What is a financial crisis and what are the signs before it?

Financial crisis is a terrible word. Once the financial crisis breaks out, it will directly affect all aspects of life! So what exactly is a financial crisis, and what are the signs before the financial crisis? This article will give you a brief explanation.

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What is a financial crisis

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Financial crisis is also known as financial turmoil. Refers to a country or several countries and regions of all or most of the financial indicators (such as: short-term interest rates, currency assets, securities, real estate, land prices, the number of corporate bankruptcies and the number of financial institution failures) sharp, short-term and super-cyclical deterioration. It is characterized by people's more pessimistic expectations of the future economy, a large depreciation of the currency value in the entire region, a large loss of economic aggregate and economic scale, and a blow to economic growth. It is often accompanied by a large number of business failures, increased unemployment, a general economic depression in the society, state bankruptcy, and sometimes even social unrest or unrest at the political level of the country.

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Financial crises can be divided into currency crises, i.e. sharp devaluation of currencies; debt crises, i.e. systematic debt defaults by companies or countries; bank crises, i.e., lack of liquidity in banks due to runs, etc. Financial crises in recent years have increasingly taken on a hybrid form.

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What are the signs before the financial crisis?

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The first global financial crisis was the financial crisis of 1987-1988. Its iconic event is "Black Monday". The second financial crisis is the 1997-1998 Asian financial crisis that we are very familiar with, and its landmark event was the 1998 Hong Kong Financial Defense War. The financial crisis this time includes four stages: the Asian financial crisis, the Russian financial crisis, the financial defense war in Hong Kong, and the Wall Street crisis.

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Judging from several major crises, these financial crises have many similarities.

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First, the economy is overheating. As long as there is a financial crisis, there will inevitably be a round of economic overheating, and the more before the crisis, the more serious the economic hot wind will be. And as soon as the risk of overheating is released, a crisis occurs.

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Real estate is overheating. Any country or region with overheated real estate will inevitably have greater risks. Especially in major economic countries, once the real estate overheats and there is no ability to defuse risks, it is inevitable that a crisis will occur. This round of financial crisis was triggered by the subprime mortgage crisis in the United States.

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The hollowing out of the economy. In order to maintain a balance in the world economy, it must be supported by the real economy. Judging from the situation in previous years, the phenomenon of the hollowing out of the real economy has appeared in many countries. All countries with poor performance in the financial crisis and weak coping capabilities are countries with serious economic hollowing out.

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Financial overreach. Finance is a good thing and the blood of the modern economy. However, overuse can also have the opposite effect. Clearly, in many countries, financial excesses have already occurred. The result of financial excess is the rapid accumulation of financial risks, which eventually leads to a financial crisis.

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High welfare. Appropriate welfare is very important to the stability of society. However, excessive welfare, especially for public servants, will also greatly reduce the society's ability to resist risks. In particular, the occurrence of sovereign debt crises can easily lead to financial crises.

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Before the crisis, there had been unprecedented economic prosperity, and the governments in the origin of the crisis had adopted extremely laissez-faire economic policies.

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Another common feature before the two crises was that fewer people possessed more social wealth. What manifested during the Great Depression was the contradiction between private possession and large-scale socialized production, in the form of overcapacity and insufficient effective demand in the real economy.

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What are the manifestations of the financial crisis?

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1: A sharp drop in the price of financial assets. Mainly refers to the sharp depreciation of the domestic currency in the short term, such as my country's serious inflation in 1994, the data shows that in 1994, the official CPI was as high as 24.1%. It is more intuitive like Zimbabwe abroad.

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Two: Financial institutions experience a cashing crisis or financial institutions go bankrupt. Financial institutions here include shadow banking in addition to the banking system we are familiar with. For example, although this P2P company has no credit endorsement, it belongs to a type of shadow banking. The collective thunderstorm of P2P belongs to the category of financial crisis.

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Three: A financial market crashes or plummets. This financial market mainly refers to the stock market, bond market, commodities, futures market, foreign exchange market and so on. Our stock market plummeted in 2008 and 2015, and the exchange rate was directly adjusted from 5.7 to 8.7 in 1994. These are all financial crises.

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That is to say, when the above three situations occur, it can be judged that the financial crisis has broken out.

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Now everyone should know what a financial crisis is. It can be seen that the impact of the financial crisis is huge, not only affecting individuals, but even the entire country and even the world will be affected. Of course, ordinary financial crises are not terrible, and they happen often in our lives, such as the previous stock market crash, bond market crash, and so on. As long as we handle it properly and stifle the financial crisis in its cradle, all shocks will be under control.