A global financial crisis creates a domino effect, which means one problem is often linked to another. For instance, reduced consumer spending can result in increased unemployment. Another example of one impact of a global financial crisis leading to another is limited availability to credit forcing people to rely on cash, which they have less of due to significant drops in the stock market.
Individuals, businesses, and governments rely heavily on credit. A global financial crisis can limit the availability of credit to all parties and thrust them into a more cash-driven setting. Although some credit may still be available, the qualifications for accessing it tend to become more stringent and, in many cases, the costs of borrowing also increase.
In some economies, governments may try to stimulate economic activity by making certain types of credit, such as bank loans, cheaper. Although there is no guarantee that this will make credit more available, it does mean that savings won’t grow as much because of the lower interest rates. This means that people who have money in savings accounts, certificates of deposit (CDs), and government bonds earn much less for those investments than they did during better economic times.
A global financial crisis reduces the flow of money in other ways, especially consumer spending. People generally buy less during an economic downturn, which further cuts into the revenues of businesses that already have less ability to access credit. Furthermore, investors can become skittish, not wanting to invest in companies that are struggling, which can have a negative impact on the stock market. When the stock market drops, people who have made those types of investments lose a portion of their wealth.
At some point, many companies begin to realize that their survival depends on cutting costs, and labor is commonly one of a business’ greatest expenses. This means that it is necessary to eliminate jobs, often on a wide scale. Other businesses simply find that they cannot survive the impact of a global financial crisis and must close. This results in the loss of more jobs, increasing the overall unemployment rates.
It is important to remember that charities are also businesses, and people often donate less during a financial crisis. In many cases, this jeopardizes or eliminates people’s access to resources that they are desperate for, including food, clean water, and housing.
Smaller economies may feel the affects of a global financial crisis much more severely. These nations are often export driven with limited domestic earning potential. When larger countries reduce their demand, these countries, which may already have high levels of poverty, see larger portions of their citizenry struggle just to survive. This can trigger a wide range of political problems, such as government protests and even civil war.