Economic crisis

This post is from my personal point of view, only receive academic feedback for contribute.

What is economic crisis?

As you known, economic crises in different ideologies will have different perspectives. For example, according to Keynes, economic crises and unemployment are because the state has not intervened enough in the system. On the other hand, according to Hayek, an economic crisis is only because the interest rate has risen by 1%.

From my perspective, an economic crisis is when the economy becomes “deficient” or “excessive” in something, causing the demand price and supply price to become worryingly different. For example, an economic crisis can arise from having too little money in the market, preventing the economy from circulating, but it can also come from having too much money in the market, leading to inflation, … When the gap between demand price and supply price reaches an extreme, the links of the wheel will derail and cause an economic crisis.

How can we predict economic crisis?

Usually, people predict the situation of an economy through analysis. They analyze the issues, the market, the suppliers, the things that could affect the future of the economy, and whether they are good or bad.

Analyze monthly interest rate reports

According to Hayek’s theory, once interest rates rise, the economy will fall into a crisis phase within the ‘Crisis – Recovery’ loop. That is because when bank interest rates are too high, those who want to borrow money – investors, shop owners, e.g., – will start to become concerned and withdraw. At that point, there will be no investors at all, and no money will circulate anymore. By then, the economy will come to a standstill and plummet uncontrollably.

In addition, every month, the U.S. Department of the Interior FED will release an end-of-month announcement on the economic situation, based on which the direction of economic growth can be predicted. We can follow the analyses of the FED to predict the future of the economic. If you see that the interest rate tends to rise compared to the previous period, this means that the economy will have changes in the near future.

Analyze the political situation

The political situation has an extremely large impact on the market. For example, the current situation in the United States, when Donald Trump decides on a campaign towards Venezuela and puts pressure on Iran,… at that time, the oil prices of these countries will increase significantly and may cause a slight impact on the economy. (when people’s spending is not enough to meet the price of oil, while demand keeps rising). These things are often seen because the government also has a certain influence on the economy: If that country encounters any unforeseen events, its government will have the right to decide to buy or sell that currency on the market in US dollars. That also means that the state can control the value of the country’s currency on the international market. And once the value of a unit of currency changes, the prices of goods in its market will fluctuate. In addition, there are countries that hold a large market share in exporting an important type of commodity on the market. If the governments of these countries suddenly refuse to trade that commodity, the international market will fluctuate strongly, leading to changes in value. When prices change drastically, it will cause shortages or inflation (due to reduced supply while demand increases).

To understand what effects these will have on the economy, we need to monitor the geopolitical situation. For example, if there is a trend of deteriorating relations between countries, especially major exporting powers in the market. This means that the value of that item will tend to be affected.

Analyze the inflow and outflow trends of cash

In the market, if too much cash flows out, the economy will not circulate. This is because if everyone keeps money for themselves and refuses to spend, goods will not be sold, factories will not make profits and will be forced to lay off their workers, leading to increased unemployment and an unstable economy. On the other hand, if cash is “pumped” in excessively, and everyone has money, supply will increase while demand remains the same, leading to inflation. Therefore, the direction of cash flow in and out can help us predict how the economy will be in the distant future.

Recognizing the trend of cash flow requires us to be sharp and observant. It is not only necessary to diligently follow the reports of financial websites. Additionally, we can also follow investors, those who have a significant influence on the economy, to observe how they take money in, put money out, or maintain the cash flow as it is. However, we should also be cautious, avoiding being easily trusting and falling for the “manipulations” of the big “sharks” in the market.

Benefits of economic crises

On the other hand, economic crises sometimes also have some positive aspects. First, during a crisis, the economy will return to zero. This is the most suitable time for a person to build a foundation from scratch. In addition, during an economic crisis, everything becomes extremely cheap and easy to buy, because at that time, everyone is trying to sell their assets to get cash. This also means that wealthy people, or those who have some reserves or highly liquid items, will be able to purchase assets at very low prices. When the crisis ends and everything returns to its original value, won’t these people make a profit from the assets they purchased during the crisis?