Monday, March 28, 2005

Prepare to be Depressed

There are many theories on the what caused the Great Depression. Was it unemployment? I doubt it. Unemployment now is probably about the same as it was before the Depression. It is an easily manipulable number. For example, how did women and minoritys play into the 1920s unemployment figure? Its pretty interesting if you think about it rationally, instead of just read what we're taught.

I think credit had a large thing to do with the Great Depression. People bought lots of things on credit, especially stocks (aka margin). When they could not come up with the money to pay their debts, things went haywire. People freaked out and started taking all their money out of banks...but guess what, banks work off of credit too. They don't have any money, its all lent out. Most of the money is on paper.

Which brings me to the title of this post. If I were a betting man, I would buy Hedge Funds. Hedge Funds bet on the the direction of stocks, indices, etc. They sell short (sell stocks now, buy them later) and they buy stocks with loans (don't quote me on that). They are HEAVILY leveraged. Some of these suckers are in the Billion Dollar range. Hedge Funds are very popular right now. I'm afraid if they continue to gain in popularity, we will have another Great Depression. Think about it. These Funds have billions of dollars in loans. Lets say the stocks do the opposite of their bet? They are wiped out. They wipe out all the fundholders in that fund, AND they wipe out the shareholders that they borrowed short from. That is alot of people wiped out of ALOT of money.

But they can just disolve the fund. Bail out. Screw everyone involved. Very few gamblors win conistently. This is no different. These fund are playing with so much money that the ripples will be dramatic. And unless there are regulations to stop it, than I expect another Great Depression in the near future (3~15 years).


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