Preparedness for when

Frugalsod

moneyistooshorttomention wrote: »

I can certainly see that there are a lot of people out there with personal debt and to the extent there are many with a triple burden of debt and mortgage and student loan.

I am puzzled as to why other peoples personal debt could mount up enough to affect Society as a whole though? People in debt going bankrupt affects those they owe money to obviously (and I do feel very sorry for creditors of people who've gone bankrupt obviously).

What is the reasoning behind reckoning that debtors could drag down Society as a whole though? Can anyone explain that?

There are multiple ways that the debts of individuals can impact society as a whole. Debts are really a claim on future income. So if you leave university with lots of debt you are rather constrained in what you can do. First you have one huge debt that needs to be cleared somehow, as it cannot unlike many other debts be written off in bankruptcy. For the banks that issue this debt it is a great deal. They get a percentage of your future income and if at the end of the term you are unable to pay the government has to pay the banks on your behalf. So that is eventually going to mean either higher taxes or lower pensions for all. What this also does is drastically reduce the numbers of new businesses as people become more risk averse as they already have one huge debt and cannot risk taking on a business loan.

Secondly individuals have to budget. So if you have take out a loan what you are effectively doing is bringing forward that expenditure from the future to today. Though you will have to eventually repay the loan and so that reduces future sales. Now governments loved credit booms because it got the consumers spending and the economy going at someone else' expense. They could look fiscally prudent and let the economy rip. So over time the extra credit pushes up house prices and rents. This means that wages have to go up otherwise companies cannot recruit staff as they have higher living costs as a result of higher property prices. What most economists do not appreciate is that rising asset prices are really a tax on everyone, a tax collected by the banks instead of the government, and for which you get no benefits. For new businesses rampant property price increases are a hindrance to the formation of new businesses.

Eventually personal debts get to a problem level for more and more people and eventually debt repayments and interest take up a bigger and bigger share of the wage packet. What this means is that individually you have less and less available spending for discretionary items and then eventually even basic items. You can see this in the rising numbers dependent on food banks. You can also see this in sales starting before Christmas rather in January as they used to. Stores are struggling to sell their merchandise when customers discretionary incomes are falling. So what is a problem for one person and they might write off as a personal failing is really the cumulative impact of 35 years of bad policy by governments impacting millions of people.

Then the real problem kicks in. House prices are set at the margin. So if a street has only one house that ever changes hands and all the neighbours stay put in their identical homes, then property value is set by what that one house changes hands for. So when you have a credit boom that house could rise twenty fold. Yet every other house will be valued at the same level purely because it is identical. What this means is that the others could keep remortgaging and taking out bigger and bigger loans and spending the money because their home was worth 20 times as much. Banks love this because it creates new loans and because the equity is used as security they have assets that are much more than the loans. So banks are able to leverage this out as new loans and so the Ponzi scheme continues. The real problem hits when that one house has a problem. The owner loses their job or is unable to afford the payments. If they foreclose but the next and only buyer is only willing to pay 10% of the previous price, then that revalues the rest of the street at 10% of its former value. So for the home owners if they remortgaged could suddenly find themselves in negative equity. For the banks it would destroy their balance sheets. The loans would be far more than the assets that they could claim (the rest of the street). They would be bankrupt. This is approximately what happened in 2008. Homes fell in value 15% and the banks were insolvent as a result of their leverage. Yet the central banks treated it as a liquidity problem and threw trillions at them. So while no bank went bankrupt the result is that all the efforts to bail out the banks have been to support housing prices at their over priced valuations. For individuals this feels better because their home is not worth a fraction, but it does mean that the banks are rescued and can pay out their bonuses again. It also drags out the eventual reset and so squeezes the incomes of the majority for longer.

Also when you feel sorry for the creditors it does depend who you mean. If you bought a tin of baked beans for £1 on credit and then defaulted that would be a minimal problem. When you buy an identical tin for £190 001 on credit because it is an investment and you got a loan for it do you still feel sorry for the bank? Just because there is a world awash with credit does not mean that the tin is worth any more than £1. So that extra £190 000 is really an asset to the bank that created the money and no one else. If baked beans reverted bank to £1 would the world be any worse off? Or only the fools who lent money on that tin of baked beans?

So when you add up the cumulative impacts of all these debts and the impact it has on their spending you can see how it impacts the economy.

Frugalsod

nuatha wrote: »

One minor niggle with an otherwise cracking post.
You've always been (or at least several centuries) an unsecured creditor.

