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Why crisis is important for any economy

by Staff writer
27 Jul 2020 at 20:44hrs | Views
This year will be etched in people's memory. Devastating effects of COVID-19 are felt around the globe. Just a handful of countries have not reported any cases so far. South Africa and Nigeria have also been affected. Their economies are severely damaged. It remains to be seen how soon they will recover.

In Nigeria, the situation is exacerbated by another collapse of oil prices. The nation is a large oil exporter, and the commodity accounts for 90% of its foreign exchange earnings. As international travel was put to a halt, the effects of oversupply will be lasting. The present crisis is compared to the Great Depression, but are there any positives?

The Damage Done

When people think of economic crises, their immediate associations are negative. The decline elicits fear. Consumers lose their jobs and businesses downsize. As the economy slows down, it is hard to discern any upsides. Here are the most obvious effects:

●    skyrocketing unemployment;
●    depletion of capital;
●    falling standards of living;
●    negative sentiment.

The Big Picture
Every national economy experiences ups and downs. This is a natural cycle: after a collapse, comes recovery. In some countries, it takes years. Still, it is wrong to deny the importance of the following effects.

Redistribution of Resources

Deep crises eliminate businesses built on distorted pricing. Resources are thus freed and redistributed among market participants. New owners may put them to better use. This reallocation benefits the entire economic system.

Consumers discover alternative ways of earning, as conventional employment is shattered. As companies shrink or capsize, remote opportunities like online trading are a lifesaver. In South Africa and Nigeria, residents may work without leaving their homes. With lockdown measures restricting movement, this becomes their sole source of income.

Thanks to brokerage from FXTM, locals trade financial instruments on global markets via computers and mobile devices. Internet-based trading options are in high demand. As a result, the population becomes more financially literate on the whole. Residents start with the least complicated options. Nigeria is seeing a rise in stock trading and CFDs are gaining traction.

It is important to understand that these effects are favorable. Problems caused by crises are temporary. Governments that use unwise stimulus packages slow down the natural healing of the wounds. The renovation should not be suppressed and failed companies should not be supported.

Changing Psychology of Investors

When the going gets rough, investors are forced to reconsider their priorities. Borrowed capital loses its appeal. Projects with a high level of risk begin to look questionable.

As a result, funds are used for more prudent and safer purposes. Investors exhibit more rational behavior overall. Entrepreneurs may become employees, as startups go under. Such are the effects of any downturn.

A common obstacle is government policy. Authorities may stifle this redistribution of assets. When investors are bailed out, they have little motivation to change their thinking. More affordable borrowing does not stimulate the positive process, either.

New Buying Opportunities

Economic crises lead to liquidations on a massive scale. These events have an upside. Property and stock become more affordable. Assets and resources are redistributed in a better way, enabling fresh buying opportunities. As a consequence, startups emerge. These new businesses have access to a cheaper workforce and land.
The stock exchange is destined to recover from any downfall. This is the natural course of events. During a downturn, investors may buy equities that will bring colossal returns down the road. After a recession, prices rebound, often reaching new peaks.

Popularity of Saving

Consumerism is a notable characteristic of Western society. Now, the trend is observed around the world. Humans buy unnecessary items to feel better about themselves or impress other people. A shopping spree delivers a high, but this sensation is fleeting.

A crisis has the power to change people's thinking and motivate them to save, rather than splurge. When incomes shrink, there is no other option. The survival instinct is stronger than any fads. As a result, countries see a rise in savings.

That is unless the government interferes with unwise support policies. A recession does not justify the lowering of interest rates. The attraction of foreign capital is an easy way out. Instead, it is necessary to curb excessive consumer spending. This will stimulate the positive psychological reformation of society.

Balance of Good and Bad

Every crisis has a silver lining. Tough times prompt people to reconsider their financial habits and spend more wisely. Resources are redistributed and used more prudently. The local population discovers new ways to earn, such as stock trading. Despite the immediate damage, crises are important drivers of development. They serve as triggers for positive reformation. A crisis is an opportunity - although corny, this phrase is more than an empty cliche.

Source - Byo24News