Crash Course Economics: Economic Crashes

Introduction

• Hosts: Jacob Clifford and Adrienne Hill
• Topic: Economic crashes, focusing on hyperinflation, depressions, and stagflation.

Hyperinflation

• Case Study: Germany (1923)

  • Hyperinflation due to reparations post-World War I.
  • Massive printing of currency (the mark) led to extreme inflation.
  • November 1923: 1 trillion marks for 1 USD.
  • Money was used for wallpaper and fuel due to its worthlessness.

• Case Study: Zimbabwe (2007-2009)

  • Rapid inflation started in 2007.
  • By 2008, annual inflation rate estimated at 489 billion percent.
  • Currency denominations increased to a hundred trillion dollar bill.
  • Zimbabwean dollar lost 99.9% of its value. Eventually abandoned.

• Causes and Effects of Hyperinflation

  • Root Cause: Government printing money to pay bills.
  • Effects: Erosion of wealth, forced spending, limited investment and trade.
  • Vicious cycle: Higher prices lead to expectations of more inflation.

• Resolution

  • Germany: Replaced mark with new currency.
  • Zimbabwe: Abandoned currency, switched to US dollars or neighboring currencies.

Economic Depressions

• Definition and Effects

  • Real GDP falls for a prolonged period.
  • Results in unemployment, falling prices.

• Historical Example: The Great Depression (1929)

  • Stock market crash led to panic and reduced spending.
  • Unemployment rose to 25%, family income dropped by 40%.
  • Federal Reserve dropped interest rates to zero, but deflation continued.

• Monetary Policy

  • Expansionary policy (lower interest rates) tried to speed up economy.
  • Liquidity trap: Expectations of falling prices discourage spending.

• Resolution

  • Significant government spending during WWII helped end the depression.

Stagflation

• Definition

  • Combination of stagnation (no growth) and inflation.

• Historical Example: US (1970s)

  • Triggered by supply shocks like oil price hikes.
  • Fed increased money supply, leading to inflation but no output growth.
  • Inflation expectations worsened the situation, leading to recession.

• Resolution

  • Paul Volcker (Fed chairman) cut money supply, raised interest rates.
  • Initially caused unemployment but stabilized prices and expectations.

Conclusion

• Importance of understanding and managing the economy.
• Role of government in exacerbating or alleviating crises.
• Collective expectations and behavior influence economic outcomes.

Next Week

• Exploring different schools of economic thought.

Acknowledgements

• Support for the show via Patreon.
• Thanks to contributors and patrons.