Financial Crisis: How Catastrophic Is 2022?
“The lesson of history is that you do not get a sustainable economic recovery as long as the financial system is in crisis.” Ben Bernanke
Every financial crisis leaves a dent on the economy, people’s lives and most importantly, our hopes for a better future. While there’s no standard definition of a financial crises but it is characterised by the catastrophic deterioration in economy coupled with significant and rapid drop in the value of assets. Crises are like storms: they don’t differentiate on any basis be it people, religion, location. The magnitude might differ, but all are impacted.
Historically, there have been various causes of financial crises: economic, social, geo-political, asset bubbles, epidemics (now pandemics) etc. Whatever may be the cause, the impact was frightening. The latest financial crises were triggered in 2020 attributable to Covid-19 pandemic which shook the entire world. Lockdowns, exponentially rising deaths, shortage of food, medical and other resources, economic recession and rising unemployment, slump in asset prices and what not. The entire world and people living in it witnessed the worst times of the 21st century.
But humans are cursed with the habit of non-satiation. While the world was still gathering the pieces left after 2020’s pandemic led crises in 2021, the year 2022 started with declaration of invasion in Ukraine by Russia. The purpose of this article is not to comment on the logic/correctness of the war but to assess the aftermaths of any event which pushes us to another financial crises.
Crude prices are already at multi year highs, Europe is facing economic recession in multiple member nations, credit ratings have dropped, interest rates are rising, inflation is at alarming rate and life of people has become a nightmare. One can say that many countries, which were still recovering from the impact of Covid-19 and its new versions, have gone back decades in terms of economic progress.
The Great Depression in US kicked off with a massive stock market crash on October 24, 1929. On the date, also named the Black Monday, the Dow Jones Industrial Average (US stock market index) dropped by about 13 percent. And by the year 1932, the market crashed more than 80 percent, GDP growth rate slipped to negative 25% during 1929 to 1933, inflation rates turned negative, unemployment rates rose to 25% in 1933. Purchasing power vanished. People started withdrawing money and gold from banks which created stressful situation in the financial markets. During 1930 to 1933, thousands of US banks had failed.
The infamous Asian financial crisis of 1997 started with large currency devaluations by East Asian nations starting with Thailand. Stock markets dropped along with imports ending with political unrest. Poverty and inequality worsened, while employment, earnings, and social welfare all decreased significantly. The GDP growth fell by over 50% in Indonesia and Thailand whereas growth in Korea and Malaysia dropped by over 40%. Unemployment rates rose in all nations, with Indonesia witnessing over 5 percent.
The Subprime crisis that started in 2007 in US and engulfed nearly the entire world economies was a result of poor banking regulation compliances and exotic packaging of poor quality (high default probability) loans. Popularly known as the real estate bubble, the crisis started as majority of sub-prime borrowers (having poor credit history) failed to make payments on their mortgages. Eventually banks started failing along with investment banks/funds which had invested in the sub-prime loan packages. Lehman Brother’s, a firm that was in business for the last 150 years, had to close its doors which resulted in a cascading effect on the entire US Financial sector.
Year 2020 witnessed one of the most tragic and devastating pandemics viz. Covid-19. Starting with spread of Covid-19 cases in China, eventually the entire world got impacted. Countries declared lockdowns for months; curfew was imposed; offices, factories & schools/colleges were closed; people stranded to reach their homes. Consumption slumped, businesses saw low or no sales/profits, and unemployment rose. Economies were drastically impacted, in fact as per estimates global economic growth witnessed degrowth of around 3.2% in 2020. Global trade is estimated to have fallen by 5.3% in 2020. Government borrowings increased exponentially, and deficit financing was adopted. The loss to nations, in terms of GDP growth, was even more catastrophic than 2008 financial crisis. India suffered decline of 7.3%, US of 3.4% while China managed 2.3% growth in GDP.
While the world was tirelessly recovering from Covid-19 and it’s many new forms, there was yet another tension building up. Starting 2022, Russia invaded Ukraine. People died and if alive stranded, refugee camps established, arms and food being supplied, bombs exploding homes. As per estimates, Russia’s invasion has resulted in ten million refugees, the worst in Europe since 1990s. Economically speaking, not only both countries suffered huge loss due to the war in terms of defense spending, falling currencies and poor corporate performance, but the world at large saw prices of essential commodities like crude oil, natural gas, sunflower oil, zinc, etc. shooting the sky. Sudden jump in commodities is never good for nations. But the gap between global financial crises is reducing. Take this: we all witnessed five such crises in the last three decades.
Storm has no color but destroys everything. Same is with economic or financial crises. Whatever may be their reason or cause or point of origin, people get impacted. The lives of humans as well as state of economies goes back decades. Therefore, it’s high time that rather than focusing on just growth, our world and its people focus more on sustainable, clean, and cohesive growth.
Rajesh Mehta is leading International Consultant in the field of Market Entry, Innovation & Public Policy. Sunny Sabharwal is a Chartered Accountant and an Associate Professor of Practice (Accounting and Finance) at Jindal Global Business School
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