Three Possible Causes of Yet Another Downturn

|
 |  Includes: UDN, UUP
by: Ryan Edward

Although I would love it if the market is only headed higher, there are a lot of possible scenarios that would send it lower yet again. The following list isn't necessarily what I think will happen, just things that are possible, some more than others. Many of the things seem inevitable in some economists' eyes, so in today's market, buyer beware.

1) A Crash In the Dollar: Some would say this is inevitable with the government printing money like it's Christmas, but yet others see it as unlikely. The dollar may be strong currently, as it is usually the currency of choice during troubled times, but once confidence resumes, the dollar may fall back to reality. In the process, it could send us down yet again by causing interest rates to rise at an inopportune time.

2) Political Tensions: The main reason this recession is unlike last recessions/depressions is that the government is rushing to help instead of making things worse. They are loosening credit and saving troubled banks. Although I am not a big fan of big government, recent Federal Reserve moves could have saved the US economy from larger problems. If anything gets in the way of US or European governments from saving a large entity such as another Lehman Brothers, it could tip the economy over the breaking point. A small roadblock in fiscal or monetary policy may not make things worse, but it prevents the government from trying to make them better, allowing the economy to deteriorate on its own.

3) Deflation: Although this scenario is becoming less likely with a larger money supply and growing government spending, it is still not out of the question. With key rates almost as low as possible and government spending higher than any other recessions in United States history, if deflation were to creep back up, there may not be much the government could do about it. Deflation would cause lower prices and incomes, all the while making debts harder to pay off. Debtors would be paying off loans with money that is worth more, causing some of the companies on the fringe to default and fail.