Will the economy collapse? Here’s why it could happen.

The possibility of a global economic crisis is growing. That’s why more and more people are asking, “Will the economy collapse?”

People have good reason to be worried.

There are more and more concerns about the state of the global economy. Fears are growing about a possible economic collapse.

Here are some of the big trouble spots:

The Chinese Economy could be in serious debt trouble

There are serious fears that China’s economy could have a hard landing, which would have a severe negative effect on the world economic system.

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China has a big debt problem. China is being urged to deal with their debt problem, and UBS has said China is already trying to bail out their banks.

If the Chinese economy falters, or experiences a serious crash, the shock waves will be devastating for the world economy. With growth in most highly developed economies stagnant, and Brazil and Russia in recession, China and India are the only two large bright spots on the world economic stage.

India is not yet large enough to drive global growth, so growth in China is incredibly important to the world. Without that growth engine, it’s tough to see where other sources of growth will come from.

Will the economy collapse in China if there is a full-blown debt crisis?

Growth is elusive and debt is rising in Europe

The European economy seems stuck in neutral. Brexit has only added to the problem. Doubt is growing about the future of a unified Europe. Germany, the manufacturing hub and economically dominant power in Europe, is facing increasing political divisions over refugee settlement. German Chancellor Angela Merkel has watched her political power erode.

Far-right movements are gaining in support throughout Europe. Fear of terrorism is growing. This will distract attention and energy from economic reforms and will prolong stagnation.

If doubts continue to grow about the future of the E.U. and political divisions keep growing, the European Union could easily tip into recession and even economic collapse.

The Italian banking system is in crisis

Italian banks are facing a severe crisis. According to MarketWatch, roughly 8% of all total loans to Italian banks are non-performing – an amount worth $200 billion Euros. There are fears another $160 billion in loans could become non-performing.

This would be a disaster for the Italian banking system, Italy, and the Eurozone economy. And as we saw in the 2008 Subprime Crisis, a problem in one part of the world economy could quickly spread across the world.

Because Italy’s economy has grown so slowly – in keeping with Eurozone stagnation as mentioned above – there isn’t enough new investment coming in for the banks to remain stable.

If Italy’s banking system collapses, or requires a massive bailout, there are fears the beneficiary will be the Euroskeptic 5 Star Movement. They have called for a referendum on Italy’s EU membership. Given Italy is the 3rd largest economy in the EU, it’s exit, or even the prospect of exit, would be a huge blow to the stability of the European Union. It could even be the death blow to the European Project.

Interest rates are low

Usually, when the economy needs a boost, central banks can react by lowering interest rates. Unfortunately, interest rates are already at record lows in much of the world. In many countries, rates are sow low that when combined with inflation, the rates are actually negative. This means people with money in the bank are seeing the real value of their money decline.

Even worse, some banks are actually charging real negative interest rates, meaning depositors are being charged for the “privilege” of keeping their money in the bank.

Without the ability to lower rates further, central banks are trying to fight stagnation with one hand tied behind their back. Worse, it’s a sign that the typical solutions aren’t working, pointing to the fact that there is a deeper problem at the core of the economy.

The middle class is struggling

The middle class is getting crushed. Rising income inequality means wealth is being concentrated in fewer and fewer hands. At the same time, rising personal debt is a massive burden on those in the middle class. Those trying to get into the middle class feel locked out. The cost of healthcare, education, and consumer purchases are all pushing more people into unsustainable levels of debt.

This slow and steady destruction of the middle class is contributing to rising economic and political instability that threatens our future.

We will need new ways of thinking to actually support and grow the middle class, not just tinker around the edges of a broken and failing system. If inequality keeps rising, economies around the world will become more and more unstable, raising the risk of disaster.

Great Depression soup kitchen economic collapse.
If we are not careful, this could happen again. They didn’t see it coming.

Will the economy collapse?

Consider all the factors mentioned above:

  • China’s economic woes.
  • Stagnation and debt in Europe.
  • A potential banking collapse in Italy.
  • Low interest rates not working.
  • A struggling middle classes being crushed by rising income inequality and debt.

The world economy is in a precarious position.

The 2008 Financial Crisis may have just been a warm up for something much worse. If our leaders don’t take action to fix a system rigged against the majority of us, economic disaster, crisis, and even collapse could be the result.