Will the Economy Collapse? The Future of U.S. and Global Economies (2007)

There is no precise definition of an economic collapse. The term has been used to describe a broad range of bad economic conditions from a severe, prolonged depression with high bankruptcy rates and high unemployment, such as the Great Depression, to a breakdown in normal commerce caused by hyperinflation (such as in Weimar Germany), or even an economically caused sharp increase in the death rate and perhaps even a decline in population (Former USSR). Often economic collapse is accompanied by social chaos, civil unrest and sometimes a breakdown of law and order. There are few well documented cases of economic collapse. One of the best documented cases of collapse or near collapse is the Great Depression, the causes of which are still being debated. "To understand the Great Depression is the Holy Grail of macroeconomics."[4] —Ben Bernanke (1995) Bernanke's comment addresses the difficulty of identifying specific causes when many factors may each have contributed to various extents. Past economic collapses have had political as well as financial causes. Persistent trade deficits, wars, revolutions, famines, depletion of important resources, and government-induced hyperinflation have been listed as causes. In some cases blockades and embargoes caused severe hardships that could be considered economic collapse. In the U.S. the Embargo Act of 1807 forbade foreign trade with warring European nations, causing a severe depression in the heavily international trade dependent economy, especially in the shipping industry and port cities, ending a great boom.[5] The Union blockade of the Confederate States of America severely damaged the South's plantation owners; however, the South had little economic development. The Blockade of Germany during WWI lead to starvation of hundreds of thousands of Germans but did not cause economic collapse, at least until the political turmoil and the hyperinflation that followed. For both the Confederacy and Weimar Germany, the cost of the war was worse than the blockade. Many Southern plantation owners had their bank accounts confiscated and also all had to free their slaves without compensation. The Germans had to make war reparations. Following defeat in war the conquering country or faction may not accept paper currency of the vanquished, and the paper becomes worthless. (This was the situation of the Confederacy.) Government debt obligations, primarily bonds, are often restructured and sometimes become worthless. Therefore there is a tendency for the public to hold gold and silver during times of war or crisis. Hyperinflation, wars and revolutions cause hording of essentials and a disruption of markets. In some past hyperinflations, workers were paid daily and immediately spent their earnings on essential goods, which they often used for barter. Store shelves were frequently empty. More stable foreign currencies, silver and gold (usually coins) were held and exchanged in place of local currency.[6] The minting country of precious metal coins tended to be relatively unimportant. Jewelry was also used as a medium of exchange. Alcoholic beverages were also used for barter.[1] Desperate individuals sold valuable possessions to buy essentials or traded them for gold and silver.[6] In the German hyperinflation stocks held much more of their value than paper currency.[6] Bonds denominated in the inflating currency may lose most or all value. During severe financial crises, sometimes governments close banks. Depositors may be unable to withdraw their money for long periods, as was true in the United States in 1933 under the Emergency Banking Act. Withdrawals may be limited. Bank deposits may be involuntarily converted to government bonds or to a new currency of lesser value in foreign exchange.[7] During financial crises and even less severe situations, capital controls are often imposed to restrict or prohibit transferring or personally taking money, securities or other valuables out of a country. To end hyperinflations a new currency is typically issued. The old currency is often not worth exchanging for new. http://en.wikipedia.org/wiki/Economic_collapse