PBL Trigger 4 - How to predict and implement large scale change in time of crisis?

Learning Objective 1 - What are the causes & indicators of crisis and how it can be analyzed?

Some of the early warning signs of a brewing financial crisis can be viewed as:

• ·        Poor trade balance, depicted in the form of “current account”
• ·        Accelerated inflation, leading to the possibility of hyperinflation
• ·        Overvaluation of currency
• ·        Excessive available credit leading to widespread defaults
• ·        Consistently low interest rates leading to the formation of bubbles from lack of risk
• ·        Large fiscal deficits
• ·        Public recognition leading to lower consumer spending and falling stock prices

The list can go on and on. There is no perfect indicator of large scale financial crisis but many microcosms that orbit and influence one another.

The causes of crisis are very specific to each country. They can be caused by poor regulation and greed in the financial sector, political parties or regimes making drastic changes to legislation, spikes in commodities from climate change or many other causes. The one uniting factor seems to be inflation.

Morah, C. (2016). What causes a recession? [online] Investopedia. Available at: http://www.investopedia.com/ask/answers/08/cause-of-recession.asp [Accessed 26 Sep. 2016].

Economics of Crisis. (2016). *Indications of a Financial Crisis. [online] Available at: http://www.economicsofcrisis.com/indications.html [Accessed 26 Sep. 2016].

Nowandfutures.com. (2016). Financial Crisis - indicators and estimates. [online] Available at: http://www.nowandfutures.com/financial_crisis.html [Accessed 26 Sep. 2016].

Learning Objective 2 - How does crisis affect an economy?

A financial crisis can have many far reaching and cascading effects on larger economy. Some of these effects manifest as:

• ·        Food shortages
• ·        An increased dependence on imports
• ·        High unemployment
• ·        Plummeting stock prices
• ·        Increased interest rates
• ·        Narrowing of market offerings
• ·        Rising national deficits
• ·        Lowering of tax revenue; Leading to austerity measures
• ·        Slowdown of Gov’t dependent industry
• ·        Consumer uncertainty and spending drop offs

Of course the impact of crisis on an economy is larger than we can fathom, one of the largest impact is on the consumer. The confidence of the consumer can be shaken to the core and can prolong the crisis. If the public at large decides that the recession is still on, the recession will still be on.

 

Ioan Grillo (2016). How Venezuela, Once Latin America's Richest Nation, Collapsed. Time. [online] Available at: http://time.com/venezuela-brink/ [Accessed 26 Sep. 2016].

Nber.org. (2016). The Effect of the Economic Crisis on American Households. [online] Available at: http://www.nber.org/bah/2010no3/w16407.html [Accessed 26 Sep. 2016].

 

Toro, M. (2016). Venezuela Is Falling Apart. [online] The Atlantic. Available at: http://www.theatlantic.com/international/archive/2016/05/venezuela-is-falling-apart/481755/ [Accessed 26 Sep. 2016].

 

Learning Objective 3 - What actions can be taken to respond to crisis?

After creating a PESTEL analysis and examining contributing factors the government should form their reaction. This reaction to crisis will either come from the government as stimulus, austerity or reform; or to it in the form of a drastic political response. A government may try to mitigate to a slowdown with stimulus programs targeting a plethora of markets and industries (George Bush sent me $200 in 2008, it didn’t work). Austerity, I’m sure we are all familiar with, spending cuts and/or tax increases aimed at cutting the bottom line. Reform can take the shape of banking and reporting regulations or new legislation. Voter reaction is usually swift and harsh, switching to the opposition of whatever party is in power, often swinging in a more conservative direction.

Davies, H. (2015). The political effects of financial crises. [online] the Guardian. Available at: https://www.theguardian.com/business/2015/dec/24/the-political-effects-of-financial-crises [Accessed 26 Sep. 2016].

Nber.org. (2016). [online] Available at: http://www.nber.org/digest/mar09/w14753.html [Accessed 26 Sep. 2016].

Example of a PESTEL analysis