that have occurred throughout history. The Soviet Union, Latin America, Greece, and Argentina have all made headlines. In the cases of Greece and Argentina, both were brought about by severe issues with sovereign debt. In both Greece and Argentina, sovereign debt collapses led to consumer riots, a drop in the currency, international bailout support, and an overhaul of the government.

Economic Cycles

What can be very important to understand when considering an economic collapse or factors leading up to it is the economic cycle as a whole. Economies go through cycles including phases of trough, expansion, peak, and contraction. A trough can also be called a recession and an expansion period may also be called a recovery. Regardless, an economic collapse is not necessarily a standard part of any economic cycle but it may occur at any time. What follows an economic collapse can be more generally characterized within the categories of contraction and trough. Depending on the circumstances involved an economic collapse may move quickly from contraction to recession.

Once a collapse occurs and is identified the standards for analysis typically fall more neatly into the variables involved in contraction and recession. In general, a contraction is noted as a decline in economic output, mainly gross domestic product, A recession is more clearly defined as two consecutive quarters of negative gross domestic product growth. Both contractions and recessions can be part of an economic collapse. In both of these phases, economic depression, civil unrest, and highly increased poverty levels are common.

Watching for Signs

Like a contraction and recession, investors and economists are also always watching for signs of an economic collapse. Through the first quarter of 2019, the United States experienced a 10-year bull market that continues to keep extending. Through February 2019, the S&P 500 index was up 313% from its lowest point in March 2009. While it continues to gain, economists and the media put out regular reports on warnings signs that could lead to a contraction or collapse. In the U.S. there are several changes taking place that speculators are watching, including effects from the new corporate tax cuts and Tax Cuts and Jobs Act, new trade agreements in North America and China, and the U.K.’s pending exit from the European Union.

Other noteworthy headlines have identified risks in unmatched long-term liabilities, a resurgence of problems in the real estate market, the U.S.’s budget and deficit management, missteps in monetary policy, rising debt to GDP ratios in the U.S. and globally, and the ongoing risk of too big to fail institutions and their mounting debt. For those investors closely watching these risks or concerned about the global view, the International Monetary Fund and World Bank are two of the best global sources, with the IMF publishing the World Economic Outlook and Global Financial Stability reports regularly.