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What Is the Impact of a Global Financial Crisis?

A global financial crisis can limit the availability of credit to all parties and thrust them into a more cash-driven setting.
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  • Written By: Felicia Dye
  • Edited By: Melissa Wiley
  • Last Modified Date: 20 July 2014
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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.

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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.

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Discuss this Article

Viranty
Post 3

@Chmander - This is just my opinion, but I think your boss was very aggressive with you because of the state the economy is in. Employers are trying to get the best business possible, and they want you to work beyond your limits. They know how difficult it is to find a job out there, and they expect you to work just as hard.

Chmander
Post 2

@RoyalSpyder - Though I wouldn't say that we're in a financial crises, I do think that the economy is in a worse state than it ever has been. Also, I can sympathize with you about employment. It's not easy, that's for sure. I graduated from college in May of 2012. In order for me to find a job, it took almost two years. And even when I was employed, my boss was very aggressive, and even threatened to fire me on several instances.

RoyalSpyder
Post 1

In this day and age, it's all about the money, and a financial crisis can definitely put it to the test. Does anyone feel that this is one of the reasons why it's so hard to get employment nowadays? For the past few summers, I have been desperately looking for some form of a job, whether it's an actual employee, or an independent contractor. However, I've had no luck.

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