What Causes Economic Depressions?
Posted on August 1, 2011 - Filed Under Business | Leave a Comment
Many are a bit concerned about recessions and depressions because of recent economic issues. This concern has caused some to find out why these types of problems actually happen in modern civilized society. What is it that actually causes depressions?
The first and leading issue in most circumstances is that the currency becomes devalued. This means that year after year what you can buy with the currency becomes less and less. Most of the time this is caused by the government issuing more money into the money supply. If you examine most countries, the government will print money to make up for budget shortfalls. Eventually this devalues the money. This causes inflation which can lead to depressions.
Economic
Another cause is defaults on loans. Most of the time when money is loaned out more is given out than actually exists. This type of system exists so that more people can get credit than if every dollar was loaned out and backed by an actual dollar or item. If some start to default on the loans, this causes huge problems for the banks and causes a credit crunch which eventually leads to recessions and depressions.
Bubbles also cause depressions. A bubble is when an item is worth more than it actually is. There is temporary demand for the product which causes the price to rise considerably. At some point in time the bubble pops and this leaves a horrible situation for many. Think of things like the Dot Com Bubble. There was no real value behind these investments but people still invested in something that was essentially worthless.
Another leading cause of depressions is that the world's goods become more expensive. If the economy you live in depends heavily on a certain commodity, like oil for example, when the price of the item goes up higher and higher, people have less and less credit and capital to work with. Eventually this can cause recession and depressions.
What Causes Economic Depressions?
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