Is it possible to predict a financial crisis?

 

It is impossible that at least one financial crisis will not occur in any country in the world. Everyone, including, has already experienced or will witness a period of crisis at some point in life. This is because the global environment in which we are inserted today favors the appearance of economic crises.

Globalization and the dependence of some countries on products supplied by other nations make it easier for these problems to spread, affecting several economies around the world. But there are many reasons why a financial crisis happens.

However, have you ever stopped to think about whether it is possible to anticipate a financial crisis and anticipate it? This is what we will talk about next.

Read the article and find out the answer!

What is a financial crisis?

Brazil has recently gone through an economic recession and the economy is still recovering from this turbulent period. In addition to this recent one, we can mention the 2008 crisis, which started because of real estate credits in the United States and spread to the rest of the world, as a very turbulent recent period in our economy.

A financial crisis can happen for several reasons, affecting only one region, an entire country or several nations. When a country is in crisis, it means that several sectors of the economy have suffered some shock or that they have had some devaluation in their financial assets.

Society, in turn, ends up suffering the effects of these crises. After all, in turbulent periods it is common to have a reduction in economic power, disharmony in the “supply x demand” balance and mass layoffs.

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How does an economic crisis occur?

Economic crises happen frequently around the world. And there are many reasons why they occur.

However, it is possible to affirm that they arise long before the crisis, in fact, appears. Any situation of crisis and economic imbalance was certainly preceded by events and cycles that resulted in a crisis.

What is the current scenario?

Some experts argue that we may be on the verge of a new global economic crisis. Still, the Organization for Economic Cooperation and Development (OECD) argues that the global economy will grow less in 2020.

The trade dispute between China and the United States also worries experts, despite recent efforts to end the war between the two powers.

In addition, Deutsche Bank issued, in 2019, a report warning of some possibilities that could favor the scenario of a new economic crisis.

But, after all, is there a way to predict a financial crisis?

Despite speculation, the fact is that it is difficult to predict a financial crisis with complete assertiveness because it grows little by little, and it may take years to really break out.

Crises have always shaken the world, but it was not always possible to identify them before they happened. It is common, even, that this analysis is done only after the problem breaks out.

Despite this, it is important to understand that there is no escape from the effects of a financial crisis, as they inevitably happen.

According to the Austrian Economic Cycle Theory, an economic crisis can be predicted by analyzing 3 factors:

1. Economic fluctuations

It occurs when the production of a given product suddenly falls for months or when the society allocates resources used in an area for the production of another type of product.

2. Beginning of a cycle

Cycles begin when the country's economic activity begins to show signs of shrinkage. Some signs are: demand for products decreases, credit starts to become scarce, the number of layoffs increases and job opportunities decrease, reduction of purchasing power, among others.

In other words, economic growth begins to slow down slowly. Still, the devaluation or overvaluation of the value of some products becomes visible.

3. Economic policies

The actions of a government to delay the crisis, changing these signs, also contribute to the problem to break out in a serious way. Thus, information about the market situation is not visible and everyone in society can make financial mistakes.

The government interferes in the economy, expanding monetary policy. In other words, it lowers interest rates, makes credit cheaper and increases the supply of government bonds. In addition, the Central Bank   reduces banks' compulsory deposits, allowing them to earn more money through loans and fractional reserves.

In other words, the government increases the money supply in the economy. Thus, people resort to loans to consume goods and banks lend more and more because of the greater liquidity and falling reserve requirements.

These actions work at first, as happened in Brazil between 2010 and 2011. At that time, society became euphoric, the government's popularity increased, people had a false sense of social class change and consumption increased. However, in the long run, this reality has become difficult to maintain.

How to prepare for a financial crisis?

As are inevitable, financial crises affect the entire population. However, if you notice these signs mentioned above, you can take steps not to harm yourself. The first is to have financial organization, planning and an awareness of not making unnecessary debts.

Having a minimalist lifestyle and learning to live with just what you need can help you survive the crisis without having too many problems. But be aware that when an economy is affected, it is difficult not to feel any symptoms.

Predicting a financial crisis is not easy. But, before hatching, several signs can be observed.

And while these crises are inevitable, you can start preparing for them from now on, by adopting healthier financial habits and organizing yourself to feel the effects of crises as little as possible when they do happen again.