An economic depression usually results from a period of economic turmoil based on the country’s Gross Domestic Product (GDP) rate. Whether you knew this or not, an economic depression is way worse than a recession, as GDP is constantly falling, and it usually lasts for a longer period of time.

In America, the Great Depression lasted for more than a decade, as the unemployment rate reached 25% and wages fell by 42%. An economic depression is mainly caused by terrible consumer confidence, which oftentimes leads to a drastic decrease in demand. As a result, many companies are forced to go out of business.

When consumers stop consuming, so to speak, companies are obliged to consider budget cuts, which include firing workers as well. Let’s reevaluate some of the factors that could lead to an economic depression:

Stock market crash

The stock market is made up of stocks that investors already own in public companies. Changes in shareholdings could also symbolize a reflection of the current state of the economy.

When the stock market crashes, it could be a clear indicator of investors’ declining confidence in the current economy.

Rapid decrease in manufacturing orders

A business usually flourishes on how demanded are their products and services. However, when manufacturing orders show a decline, especially for a longer period of time, it might lead to a sudden recession or, even worse, an economic depression.

Control of prices and wages

Price controls already happened once while former U.S. President Richard Nixon was in the Oval Office. Back then, prices just kept going higher and higher.

Also, when wages are fully controlled by the government and companies are unable to lower them, businesses might be obliged to lay off employees just to stay afloat.

Deflation

Deflation means lowering consumer prices over time. Even though it might seem like a positive thing, as people would finally be able to afford more commodities, in reality, it means that there has been a drastic decline in demand.

Oil price hikes

Everybody knows how oil price hikes could cause a ripple effect on almost everything in the market. When it happens, consumers simply lose their purchasing power, which might lead to a decline in demand.

Loss of consumer confidence

When consumers aren’t confident in the economy, they might alter their spending habits, which ultimately reduces the demand for goods and services.

Worsening unemployment rate

A worsening unemployment rate is a clear sign of impending economic depression. As unemployment rises, consumers might lose their purchasing power, which might lead to lower demand.

Rising inflation

Inflation is supposed to be a good sign, as it signifies that demand is higher thanks to wage growth and a strong workforce. Even so, too much inflation will automatically discourage people from spending, and it might result in a lowered demand for products and services.

Declining property sales

In a perfect economic situation, consumer spending is technically higher, including the sale of homes. However, when there’s an imminent economic depression, the sale of homes is down, which means that there’s less confidence in the economy.

Increasing credit debt defaults

When credit card usage is higher, it’s one of the best signs that people are spending money, which is supposed to be good for the GDP. But at the same time, when debt defaults are rising, it could mean that people are losing their power to buy, which signals an economic depression.

What do you need to know about Silicon Valley Bank’s collapse, the 3rd biggest bank failure in the history of America?

Silicon Valley Bank crashed in a spectacular fashion, creating the biggest bank failure in America since the Great Recession. On March 10th, the California-based Silicon Valley Bank was forced to close by the state’s financial regulator.

The closing comes after a couple of tumultuous days after the technology startup’s lender announced it had sold no less than $21 billion in securities, at a loss of $1.8 billion, and it might seek to raise $2.25 billion in capital.

The wide majority of shares of the parent company, SVB, were completely halted on the same day, after falling 64% in pre-market trading and taking a 60% dive on Thursday, as investors rapidly sold shares.

In the midst of all the concerns about the bank’s stability, some venture capital funds, such as Peter Thiel’s Founders Fund, recommended portfolio companies pull all their money out of this bank, while the CEO of the company advised its clients to calm down, adding that the bank has ample liquidities to cover the losses.

SVB Financial attempted to sell itself after many failed attempts at raising capital, but the plans were soon abandoned as no one was interested in buying.

The FDIC then created the National Bank of Santa Clara to make sure that all insured depositors are protected, giving them access to their insured deposits in a maximum of three days.

It seems that SVB declared $212 billion in assets, making it the second-biggest bank failure in the country’s history, preceded by Washington Mutual, whose 2008 failure came as the bank only had $300 billion in assets. Silicon Valley Bank was the 16th-largest bank in the United States.

The ranking was based on all its assets before the collapse. After the tech industry rapidly evolved during the pandemic, SVB’s clients deposited millions, if not billions, of dollars, raising the bank’s assets from $60 billion to nearly $200 billion in only two years.

As deposits rapidly came in, SVB invested in debt, such as U.S. treasuries and mortgage-backed securities. However, as the Federal Reserve started to increase interest rates to fight inflation, the value of the Silicon Valley Bank crashed.

Unfortunately, the failure that both SVB and the cryptocurrency bank Silvergate registered sparked many fears of contagion and even drew negative comparisons to the Great Recession.

Some analysts would even agree that the contagion concerns are increased by the idiosyncratic problems at all the other individual banks. Why? It seems that SVB and Silvergate had a lot of business within industries vulnerable to higher interest rates, and plenty of banks have broader customer bases.

How to prevent another economic depression:

As all Americans are troubled by the idea of another “Great Depression”, economists made a list of policies that might avoid that:

Expansionary monetary policy

An expansionary monetary policy usually involves cutting interest rates in order to encourage investment and borrowing. As interest rates are lower, consumers will be able to enjoy their money more (because of added value), and they’ll be encouraged to spend more.

Expansionary fiscal policy

An expansionary fiscal policy basically means increasing the overall government budget, reducing taxes, or even both. Tax reduction offers consumers a disposable income, which encourages spending.

Financial stability

Financial stability is based on the government’s ability to guarantee bank deposits, which could promote the credibility of banks.

Takeaway

A widespread economic depression is definitely something to be afraid of. After all, the entire world is suddenly forced to shut down, sometimes for decades.

If those who are in charge of the economic well-being and growth of the country are unable to work with all the other sectors of the economy to make things work for the sake of the nation, then it might happen again, multiple times.

You know what they say: Unless you learn from the mistakes of the past, history will keep repeating itself.

If you’re eager to read more information about finances and economics, we have something else for you: These 5 Types of Retirement Income Are NOT Taxable