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Financial Crisis – Could it happen again?

One thing is certain – another recession will sooner or later hit the US market. Some experts claim that it could be one year ahead of us. And this time, it will be different that we went through in 2008. As investors struggle to protect their losses during the recession, they usually turn to Treasury bonds – but many point out that during the next recession this opportunity might become unavailable.

For the US to go through another round of recession it’s enough to repeat the scenario of the last Great Recession. When it started in 2008, it had a global impact and things were looking bleak for a very long time. Due to credit downgrades of European governments ranging from Ireland to Italy, investors found it very difficult to secure the low-risk end section of their portfolios and the investment environment exposed them to risk higher than ever.

Here’s everything you need to know about the potential recession which is expected to hit the US market in the future.

The financial crisis will happen, but it will be different

Experts claim that with a series of credit downgrades of US government debt, this situation can be easily repeated. Since the budget deficit again is predicted to exceed $1 trillion in the next recession, this is a likely scenario.

Still, there are many voices out there that articulate hope and belief in reform as a preventive measure against the 2008-style recession. Former Treasury Secretary Tim Geithner openly stated that a financial crisis will happen again, but pointed out that the structural reforms implemented after 2008 will help to mitigate the damage.

Today, the economy of the US is stronger – more stable and potentially resilient than before the crisis of 2008. Many thought that America will follow the path of Greece or fall into the trap of hyperinflation, but none of that happened. Even though the economy still faces many challenges, Geithner considers America a “lucky country”.

Measures of protection

Since the perspective of another financial crisis is certain, Geithner expects that the Federal Reserve and the government will have to act again. The central bank and the government need to step in and take the risks nobody else can take on the market – especially important in protecting people from the effects of economic panic.

What did the reforms implement after the 2008 change in the US economy? Today, there’s more capital in the system and much stricter rules for risk-taking, designed to ensure the longest possible period of economic stability.

The recent increase in the dollar during the last year is a problem that Geithner failed to address. And since a stronger US currency makes goods provided by American companies more expensive, they might suffer due to pricing disadvantage against their foreign competitors. The negative impact of a strong dollar has been shown in analyses of corporate revenue during recent quarters.

How can we prepare for a financial crisis?

Nobody can accurately interpret what the market reflects at any given point of time. Many things that we know now about the crisis of 2008 become available to us in retrospect, hopefully preparing us better for the reality of an impending recession.

Most importantly, we have to learn our lesson from Europe’s experience with the Great Recession as well. This is clearly something that the US would want to avoid. The current situation with elements like considerable government debt weakened credit status and recession on the radar should put the American economy on its toes.

If the federal government allows its deficit to increase to the smashing figure of $1 trillion yet again, the American economy could become more similar to the European investing markets, where risk-averse investors face serious challenges.

Whether the recession comes in 12 or 18 months, one thing is clear – it will be nothing like the one of 2008.