A new 'tougher' thread... and so it continues

Possession

Thanks Bupster that's a great explanation. I think I'd like to know where this extra money being pumped in is coming from - are we borrowing again because of our AAA credit rating? If so who on earth are we borrowing from given that everyone seems to owe everyone else money? I know there isn't a thing I can do about it but I would like to understand it and not get carried away on a tide of Daily Mail hype.

Evie74_2

Thanks Bupster - that's so helpful

Evie xx

bupster

Well, national economies aren't really like household ones. If you're in debt as a household, it's quite sensible to tighten your belt for a while and stop spending. But national economies are all inter-related with the banking and financial system, and it's like this enormous complicated whirligig of money flying around that's basically based on faith in each other and the system. It's more like a human body - if one bit of the system stops pumping properly then all the other bits suffer.

It's described as borrowing because it makes it simpler to describe, but what actually happens is national governments sell bonds to whoever wants them and those investors get a return depending on how popular the bonds are. So everyone thinks German bonds are safe, so the German government pays hardly any 'interest' and gets lots of pretty cheap money. We do too, largely because we're outside the Eurozone and so investors think we're a safe haven. These investors are actually things like pension funds. In a way we're all investing in and lending to and borrowing from ourselves. And all countries do it all the time, because they have to - even Germany is still borrowing money, because that's the way the system works.

When the system stops working properly, which is what's happening right now, then things snarl up. So lots of Eurozone countries can still borrow the money they need to function, but it's much more expensive - and some countries like Greece get to the stage when they can't pay the interest AND the stuff they are borrowing the money for at the same time. (Greece was in even more trouble because it had what's called a primary deficit, meaning it wasn't taking in enough from taxes to cover its ordinary outgoings without borrowing money.)

The system basically is based on faith that economic growth will keep happening and countries' income will keep growing. And though this sounds a bit bonkers if we're comparing it to how households work, actually, that's exactly what's happened for decades and decades. Governments borrowed money to build roads and airports and invest in growth, which was repaid in higher tax returns and a lower welfare bill. But the system is all based on faith, and right now it's like the faith is breaking down.

Still making sense? I'm very robust so you can tell me to shut up

Possession

Makes perfect sense, especially since I think I knew all that but hadn't linked it all together IYSWIM. Little grey cells now joined together a bit more! Next lesson - are there reliable predictions for what will happen if too many people lose faith in the banking system? Or is it all a wild guess?

bupster

It's unlikely to happen on an international level, because so many of the actors are part of the financial system - it would be like the whole of the City going mad and running out of their offices naked and gibbering. So the system as a whole will keep going, but this is a big shock and everyone's just trying to work out how much of a shock it is.

On a national level, we know exactly what can happen if people lose faith in the banking system. It happened in Argentina. Banks run on faith, as they lend out most of the money we deposit. If everyone lines up and demands their money back, they can't pay, without borrowing off another bank. Losing faith in one bank is therefore pretty bad for an economy, but losing faith in them all creates real problems. Banks either have to demand back the money they've lent (and they can't get it all, because borrowers have spent it) or not pay out. What happened in Argentina is the government had to legally limit how much money people could demand back from their banks, and then they devalued the currency so even that money wasn't worth so much.

If Greece refuses to pay its debts (which might happen if SYRIZA win the election on Sunday) then it might have to leave the Eurozone, and there will likely be a run on the banks as happened in Argentina. There are already signs of people taking out their money because they think their savings will be safer under the mattress.

Argentina recovered, and Greece will if it leaves the Eurozone (which is effectively a devaluation because drachmas won't be worth as much as Euros). But in the short term, it's really, really painful. People lose their savings, as they're not really worth much any more. Businesses go bust because they can't borrow money and nobody has any to spend. People on fixed incomes like pensions really struggle because their money doesn't go as far. In Greece, many people will have debts in Euros - drachmas won't be worth as much to pay them back. So we know what will happen there - but it's very unlikely to happen here.

Possession

Thankyou very much, that has made it a lot clearer.

bupster

Really? Because sometimes I confuse myself

mardatha

Just wondering why they let moronic millionaire ex-public schoolboys -who have never had to even balance their pocket money- run the country in the first place!

Possession

You explained it very clearly. My DH is a chartered accountant, and very clever, but useless at explaining stuff in a clear manner. I think just because his brain is wired a certain way he can't imagine anyone not being able to follow him. My brain is wired differently in a more arty-farty can't read a map kind of way.

bupster wrote: »

Really? Because sometimes I confuse myself

[Deleted User]

PIC - our wood deliverer is a lovely black lab who has a fascination with driftwood. He won't look at anything less than 6' long and as thick as he can manage to pick up. His dad has to take the branches if they have to go through narrow gaps or gateways cos the pup just keeps walking and gets stuck! We get a phone call when the pile of wood reaches 5' tall and collect by the trailerfull. He's a very good boy and one of Docky's bestest friends aren't doggies wonderful? Cheers Lyn x.