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What will cause the next Depression?

Posted on Jan 12, 2009 by Paul White

the real value of moneyMany of you are probably wondering how could we have another depression.  Well its actually very simple. Especially the way the government has been giving away money to all the banks and big corporations to keep them afloat.  The problem is whenever the government gives away money, they have to print more money, thus lowering the value of money, but in reality there is a lot more to the value of the dollar than this simple supply and demand example. 

Normally I get on msn and check the stocks I own, the stocks I used to own, and the ones I am thinking about owning, ( like most investors ). But today with how things have been so bad on the market, I decided to check a stock I won't be owning anytime soon, Berkshire Hatha Class A Ord Shs (BRK.A), Warren Buffet's stock for Rich guys.  As I was looking at this stock's historical data, I also noticed the recent discussions.  One of them was titled German bond sale's fate signals trouble ahead - Financial Times.  After reading the article I came to realize where the market will be heading this year.

Germany's Bonds are thought as some of the most secure bonds you can buy.  ( more so than the US bonds ).  The value of the Bonds directly affects interest rates, and the value of the dollar.

Bonds for Dummies

Governments sell Bonds and Treasury notes to individuals and other governments.  The interest rate given to bonds are dependant on the demand for the bonds.  The higher the demand the lower the interest rate.  But if bonds are thought to be a risky investment, the demand will go down, and the treasury will be forced to pay a higher interest rate to get investors interested in bonds.

The biggest purchaser of the USA dept ( or treasury bonds ) is the chinese government.  With China it's a double edged sword.  They loan us money. Walmart buys their products.  Americans buy from Walmart.  Its a vicous cycle.

Back to the article I referenced earlier. With German bonds having trouble finding buyers. This is a sign of what is to be expected in the near future.  With lower interest in bonds. interest rates which are at all time lows, are sure to start rising.  As the fed raises interest rates, it will become more expensive to buy a car or home.  This will drop the value of housing prices and valuations. The decreased valuations will cause local and state governments to have shortages in property taxes.  As it is California is already facing this problem.

How a drepression will result from this

During 2009 the government will continue to spend billions on bailing out corporations.
The increased amount of dept will force the government to raise money via a bond auction
Due to the increased amount of bonds for sale on the auction higher interest rates will be paid
The Fed is forced to raise interest rates to help bring the dollar back up.
Higher interest rates force most of those on variable loans to get foreclosed.
Higher interest rates and tighter credit make homes too expensive to buy for average families.
The number of buyers in realestate severally decreases.
Home values drop.
Anyone in the real estate market will suffer ( brokers, agents, builders, home depot )
The Increased defaults will cause a second wave of panic for banks.
Credit will get even tighter.
Demand for vehicles will drop due to buyers not being able to buy new cars ( due to not perfect credit )
The American Auto companies ( GM, Ford, Chysler ) will go bankrupt.
GM and chysler eventually have to file chapter 7 and liquidate.
Ford will stay alive in chapter 11.
Increased layoffs will cause consumer demand to drop.
Companies will layoff more employees due to decreased demand for products.
Unemployment will rise to 9% by years end.
2009 will be Worst Christmas in history.

If you notice how Obama has changed his view in recent weeks. That is the difference between wanting the job, and then knowing the job.  Now that his team has been brought up to speed by the current administration, Obama realizes how big the countries problems really are.  It will be interesting to see what kind of change Obama brings to Washington.

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