Comparison between the current crisis and the 2008 Financial crisis
In the past few decades, the global economy had faced a severe economic and financial crisis, which made the global economies go through a period of a deep recession. The major economic crises which the global economies faced in the past are a great depression, the dot-com crisis, along with the 2008 financial crisis. The dot-com bubble was a speculative bubble of the stock prices of the American Internet firms during the period from 1995 to 2000 when the new venture capitalist that a new era in technology had just arrived, and it was their responsibility to venture into the technology. Within two years, the internet sector of the USA encountered a growth of over 1000% of its public equity, and it equally about six percent of the market capitalization of the USA. The crisis had its peak on March 10, 200, with NASDAQ score of 5,048.62. Moreover, the dot-com crisis was characterized by several establishments of companies in the internet sector. Likewise, the 2008 financial crisis was the worst crisis ever experienced since the Great Depression of 1929. The crisis contributed to a great recession which was associated with a decrease in house prices. The world is, however, currently experiencing a new crisis, which is most likely to affect the global economies more than the 2008 financial crisis and dot-com crisis. The coronavirus which is the current crisis is a health and economic crisis that is imposing intense strain on the financial system of the world. It is anticipated that the crisis will impose effect on the economies more than the crisis which have been experienced in the world over the past few decades. This research paper offers a discussion on the comparison between the current crisis and financial crisis, along with the dot-com crisis.
Comparison between the current crisis and the 2008 Financial crisis
The 2008 financial crisis and current crisis share some common features, which include unemployment, plunge in the price of oil, fall in the GDP, and decline in the global stock markets. The 2008 financial crisis witnessed a high unemployment rate. In the worst of times, more than 750,000 job losses were recorded every month during the 2008-2009 winter season. In total, 8.7 million job losses were recorded during the recession period. For instance, during the crisis, the British unemployment rate went up as the financial crisis filtered through to the job market. The results by the ILO showed that unemployment in Britain had risen by 164,000 in three months to August to stand at 1.79 million. Also, in Ireland and Spain, unemployment rose significantly during the recession period due to a sharp fall in house building resulting in significant job losses in the sector. Job losses were also witnessed in those sectors which were not directly implicated in the housing bubble and associated in financial markets like the motor vehicle industry, which had seen sharp drops in sales, leading to a reduction in employees in the sectors.
Similarly, the coronavirus continues to hit the world economy, with millions of people around the world losing their jobs. The crisis has brought the world economy to a standstill, with significant sectors of the economy being closed down. Most employers across the world are now laying off their employees, and this has led to the loss of jobs in different sectors such as manufacturing, restaurant, and construction sectors. For example, the latest reports by the USA Labor Department show that over 701,000 jobs have been lost in the last month, and it is considered the most significant number since the financial crisis of 2008. The report also revealed that unemployment rose to 4.4% from 3.5%, which was the most substantial increase in a single month since 1975. Similar trends in unemployment have been witnessed in all countries throughout the world. Some of the job losses are due to the governments’ directions of limiting social contacts to prevent the spread of the disease.
The 2008 financial crisis led to plunges in the price of oil. During an economic crunch, economic growth slows down, and demand goes down, impacting the oil prices negatively. During the financial crisis of 2008, the prices of crude oil declined from the maximum of $147 per barrel to $32 per barrel while the cost of liquid gas fell from $14 to $4. The drop in oil and gas prices led to a decline in revenues for oil and gas companies. Just like the 2008 crisis, the current crisis has led to a drop in oil prices. The latest reports reveal that oil prices have dropped to their lowest in 18years as the world economy appears set to enter a recession-induced by a coronavirus. Demand for oil has also dropped drastically as billions of people stay at home, and companies reduce production. Besides, the current crisis has led to Saudi Arabia and Russia entering a price war, which has led to oil supplies remaining buoyant. For example, the Chinese oil demand has gone down by about 20% as the coronavirus continues to exert pressure on the global economy.
The 2008 financial crisis led to a decline in global stock markets, and it was the point of a drop in history till then. The decline in the worldwide stock market was as a result of the rejection of the bank bailout bill by the Congress despite the fact that forces that led to its decline had been building up over a long period. The stock market dropped by more than 50% to 6,5944.44 by 2009 from 14,164.53 in 2007. The coronavirus crisis has equally seen a decline in global stock markets following a crash in oil prices. Stock markets around the globe have incurred trillions of US dollars of losses in one week, which was considered the worst week since the 2008 crisis. With the rapid spread of the virus to other countries, investors’ worries about their stocks are largely increasing.
The 2008 crisis led to a decline in GDP in most countries. For example, despite US GDP dropping by less compared to Germany, its consumption fell from plus 3% to minus 1-2%, yet consumption accounts for almost 70% of GDP, and this led to a decline in US GDP. Likewise, the current crisis harms the GDP, and OECD approximates that the world’s economies will grow less in 2020 than in 2019. The chance of GDP rising relies on the ability of the government to contain the virus. The IMF sees GDP per capita dropping across many countries due to the current crisis, and it recently announced that the Great Lockdown recession would slow down GDP by 3% in 2020.