Yes but there was deposit protection scheme brought in to protect customers from such losses. The main beneficiary was the banks as it prevented bank runs, and customers who would no longer need to panic. When Northern Rock failed I was asked by a neighbour who had money what to do. I said it was safe as long as it was below the deposit limit. They lost nothing. Though they were considering going to collect their money.

Now though I am not so sure that they would be. Cyprus thought about bailing all depositors even below the €100 000 limit. In the end they targeted everyone above that and it resulted in losses of 40% of deposits being bailed in. My only guess now is to play safe. Bank runs are guaranteed now with the new bail in rules.

Frugalsod

moneyistooshorttomention wrote: »

So, put another way then, what you would foresee is more people whose finances are okay of themselves being affected by a steadily increasing number of debtors going bankrupt and maybe Mr/Mrs Okay With Money comes a cropper because of being victim of someone else's bankruptcy (as they are one of the debtors' creditors).

So there might be more people suffering because of being owed money by a bankrupt. The housing market suffering affects those who aren't yet "settled" and/or have a mortgage.

Do you foresee any other ways someone could be affected then - either of themselves or as knock-on from someone else's finances being dicey and affecting them?

I'm rather taking your post as if you protect yourself from any risk of other people owing you money then they couldn't affect you. If you do what you can on the housing front to make sure you are "settled" and clear of mortgage as far as you can, then anything happening to the housing market cant affect you.

So, if someone protects themselves from being owed money by others (just in case they defaulted on them) and is safe against housing market changes, then do you foresee any ways people might still find themselves vulnerable to financial changes in Society as a whole? We've already established its wisest not to have too much money in a bank in case of a bail-in. Is that all bases covered then do you think?

Even if you did absolutely everything right you would still be impacted.

If you had only £1000 in the bank you might at most expect to lose £60, the same as the Cypriot government wanted to bail in everyone (6%).

If you had no mortgage the property would only be worth what people would be willing to pay. There may be millions of homes suddenly on the market and the buyers will be able to pick and choose. Also the biggest factor is that they would not be able to rely on bank loans so only cash buyers will be interested. So you could easily be looking at 50% price reductions. Many potential cash buyers may have been impacted by a bail in as well.

If you have no mortgage the home may still plummet in value but as it is only a valuation it means nothing, as you still need somewhere to live. If you used it to collect rent then rents might fall drastically as well.

If things are uncertain would you spend a lot of money on new carpets or a kitchen if you did not have to? Probably not. You might want to wait and see how things pan out. During uncertainty people stall big spends. So big ticket items are usually the first to be cut. In fact many people will sacrifice the deposit rather than go ahead with many deals.

They might also cut back on things that they previously spent on like car maintenance and try and do much of it themselves. Many sectors will be impacted by uncertainty. House sales will plummet so expect redundancies there. As these sectors are impacted so they affect the spending of all those that formerly worked in them. As these ripple through the economy then you see how it impacts peoples daily spend. Look at the rise of the German supermarket discounters. How many more people are shopping at a discounter rather than the big supermarkets nowadays? While some of that is down to the improving quality at the discounters the economy is a bigger impact. So even total national grocery spend is now falling.

You only have to imagine what you would do with a 25% cut in wages to work out what others may do in the same circumstances.

nuatha

moneyistooshorttomention wrote: »

Do you foresee any other ways someone could be affected then - either of themselves or as knock-on from someone else's finances being dicey and affecting them?

I'm rather taking your post as if you protect yourself from any risk of other people owing you money then they couldn't affect you. If you do what you can on the housing front to make sure you are "settled" and clear of mortgage as far as you can, then anything happening to the housing market cant affect you.

That is an overly optimistic reading of my post.
For example, your builder goes bust half way through your re-roofing or extension building as too many of his clients have defaulted.
you live in a terrace of 30 houses, apart from you and Mrs Cannybody four doors away the terrace is owned by two brothers who've bought every property as its come up for sale to use as student lets. Unfortunately the banks foreclosed on three of the properties (the student loans were late being processed so rent was paid four months late) within another four months all the properties are foreclosed and boarded up. Floor boards have been ripped up as the copper thieves have been visiting, water damage has meant Mrs Cannybody is staying with her daughter as she's terrified to return home. Your fully paid asset is worthless and if you leave it, will it be safe to return?
Your car went in for service, the bailiffs walked in and padlocked the doors, now they want storage fees for your car (which is half way through having the work done and therefore not drivable) or will rent you the use of the garage to finish the work on your car (supply your own mechanic and tools).

I know people the first two happened to, my mechanic was the supply your own mechanic (and the bailiffs tried to seize his tools) in the third.

