Economic Disasters

Causes of Economic Disasters

Economic disasters are most often precipitated by a variety of long and short-term economic, political, and natural causes. The causes of economic disasters can include economic forces, such as stock market collapses; political forces, such as wars or insurgencies; natural forces, such as disasters; or social forces, such as widespread famines or social revolutions. Economic disasters can occur at the personal, community, or society-wide level. Personal economic disasters can result from unemployment; disabling accidents; or long-term, catastrophic illnesses that strain an individual or family's resources. Community-wide economic disasters can occur due to the local economic effects of events such as natural or human-made disasters. The most serious economic disasters are those that occur at the society-wide level, affecting an entire nation or region, with potential global consequences.

Cyclical economic crises are endemic parts of the business cycle, but can escalate to economic disasters when normal fluctuations between the high and low portions of the cycle are extended. The crisis or disaster lasts from the height of the cycle, when financial panic sets in, until the bottom, when financial optimism begins to return. Both normal cyclical and more severe business cycle fluctuations share common causes, which include rising costs of production, such as real wages and material prices, interest rates, and rent; or decreased demand, which results in overproduction and excess inventory of supply. These factors lead to reduced profit rates, supplies, and investment and consumer spending. Confidence in the economy falls, and financial panic often results.

Financial crises generally occur in the early stages of an economic recession and represent a prolonged economic cycle of instability. The symptoms of a financial crisis are the large-scale devaluation of capital and banking assets and abrupt change in asset liquidity and self-fulfilling panic as investors, businesses, and consumers withdraw and sell off these assets. These symptoms result in over-indebtedness and the inability of many to pay back loans made at the height of the business cycle, leading to widespread bankruptcies of individuals, businesses, and financial institutions. Financial crises often precede or accompany other types of economic crises and disasters. They end when investment and consumption demands once again rise as the business cycle renews.

Structural crises are the deepest and longest-lasting business cycle crises, which most often result in economic disasters. Structural crises are usually preceded by long-term uninterrupted upswings in the normal business cycle, often lasting several decades, which result from significant developments in institutions or technologies. These long-term upswings are then followed by long-term downswings in the business cycle. Debt deflation, hyperinflation, and drastically reduced demand levels are the most common triggers of structural crises and economic disasters in capitalist economic systems.

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