Doom Loop refers to a cycle where one negative incident triggers another. This term is commonly used in economics, but many people don’t know how negative it can be. In this blog, we will discuss the doom loopy, its causes, examples, and its impact on the economy.
Doom Loop in Economics
A doom loop in economics describes when one negative economic condition gives birth to another negative economic condition, and the cycle keeps going, resulting in a downward spiral. This term was popularised in Jim Collins’s “Good to Great” book, which launched on 16 October 2001.
Doom Loop Causes
Below are the four major reasons that can cause the rise of the doom loop in the economy.
High Government Debt
A rise in government debt is the major reason an economy experiences a doom loop. Government debt can increase when the government spends more than its tax revenue. In such a situation, the government will need to rely on domestic banks for financial help, increasing the risk of government failure.
Lack of Fiscal Discipline
Another reason why an economy suffers from a doom loop is a lack of fiscal discipline. Unwise policy discretion can cause fiscal discipline to be lacking, which will benefit policymakers but increase the risk of unforeseen shocks. Constant fiscal indiscipline would further increase public debt.
Financial Sector Vulnerability
The third reason for the doom loop is the weakness of financial institutions in a country. In such a situation, financial institutes would be affected by economic conditions and would reduce lending, which can further promote this loop.
Low Economic Growth
Low economic growth means low gross domestic product (GDP), resulting in less tax revenue. As Texas is the biggest source of the government’s income, this will result in low revenue and increase the need for public spending. It will ultimately result in the vicious loop we are discussing in this blog.
Doom Loop Examples
From the above sections, we learned what a doom loop in economics is and its causes. Learning about its examples will give you more understanding.
Greek Debt Crisis (2009)
In 2009, the latest Greek government revealed that the previous government had been sharing false reports about national finance. The government showed a worse-than-expected budget deficit in the following year. Due to this, investors hesitated to invest in the country, and interest rates skyrocketed.
Asian Financial Crisis (1997)
The Asian financial crisis of 1997 is a doom loop example worth remembering. At this time, Asian economies experienced the worst time ever as the market became aware of government debts. It triggered a huge currency and financial crisis across the whole region, hitting the economy’s heavy public debt burden.
Stock Market Crash (1929)
In the 1920s, U.S. companies witnessed exports to Europe booming, which was restructuring after World War I. Stock prices rose nearly tenfold, which makes investing a pastime for almost everyone. Currently, robo advisers are personalising investment with data-driven decision-making, but at that time, nothing was there. At the end of 1929, when the market crashed, banks issued margin calls. Investors couldn’t get cash to meet the margin. As the cycle of margin calls spiralled, investors started selling portfolios, and the stock market went down, resulting in a great doom loop.
Impact of Doom Loop on the Economy
The impact of the doom loop can be severe on both individual and international economies. It can swiftly tip a stable economy into complete turmoil, affecting everything, including the government’s fiscal status. Countries interconnected through trade and finance can experience adverse effects from other countries’ doop loom. For instance, one country’s financial institutions might have given loans to the government of a country caught in a doom loop.
The Doom Loop Explained: A Vicious Cycle Of Decline
In this blog, we learned what the doom loop in economics is and its causes, examples, and impacts. All in all, it’s pretty clear that a doom loop is quite scary for economies and can stop a growing country right in its tracks. We hope you liked this blog; if you did, let us know in the comment section. Follow Tradeflockasia on social media for more interesting blogs.
Frequently Asked Questions
1. What can a government do to prevent the doom loop from occurring?
To prevent a doom loop, a government can use strict bank guidelines, ensure fiscal responsibility, and create a banking union for shared financial risk.
2. Are there any global frameworks to address the doom loop?
Yes, the Basel Accords and the European Systemic Risk Board are global frameworks addressing the doom loop.
3. What do you mean by urban doom loop?
It’s a descending economic spiral caused by remote work, which decreases the value of office space. Due to this, city revenue decreases, pushing businesses and workers out of the city.
4. What does a banking doom loop mean?
When a negative feedback loop forms between the country’s deteriorating banks and the credit risk of sovereign debt, a disruptive economic crisis occurs, which is called the banking doom loop.