In all three cases these were people who weren't involved in the financial misfortunes but suffered as a result of others. In my case I've lost enough over the last 5 years to have paid for my house at least twice over when banks have foreclosed on companies I've done work for that appeared financially sound, but banks put their own needs first and foreclosing a business to acquire the assets is a common practise.
I don't think there is a way to cover all the bases.

Frugalsod wrote: »

Yes but there was deposit protection scheme brought in to protect customers from such losses. The main beneficiary was the banks as it prevented bank runs, and customers who would no longer need to panic. When Northern Rock failed I was asked by a neighbour who had money what to do. I said it was safe as long as it was below the deposit limit. They lost nothing. Though they were considering going to collect their money.

Now though I am not so sure that they would be. Cyprus thought about bailing all depositors even below the €100 000 limit. In the end they targeted everyone above that and it resulted in losses of 40% of deposits being bailed in. My only guess now is to play safe. Bank runs are guaranteed now with the new bail in rules.

Northern Rock was hit by a run - which was amplified by the media coverage.
There was a fairly large media campaign about the deposit guarantee afterwards which I believe effectively prevented runs when the rest of the news broke and the bail-ins happened.

I really don't know if the UK Joe Public will remember that the early proposals were to haircut every deposit in Cypress or whether they'll remember that nobody lost money below the guarantee limit in the UK with Northern Rock, B&B or even the Icelandic Banks. People may distrust politicians but they do tend to trust governments.

As I said, it was a minor niggle and I could see where you were coming from, it just amazes me that many people have never realised or accepted this.

Karmacat

I'm following the debt posts with interest, though I need to let it all digest first.

And speaking of debt ... I'm just speed reading through this morning's live Guardian blog about what the ECB dumped on Greece last night ... http://www.theguardian.com/business/live/2015/feb/05/greece-germany-debt-talks-ecb-collateral-rules-live#block-54d311c1e4b0893cc1b21237

Safeguarding ourselves financially becomes ever more relevant.

Frugalsod

nuatha wrote: »

I don't think there is a way to cover all the bases.

True but just stop taking silly risks like more than the deposit limit in any account or bank group.

nuatha wrote: »

Northern Rock was hit by a run - which was amplified by the media coverage.
There was a fairly large media campaign about the deposit guarantee afterwards which I believe effectively prevented runs when the rest of the news broke and the bail-ins happened.

That was technically a bail-OUT, by the tax payer. What is proposed now post Cyprus is a bail-IN of depositors, with no involvement by the taxpayer. Very different solutions.

My neighbour saw the queues on the TV as well and that was why she asked me. I knew about the deposit limit and said unless she was over the limit she would be fine.

nuatha wrote: »

I really don't know if the UK Joe Public will remember that the early proposals were to haircut every deposit in Cypress or whether they'll remember that nobody lost money below the guarantee limit in the UK with Northern Rock, B&B or even the Icelandic Banks. People may distrust politicians but they do tend to trust governments.

The UK government guaranteed everyone. Ireland started that, though it was forced on them. If not they would have had a bank run. So even those above the limit were protected in Northern Rock. The Icelandic banks were not regulated here so what the government did was guarantee UK depositors and they sued the Icelandic government for the £5 billion or so. In the end the government got the money, as bank assets were sold, but it was several years later.

The fact that many did not lose money is why the public might not do anything next time around. Though this time if the banks are in trouble then many could lose a lot.

nuatha wrote: »

As I said, it was a minor niggle and I could see where you were coming from, it just amazes me that many people have never realised or accepted this.

Yes the unsecured status is debatable when there is a deposit guarantee scheme. With a deposit protection scheme that is only in name only is why I suspect that bank runs will be definite from now on. Look all across the EU periphery. They have been under going silent bank runs for months as many billions of euros are leaving to Northern European banks or in London property. Greece has had hundreds of millions withdrawn in the last few weeks. That is a bank run.

Personally if the losses are 6% across the board I only expect to lose a few hundred at most. I am a long way from the deposit limit so no risk of a bigger loss.

Frugalsod

Karmacat wrote: »

I'm following the debt posts with interest, though I need to let it all digest first.

And speaking of debt ... I'm just speed reading through this morning's live Guardian blog about what the ECB dumped on Greece last night ... http://www.theguardian.com/business/live/2015/feb/05/greece-germany-debt-talks-ecb-collateral-rules-live#block-54d311c1e4b0893cc1b21237

Safeguarding ourselves financially becomes ever more relevant.

Unless, as Frances Coppolo asks, it’s really all about Germany...

