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GS-III : Economic Issues Terminology

11 October, 2022
4 Min Read

Doom Loop

There is a chance that the British economy will get stuck in a "doom loop."

What is Doom Loop?

The doom loop is a circle of vulnerability where a country's banking system can be badly harmed by price volatility in the sovereign bonds they hold as reserves, leading to a contraction in lending given by the banks.
As a result of the domestic economy slowing down as a result of the credit contraction, the price of the sovereign's bond issues continues to decline. This is because the government is being compelled to increase borrowing in order to maintain services during a time when tax revenues are declining.
The cycle can also start in the banking industry if a decline in bank lending brought on by issues with liquidity or non-performing loans causes price volatility in government bonds by slowing the economy and undermining trust in sovereign credit.
The circle can also be triggered by outside factors like trade tensions or a halt in global economic activity brought on by a natural recession.

Source: The economic times

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