If it isn’t already, surviving economic collapse should be at the forefront of your mind. And with good reason; the pitiable state of the economy has sparked fear that the world is to face an even larger economic collapse in the coming year.
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The recent global stock market turmoil has left investors panicked and worried. This is nothing compared to what we (and our ancestors) have seen in the past. Here we take a look at the most devastating financial crises that wreaked havoc through modern history.
The financial markets reflect the irrationality, optimism, and panic of market participants. Sometimes extreme optimism causes asset prices to disconnect from the reality, only to fall dramatically when the bubble bursts. Examples include the Tulip Mania (1637) and the South Sea Bubble (1720).
These are the top 10 most devastating financial crises:
10- Argentine economic crisis, 1999
Much like other Latin American nations, the Argentine economy was hit hard by the Latin American debt crisis in the 1980s. Its forex reserves were running low. The rampant corruption, sky high inflation, military dictatorship, and the Falklands debacle drove the Argentine economy to the verge of collapse.
The steep devaluation of the Brazilian currency in 1999 hurt Argentine exports. Soon the Argentine economy was in full-blown recession that lasted three years. Following the dramatic run on banks, the government froze everyone’s bank accounts. Violent protests erupted all over the country. In the absence of cash, people bartered for goods. Two consecutive governments failed to bring the economy out of recession. It took Argentina three years to recover from the crisis.
9- Russian financial crisis, 1998
Five years prior to the financial crisis, Russia issued GKOs – inflation-free treasury bills – to fund its budget deficit. The GKOs attracted a huge number of foreign investors because of high interest rates. The government was using proceeds from GKO sales to pay off interest on existing debts.
But the Russian economy continued to struggle due to corruption, political instability, and lack of economic reforms. The falling oil prices also hit the Russian economy hard. The government owned more than $12 billion in unpaid wages to employees. In 1997, Moscow tried to raise more money by selling GKOs with interest rates of up to 200%!
Eventually, investors lost confidence in the Russian economy, selling the rubles and other Russian securities en masse. The markets tanked more than 60%. Many banks vanished within weeks. The Russian central bank used its forex reserves to stabilize the ruble, but couldn’t. Even an IMF loan proved ineffective. Russia emerged from the crisis when oil prices started rising in 1999.
8- The 1987 crisis
On October 19, 1987, the US stocks tumbled 22.6% in what is now known as Black Monday. No one is entirely sure what caused the Black Monday, but it wiped out hundreds of billions of dollars from the stock markets. By the end of October 1987, the Australian stocks fell 42%, Hong Kong stocks went down 46%, and the UK stocks fell 26.4%.
Some believe the Black Monday crash was caused by the growing influence of computers on the Wall Street. Others blamed monetary policy and inflation. Following the 1987 crisis, many of American’s leading savings & loan entities such as American Savings and Loan, Gibraltar Savings and Loan, and MCorp collapsed.
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7- German hyperinflation, 1918-24
The German hyperinflation was not as bad as the Zimbabwe hyperinflation, but it was one of the most devastating financial crises in history. After the First World War, the ‘victors’ blamed Germany for starting the war. They demanded retributions for the cost of war. Whatever land, precious metals, and other assets Germany had wasn’t enough to cover the cost of war.
So, Germany started printing Mark like never before. The exchange rate skyrocketed from 4 German Marks per dollar in 1914 to 1 trillion Marks per dollar in 1923. Inflation was running high. Many countries accused Germany of deliberating sabotaging its economy to avoid the financial retributions of war.
The country tried to control the hyperinflation in 1923 by introducing a new currency called the Rentenmark. It destroyed the middle-class and paved the way for National Socialism in Germany.
6- Asian financial crisis, 1997
During the early 1990s, the Asian Tigers – Thailand, South Korea, Hong Kong, Malaysia, Singapore, and Indonesia – had become the hottest investment destinations. Developed countries were pouring billions of dollars into the region. Asset prices shot through the roof. Some of these countries were clocking annual GDP growth rates of above 12%.
Favorable exchange rates made their exports less competitive. Amid extreme optimism, investors failed to notice that the Asian Tigers were also running huge fiscal deficits. The Asian Tigers began facing fierce competition from China in the export market in 1996. The massive debts and falling exports hurt these economies. Panicked investors from developed countries withdrew credit. The asset prices started falling, leading to massive debt defaults.
The crisis began in Thailand and quickly spread to other countries. Regional currencies fell dramatically against the dollar, making dollar-denominated borrowings even more expensive. The International Monetary Fund launched a massive bailout program to help Asian countries bring their economies back on track.
