Posted by Oliver Meredew on October 28th, 2016.
The financial world has some fairly terrifying tales to tell.
While these stories might only curdle the blood of central bankers and shock stock market analysts, they still hold power as cautionary tales. So, let’s look at 5 of the most frightening financial tales from years gone by…
The first entry on this list of financial calamities concerns an ambitious nation that placed many eggs in one basket, only to break them all.
The Darien Scheme took place at the end of the seventeenth century, when the ‘New World’ of the Americas was still up for grabs by the European powers.
While the then-Kingdom of England and Kingdoms of Spain and France were busy fighting over North America, Scotland (still an independent nation) set its sights further down the coast.
The Darien Scheme (named after a supposedly lush part of modern-day Panama) was more than just an idle fancy, as it was chosen as a way of revitalising Scotland’s flagging economy, which had been depleted by years of famine and war.
The idea was ambitious – if successful, establishing a Scottish trading colony between the Pacific and Atlantic Oceans would bring the Scots great wealth as it would allow traders and merchants to avoid the lengthy and perilous voyage around South America’s Cape Horn. Notably, the expedition was almost entirely funded by the Scottish people, due to Parliament preventing English investment.
With all the best intentions, however, the Darien Scheme sadly collapsed in a spectacular fashion, laying Scotland’s economy low. The first ships sent out were largely packed with trading goods, instead of essential supplies. Worse still, the promised ‘paradise’ turned out to be an almost unusable patch of land, where the natives were indifferent to trading and disease quickly took its toll on the settlers.
The nail in the coffin for Scotland’s ambitions was the constant attacks by the Spanish, who actually held claim over the area. Along with misery and humiliation, the greatest blow was dealt to Scotland’s wallet, where the life savings of countless citizens, both rich and poor, were lost in the abandoned plans.
While not the sole reason behind Scotland’s eventual union with England, the Darien Scheme’s disastrous consequences were certainly a contributor, as a tragic tale that financially shattered a bold nation.
This next tale of financial fright took place in Zimbabwe, where between the late 1990’s and the end of the 2000’s the Zimbabwean Dollar (ZWL) became the victim of hyperinflation to an almost astronomical level. Faced with high levels of debt to GDP, the Zimbabwean Government elected to print money to clear the shortfall, only for this to backfire and national inflation to shoot up at an alarming pace.
Two facts highlight just how dire the situation was in Zimbabwe at the height of the hyperinflation crisis – the Reserve Bank of Zimbabwe began printing one hundred trillion Dollar notes (that’s Z$100,000,000,000,000), and national inflation reached a level around 230,000,000%.
As a consequence of these almost farcical economic conditions, the nation was quickly filled with ‘starving billionaires’, and vast stacks of devalued currency had to be used to make even basic household purchases.
The government of Zimbabwe ultimately chose the nuclear option and axed the ZWL in 2009, instead using currencies such as US Dollars, the South African Rand and Pound Sterling for official transactions.
This horror story has a rather twisted ending, as while the billion and trillion ZWL are worthless in their home country, these mementos of a terrifying time for Zimbabwe are now on the market as highly prized collector’s items.
Moving on to a still more recent currency crash, the effects of the global financial crisis of 2007/2008 were widespread and devastating, resulting in a 28 Days Later-style rapid infection of countries and their financial markets. Although many nations have since rebounded from the depths of recession, the long-term effects of this event can still be seen around the world today.
The causes of the crisis were many, but one of the biggest was homeowners taking out large loans at low interest rates, meaning banks were left in the lurch when high-risk borrowers were unable to repay due to soaring house prices. As a result of this, high-profile banks like the US Lehman Brothers went bankrupt, while others were bailed out by governments for vast sums.
With confidence in banks plummeting and countries pushing up their debt to GDP ratios due to repeated bailouts, many countries fell into recession – seeing unemployment rise, incomes fall and negative cycles of government borrowing emerge.
As in 28 Days Later, not every country in the world was ‘infected’, with Australia, China and India being among those nations that dodged the plague of recessions that swept across the world.
The global financial crisis never really left the headlines, with some nations still struggling to recover, but governments have been hard at work to ensure that future crises are contained by introducing policies such as ordering banks to keep money in reserve to bail themselves out, instead of dragging their host countries down with them next time.
The Chinese stock market crashes of 2015 were large in scale and highly destructive.
As with the Darien Scheme, the crash of China’s stock market was disastrous because it swept up much of the country’s finances; in a bid to prevent excess debt and prop up national economic infrastructure, the Chinese government encouraged stock market investment, which only served to amplify the number of people who stood to lose out from the crashes.
This led to a series of stock market ‘bubbles’ developing, which successively burst, leading investors from all walks of life seeing their stocks run into the green (showing negative movement in the Chinese stock market).
As with failed movie efforts to combat giant menaces, the Chinese government later implemented a ‘circuit breaker’ system in the stock market at the start of 2016, although this proved to be too sensitive and was quickly scrapped. It remains to be seen whether the Chinese government will be able to safely manage the stock market in the future, given that almost every method of management has been proven ineffective so far.
Closing off this compendium of financial fear is a threat that could well rise again to shock the Eurozone – the Greek debt crisis.
The situation has been a recurrent one for Greece, with the menace of soaring debt coming back again and again, much like evils that never die like Michael Myers and Freddy Kruger.
The problem started during the Great Recession. Unlike other nations which only experienced a short period of economic contraction, Greece fell into a 63-month long state of recession, which lasted from 2008 to 2014.
During this period, the Greek debt-to-GDP ratio rose to around 170%, causing the nation to implement crippling austerity measures and request huge bailout sums from fellow Eurozone nations and the Troika of international lenders (the collective term for the European Commission, European Central Bank and International Monetary Fund). Unemployment soared (still coming in above 20% in 2016), and pensioners watched in horror as their monthly payments trickled away due to the government tightening its purse strings.
So far, three bailouts have been granted to Greece, although the nation’s ability to pay these back has yet to be proven. Amid estimates that Greece will hit a level of around 300% debt to GDP unless it gets relief, the government has been forced into the impossible position of imposing still harsher austerity measures, all so that foreign lenders will continue to build up the soaring debt mountain with more incremental bailout funds.
We hope that you’ve enjoyed reading these stories of the financially macabre!
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