A Great Depression is a period of significant economic downturn, characterized by high unemployment rates, low productivity, and declining economic activity.
The term was first used during the 1930s when the global economy suffered a massive collapse, leading to widespread poverty, homelessness, and hunger. Since then, economists have been warning about the possibility of another great depression, and the year 2023 could be the time it happens.
This past week, Americans witnessed the failure of Silicon Valley Bank, which had more than $200 billion in assets and contributed to several tech start-ups and venture capital firms.
Americans also witnessed the failure of Signature Bank.
According to a board member who spoke to CNBC, customers of Signature Bank withdrew more than $10 billion in deposits after hearing of Silicon Valley Bank's abrupt demise.
The third-largest bank failure in American history occurred as a result of that run on deposits.
With all the recent news, people are concerned about the economy and are wondering if this is going to be another recession similar to 2008, or even worse, a Great Depression.
State of America
Banks are essential institutions in any modern economy. They play a critical role in the mobilization and allocation of resources, facilitate payment systems, and provide financial services to individuals and businesses.
The failure of banks can lead to widespread economic chaos, just like the 2008 global financial crisis caused by the housing market. This crisis was sparked by the failure of several banks, mainly in the United States, which led to a massive economic downturn felt worldwide.
Since then, governments and regulators have introduced various measures aimed at strengthening the banking sector and preventing such a crisis from happening again.
However, there are still concerns that the banking sector remains vulnerable to certain risks. For example, many banks still engage in risky lending practices, the size of the debt market keeps growing, and some banks don't have enough capital reserves to cover possible losses.
Possibility of a Great Depression in 2023
Several factors could contribute to a great depression in 2023, with the failure of banks being the most significant. Here are some reasons why:
Inadequate Banking Regulations
Although many countries have improved banking regulations since the 2008 financial crisis, there are still gaps that need to be filled. For instance, some countries lack proper regulations governing the derivatives market. Since the derivatives market is largely unregulated, it is susceptible to manipulation and fabrication, which eventually could lead to a financial crisis.
Along with this, some banks continue to engage in risky practices such as high-leverage lending, which increases the probability of defaults. If a bank fails because of its risky lending practices, it could trigger a wave of bankruptcies that would spread throughout the economy.
As more banking services go digital, the risk of cybersecurity threats increases. Hackers can steal customer data, disrupt financial systems, and extort money from banks. A cyber attack on a major bank could result in the loss of millions of dollars, leading to a liquidity crisis. If this happens, people may lose faith in the banking system, leading to a run on the banks, and ultimately, a great depression.
Increasing Debt Levels
The level of global debt has been rising steadily over the past few years. According to the Institute of International Finance (IIF), global debt reached an all-time high of $277 trillion in 2020, with government debt accounting for 103% of global GDP. If the trend continues, an economic crisis is almost inevitable.
An increase in debt levels means that borrowers may not be able to pay back their loans, leading to defaults. This would impact the banking sector, leading to a credit crunch, and ultimately, a great depression.
Money that has been borrowed is simply not being paid back, which is really really bad.
The COVID-19 pandemic has resulted in a significant economic slowdown worldwide. Governments introduced measures such as lockdowns and travel restrictions to curb the spread of the virus, leading to reduced economic activity over the past few years. Many businesses closed down, which led to increased unemployment rates and people got comfortable not working.
Even though a lot of the world has opened up in 2023 there is a risk of an extended economic slowdown due to the previous years and some of the current restrictions. This could lead to a decline in business investment, reduced consumer demand, and a decrease in tax revenue for governments. These are all factors that can lead to a great depression if not fixed.
Great Depression 2023?
While it is impossible to predict the future accurately, the risk of a great depression in 2023 cannot be ignored.
The failure of banks could lead to a significant economic downturn, triggering a chain reaction that could spread throughout the world.
Individuals and businesses should take precautions to protect themselves financially, such as diversifying their investments and reducing their debt levels.