What Happens If the U.S. Economy Crashes?

What Happens If the U.S. Economy Crashes?

By   Kimberly Amadeo   Updated on August 28, 2024

Although the initial outbreak of COVID-19 in March 2020 sent a shockwave through the markets and economy, another recent near-collapse of the U.S. economy happened on September 16, 2008. This is the day the Reserve Primary Fund “broke the buck"—the value of the fund’s holdings dropped below $1 per share.1

Panicked investors withdrew billions from money market accounts where businesses keep cash to fund day-to-day operations.2 If withdrawals had gone on for even a week, and if the Fed and the U.S. government had not stepped in to shore up the financial sector, the entire economy would likely have ground to a halt. Trucks would have stopped rolling, grocery stores would have run out of food, and businesses would have been forced to shut down.

Will the U.S. Economy Collapse?

A U.S. economic collapse is unlikely. When necessary, the government can act quickly to avoid a total collapse.

For example, the Federal Reserve can use its contractionary monetary tools to tame hyperinflation, or it can work with the Treasury to provide liquidity, as during the 2008 financial crisis and COVID-19 pandemic. The Federal Deposit Insurance Corporation insures banks, so there is little chance of a banking collapse similar to that in the 1930s.

The president can release Strategic Oil Reserves to offset an oil embargo. Homeland Security can address a cyber threat. The U.S. military can respond to a terrorist attack, transportation stoppage, or rioting and civic unrest. In other words, the federal government has many tools and resources to prevent an economic collapse. 

What Would Happen If the U.S. Economy Were to Collapse?

If the U.S. economy were to collapse, you would likely lose access to credit. Banks would close. Demand would outstrip the supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity might no longer be available.

A U.S. economic collapse would create global panic. Demand for the dollar and U.S. Treasurys would plummet. Interest rates would skyrocket. Investors would rush to other currencies, such as the yuan, euro, or even gold. It would create not just inflation, but hyperinflation, as the dollar would lose value to other currencies.

If you want to understand what life would look like during an economic collapse, think back to the Great Depression. The stock market crashed on Black Thursday. By the following Tuesday, it was down 25%. Many investors lost their life savings that weekend. 

By 1932, one out of four Americans was unemployed.3 Wages for those who still had jobs fell precipitously—manufacturing wages dropped 32% from 1929 to 1932.4 U.S. gross domestic product was cut nearly in half. Thousands of farmers and other unemployed workers moved to California and elsewhere in search of work. Two-and-a-half million people left the Midwestern Dust Bowl states.5 The Dow Jones Industrial Average didn't rebound to its pre-crash level until 1954.6

Dow Jones Industrial Stock Price Index: 1925–1960

After the Dow Jones peaked in 1929, the index fell during the Great Depression and didn't fully recover until 1954, 25 years later.   LINK   https://www.thebalancemoney.com/u-s-economy-collapse-what-will-happen-how-to-prepare-3305690

Collapse Versus Crisis

An economic crisis is not the same as an economic collapse. As painful as it was, the 2008 financial crisis was not a collapse. Millions of people lost jobs and homes, but basic services were still provided.

Other past financial crises seemed like a collapse at the time, but are barely remembered now. 

1970s Stagflation

The OPEC oil embargo and President Richard Nixon’s abolishment of the gold standard triggered double-digit inflation. The government responded to this economic downturn by freezing wages and labor rates to curb inflation.7 The result was a high unemployment rate. Businesses, hampered by low prices, could not afford to keep workers at unprofitable wage rates.8

1981 Recession

In 1981, the Fed raised interest rates in a bid to end double-digit inflation.9 That created the worst recession since the Great Depression. President Ronald Reagan cut taxes and increased government spending to end it.10

To Continue Reading:  https://www.thebalancemoney.com/u-s-economy-collapse-what-will-happen-how-to-prepare-3305690