Differences between the 2008 financial crisis and the current crisis
The primary distinctions amidst the 2008 crisis and the current crisis encompass debt deflation, international coordination among central banks, and economic recession. The 2008 financial crisis was characterized by debt deflation, which occurred due to defaults by people to pay their mortgages and loans following the sharp decline in prices of houses. The current crisis is, however, likely to experience a higher debt deflation, which might double the debt deflation witnessed during the 2008 crisis. The debt deflation would be higher due to the pandemic that has brought the world economy to a standstill lowering the ability of the debtors to repay their loans. The lockdown measure is barring from engaging in economic activities that they might use to offset their loans, and this would, in turn, escalate to high debt deflation.
Likewise, during the 2008 crisis, there was international coordination among central banks whereby the banks coordinated cut in interest rates designed to avert the danger of global recession. The banks reduced their key interest rates by half a point in the first unplanned rate moves since the aftermath of 9/11. On the contrary, the current crisis has not witnessed international coordination among the central banks to protect economies from the coronavirus pandemic, because the crisis is not just an economic crisis but is both a health and economic pandemic. Besides, the 2008 crisis delivered a recession that followed different shapes in terms of shock progression and recovery. Shock’s geometry is determined by the capacity of the shock to destroy the supply side of the economy, precisely capital formation. However, it is not yet clear on where the current crisis shock fit so far since its intensity shall be determined by its underlying features, policy responses, and customer and corporate behavior in the encounter of adversity. Also, its shock shape is determined by its ability to destroy economies’ supply side.
Comparison between the current crisis and Dotcom crisis
The current crisis and dot-com crisis share standard features which include fall in the stock markets, slow GDP along with fall in the median household income for the working family. During the dot-com crisis, the stock market fell, and this contributes to a loss of about $8 trillion of wealth. The decline was attributed to the overvaluation of the stocks and the subsequent dot-com bubble burst. The stock options that the officers took worked against the firms leading to the stock market crash. In the same way, the coronavirus crisis has contributed to a decline in global stock markets following a crash in oil prices. Stock markets around the universe have experienced trillions of US dollars of losses in one week, which was considered the worst week since the 2008 crisis.
Similarly, both the dot-com and current crises involve a fall in median household incomes of working families. By 1995, the median household income had dropped to $54,600, less than the value of revenue in 1990, but quite higher than the previous year. In the same way, coronavirus pandemic has contributed to the decline of median household income since the salaries of the employed persons have been reduced and this has consequently lowered their median household income. Furthermore, both the crises are similar because they are linked with low energy prices due to decrease in demand. Also, the dot-com crisis and coronavirus crises are associated with low GDP. The potential GDP growth significantly slowed down during the dot-com crisis, and the slow GDP was induced by productivity. The productivity during the started very strong and ended weak during the dot-com crisis, and this considerably contributed to the decline in the GDP growth. Likewise, the current turmoil hurts the GDP, and OECD forecasts that the world’s economies will grow less in 2020 than in 2019. The chance of GDP rising relies on the capacity of the government to contain the virus.
Differences between the dot-com crisis and the current crisis
During the dot-com crisis, there was no problem with debt deflection, while the current crisis is associated with debt deflection. The wealthy held majority of the stocks during the dot-com crisis and this made the companies concentrate losses on the rich, but the rich did not have debts, and they had no reason for cutting back their spending. In contrasts, the current crisis is more likely to experience a higher debt deflation which would be caused by the lack of capacity of people to repay their loans. The crisis has contributed to the imposition of lockdown policy on people to assist contain the spread of the virus. The policy however, hinders the ability of people to engage in economic activities that might help in offsetting loans and this would considerably contribute to debt deflation which might be worse than any other deflations in the history of economic crisis.
Moreover, the dot-com crisis had a mild recession with almost no effect on retail spending. The crisis did not affect consumer and retail spending, and it contributed to the increase in retail spending by about five percent. The current crisis, on the other hand, is likely to contribute to a massive recession with an impulsive effect on consumer and retail spending. Consumers are most likely to reduce their spending to sustain themselves during the crisis.
Recommendations
Based on the comparison of the current crisis and economic and dot-com crisis, it would be recommended that necessary measures should be established to prevent the occurrence of debt deflection during the current crisis to assist in availing money necessary for running the economy.
The consumers should regulate their consumption spending to enable them to cushion themselves from the economic challenge induced by the current crisis.
Banks should engage in international coordination to assist in providing financial relief to the people and investors during the current crisis as this would allow investing, which would, in turn, help in promoting the GDP of nations while also preventing the instance of the occurrence of debt deflation.
Conclusion
The 2008 financial crisis, the dot-com crisis, along with the current turmoil, share many features in common since they all affect the GPD, interest rate, and consumer spending of a nation. Both the financial crisis and the dot-com crisis had effects on the economies during their time. In the same way, the current crisis is likely to affect nations in a manner that the world has never been affected before. The crisis would lead to massive unemployment, reduced GDP, low oil prices, together with escalating levels of debt deflation, which would adversely affect the economies of nations. Similarly, the crisis would force consumers and retailers to reduce their spending, and this would also prevent the release of the money to the economy to assist the government runs the economy.