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What is an Economic Meltdown?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 07 November 2016
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An economic meltdown is a non-specifically defined term that refers to a growing financial crisis with wide reaching effects. Unlike words such as recession or depression, an economic meltdown has no specific conditions that must be met in order for the term to be accurately used. The term references the breakdown of a nuclear reactor, which can cause devastating and far reaching problems. The global financial crisis that began in the United States in 2007 is often referred to as an economic meltdown.

There are no specific factors that constitute an economic meltdown, but there are many probable causes. A serious national crisis, such as a war, can stop normal industries and destroy the economic capability to produce goods and services. Likewise, a tremendous natural disaster might destroy most of a small country's infrastructure, sending it into a very real panic for both basic needs and economic considerations.

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The 2007 economic meltdown in the United States was far more complex in nature than a basic infrastructure crisis. An interdependent problem, the crisis snowballed thanks to strongly linked markets. Crashes in the financial sector, housing market, and a growing lack of jobs all combined to create a massive economic crash. Unfortunately, since most of the affected markets relied on one another for survival, they likewise catapulted one another into deeper distress as they failed. The crisis quickly began to have global repercussions due to America's huge involvement in international affairs, leading to related crises worldwide.

There are many explanations for the economic meltdown of the early 21st century, that can vary based on personal beliefs and prevailing economic theory. Some economists believe that the economic meltdown was created and hurried along by the removal of regulation from financial and banking institutions. For instance, deregulation offered banks wide levels of freedom to create loan structure that would bring the most profit, unfortunately allowing the creation of inherently unstable loans such as the sub-prime mortgage loans. Other popular theories link the beginning of the economic meltdown to economic policies such as tax increases that played a factor in the loss of jobs, as companies found it more profitable to move manufacturing and industrial jobs offshore. Often, these theories break down along political party lines, which can lead to considerable confusion between factual information and campaign pitches.

Preventing an economic meltdown is equally uncertain, as the factors that cause the situation can vary from instance to instance. In the wake of the 2007 crash, some economists have teamed with computer engineers and scientists to try and build software-based simulators that could act as a warning system in the event of another economic meltdown. Whether this approach will provide any level of reliable accuracy is yet to be seen, but the obvious need for clearer indications and better explanations is evident.

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