Economics of Debt

was_bankrupt

Hi,

I posted a thread asking for comments about my bankruptcy experience and the thread soon turned into a dicussion regarding the levels of debt in the UK and the impact changes in economic conditions will have on debt.

I thought it would be interesting to hear what your views are on the subject. Factors to consider are inflation, interst rates, insolvencies, repossessions, house prices, political instability etc.

Gemmzie

Interesting, although could well be moved.

The main problems where I live is that - all the students move away for study and can't afford to return and buy property because of the growing numbers of retired people and the very well off buying here. Wages are terrible and living costs are slightly higher than average. Water rates are extortionate too because of the tourists?
(Can you guess what it is yet? :rolleyes:)

But I think that's because the government are ill-prepared for the rising number of people living longer - the state pensions will run out, the eldery get alot free (now, not taking this away from those who need it but it should be means tested - everyone over 60 having a free bus pass, it cripples our bus system).

Snaggles

Brighton??

Edit - Eeek, hope that didn't sound like I was being derogatory towards Brighton! I wasn't!

Gemmzie

Snagglepuss wrote:

Brighton??

Edit - Eeek, hope that didn't sound like I was being derogatory towards Brighton! I wasn't!

:rotfl:

Nope, but probably going the same way

Iwantahouse_2

got to be in the south west somewhere

rog2

We had the same problem in Bath!

Dr.Shoe_2

Oxford! ....or Cambridge. In fact it seems to describe just about any historic university town. In fact it could even be London.

Let's look at the economics of "free".

Giving pensioners free bus passes will not cripple the bus system. The fact is, the buses have to run whether people get on them or not. The overheads are the same for a bus that has three people on it as they are for one that has thirty passengers- it's just that the first runs at a loss but the second handsomely compensates. pensioners tend to travel at off-peak periods when the buses will run with lower numbers anyway. It's a bit like a greengrocer giving left over fruit to the homeless instead of just chucking it away.

Other things such as "free" or subsidised prescriptions and medical treatment are not free as such but are covered by national insurance. In some countries, you are expected to take out your own medical insurance which works in exactly the same way. The only difference is, is that the government is the insurer.

Now for debt.
If you're in debt, you have less money to spend in the shops. This means that shops make less profit for reinvestment elsewhere. They are unable to open new branches or build new warehouses or factories which reduces the number of new jobs being created. This means that more people are unemployed which pushes wages down (simple supply and demand) and the result is more debt. Meanwhile, the shops are dropping prices to attract a larger slice of a diminishing pie so you get a reduction in inflation. This is why governments have always increased interest to cut inflation.

However, zero inflation is bad because it means that there is no inward inflation and no growth in the economy, inflation=investment. Too much inflation means that wages have to be increased to keep pace with the cost of living and you'll see "suitcase economies" like in 1920s Germany- you cannot just print more money if you don't have economic growth to back it.

It was a stroke of genius when Gordon Brown gave control of interest rates to the Governor of the Bank of England. This means that they are no longer at the mercy of political will and the decisions are purely economical which is why we're doing great as a nation- we have low interest rates and low inflation meaning our economy is in perfect balance. BUT. A one percent raise in interest rates will mean an increase of around 10% in home repossessions leaving the householder with the increased burden of rents instead of mortgage- this will be particularly harsh for anyone remortgaging just to release equity. A 2% increase will mean that almost 50% of homeowners will have problems meeting their mortgage payments! The more repossessions there are the more likely that house-prices will drop causing even more problems including negative equity. This will cause migrations to cheaper areas leading to localised wage increases which would be unsustainable as the firms won't compete on price and will collapse leading to high unemployment and reccession. Now do you see why high volumes of debt is bad?

Gemmzie

Iwantahouse wrote:

got to be in the south west somewhere

Yup. Cornwall

Useless county really.

Gemmzie

Dr.Shoe wrote:

Let's look at the economics of "free".

Giving pensioners free bus passes will not cripple the bus system. The fact is, the buses have to run whether people get on them or not. The overheads are the same for a bus that has three people on it as they are for one that has thirty passengers- it's just that the first runs at a loss but the second handsomely compensates. pensioners tend to travel at off-peak periods when the buses will run with lower numbers anyway. It's a bit like a greengrocer giving left over fruit to the homeless instead of just chucking it away.

OAPs regularly walk over from the hospital and get on the bus at our college bus stop at peak college times - take all the places and then moan at the number of teenagers on the buses. And then the students have to wait, I really don't see how this is fair.
(It's the same for the snotty schoolkids who pay a hugely subsidised fare)


But the rest of your post, I agree with. It's a catch-22

choclover

Only from my experience the wages don't go up to cover inflation, so each year people are going to be out of pocket that little bit more.

A few days ago I saw a news item on the tv which said basic food items such as bread and milk have increased in price by up to 14% and what with the ongoing petrol increases, gas and electricity prices its no wonder to me that so many people are getting into debt.

ZTD

Dr.Shoe wrote:

Other things such as "free" or subsidised prescriptions and medical treatment are not free as such but are covered by national insurance. In some countries, you are expected to take out your own medical insurance which works in exactly the same way. The only difference is, is that the government is the insurer.

No, it is different. The difference is that insurance groups work to cut costs. Whatever they don't pay out, they get to keep, and this helps drive down prices and efficiency hurts their competators. A government always seeks to maximise votes. This means extending largess to those sections of the "insured" that generate the most positive publicity. Hence the largess to children, pregnant mothers and the elderly.

Somebody has to pay for this. If a private insurer did this, their costs would be too high, and you'd go somewhere else. Taxes have nowhere else.

Dr.Shoe wrote:

However, zero inflation is bad because it means that there is no inward inflation and no growth in the economy, inflation=investment.

Ah no. This is Keynsian fluff. The prices of stuff over the whole economy dropped from the start of the Victoria era to the end. By half in fact. Yet during that period investment in the underground, the sewage systems and the railways was so large, we are still living off it. In fact, the railway link for the channel tunnel which was started about 5 years ago, was the first new railway in the UK since the middle of the 1800's.

Dr.Shoe wrote:

It was a stroke of genius when Gordon Brown gave control of interest rates to the Governor of the Bank of England.

It was a stroke of political genius, as the blame automatically drops onto the BoE's head. Incidently, it's the committee that decides, not just the Governor. The Governor has been out-voted before.

Interest rates are not the only weapon for controlling the money supply. The reserve in fractional reserve banking is important as are the rules and regulations surrounding lending. Repos should be kept an eye on too.

Dr.Shoe wrote:

This means that they are no longer at the mercy of political will and the decisions are purely economical which is why we're doing great as a nation- we have low interest rates and low inflation meaning our economy is in perfect balance.

We don't have low inflation. Did you see the other thread on this?

Also, low interest rates are a sign of distress. You're having to make money cheaper in order to attract people into borrowing it. That would imply that the prospects for investment are rather poor.

If the economy is strong, then I could borrow money at 10% over inflation and still make money. If it's weak, you could offer it at 5% below inflation and still have no takers for investment purposes.

What you may end up with is banks who borrow it, and then buy Government debt with it, and hence recycle it straight back. A classic Keynesian "liquidity trap".