Varoufakis is gambling that the Eurozone, and more particularly Germany, will not dare to push him off the cliff because of the consequences for international political relations. If Germany was seen to force Greece out of the Euro by refusing to negotiate, it would become an international pariah. There are already voices reminding Germany of its own debt forgiveness in 1953, and anti-austerity movements in many other Eurozone countries would only be encouraged by Germany and/or the ECB looking like bullies. Forcing Greece out of the Euro could result in the disorderly unravelling of the whole thing.

I may be completely wrong, but this looks far more plausible to me than a simple explanation that fails to take account of the signals given by both Varoufakis and Draghi. In which case, Schäuble should beware. His position is nowhere near as strong as he thinks. He is dangerously close to the cliff edge himself. If Germany pushes Greece over the edge, Greece may well take Germany down with it.

The original bail out of some €240 billion was a massive bank door bail out of the foreign banks. Only some €15 billion actually went to help Greece.

If Greece was pushed out of the EU they could default completely What this will mean is that the EU banks will have effectively dumped more than €225 Billion of junk on to EU tax payers, mainly French and German taxpayers. That will mean that the balance sheet of the French and German governments will end up in the toilet. That is what the Germans need to avoid.

France is already in trouble and losing its share will push it closer to more extreme problems. Germany could also suffer as I suspect that there will be lots of claims on Credit Default Swaps that could push Deutsche Bank into insolvency. With that the new bail in rules will mean lots of German businesses losing money in the banks.

In the end the banks dumped their bad loans on the taxpayers and somebody will have to eat the losses.

blindman

Perplexed_Pineapple wrote: »

I don't think you are entering into the spirit of the thread, blindman. Some might consider it trolling. However, since you ask:



The spade (not a shovel, a spade can shovel but a shovel can't spade) lives in the car all year round in case I stop off at the lottie. The mobile phone is on my person at all times. I prefer stout hiking boots to wellies. Common sense is suprisingly uncommon but I think you'll find quite a lot on this thread if you care to look. As to where I drive, a relative of mine was stuck in a snowed-in car for 16 hours within 10 miles of the M25 a few years ago and where I drive is a lot more rural than that. I know it's not likely to happen, but if it does I will be safe and comfortable. You think it won't happen to you? It probably won't, but it could.

So why do the Special forces use a shovel and not a spade (spade is for gardening m'dear)

Before you venture out to get stuck in the snow I suggest you listen to the weather forecast and don't make the journey.

Common sense is suprisingly uncommon but I think you'll find quite a lot on this thread if you care to look.

Really?
Butterflybrain was stuck in the dark in the house cooking under candlight because ONE bulb blew and he\she had no replacement?
And He\She was "prepared" :rotfl:

nuatha

blindman wrote: »

So why do the Special forces use a shovel and not a spade (spade is for gardening m'dear)

Your link goes nowhere, may I enquire what you intended?
As PP points out a spade is more versatile than a shovel. Incidentally the Gerber Gorge Folding Shovel is actually a spade, I'd blame some civil servant who wouldn't know a piece of loose earth moving equipment from a tool for digging foxholes (the tool was previously an entrenching tool)

Before you venture out to get stuck in the snow I suggest you listen to the weather forecast and don't make the journey.

Sound advice, not always possible but sound advice. Weather forecasts aren't always infallible either.

Really?
Butterflybrain was stuck in the dark in the house cooking under candlight because ONE bulb blew and he\she had no replacement?
And He\She was "prepared" :rotfl:

You might read the post you're making fun of:

Butterfly_Brain wrote: »

The light in the kitchen blew this week and it was at night of course But I was prepared I have those stick on lights under each cupboard and a couple of lanterns and managed to cook a meal and wash up in that light.
The next day and £8.99 out of pocket for a fluorescent bulb :eek: it was fixed.
I swear the last time we had to change it the price was only £4.99 :eek:

I presume it was a fluorescent tube that had gone, but having stick on lights and lanterns is hardly "cooking under candlelight" is it?

None of us are perfect, I learn more from my mistakes than I do from things going smoothly.

blindman

nuatha wrote: »

Your link goes nowhere, may I enquire what you intended?
As PP points out a spade is more versatile than a shovel. Incidentally the Gerber Gorge Folding Shovel is actually a spade, I'd blame some civil servant who wouldn't know a piece of loose earth moving equipment from a tool for digging foxholes (the tool was previously an entrenching tool)

Sound advice, not always possible but sound advice. Weather forecasts aren't always infallible either.


You might read the post you're making fun of:



I presume it was a fluorescent tube that had gone, but having stick on lights and lanterns is hardly "cooking under candlelight" is it?

Hardly being prepared for SHTF though nor a good example of common sense.

None of us are perfect, I learn more from my mistakes than I do from things going smoothly.

Corrected the link-sorry-mind on other things-Meteor hurtling towards Earth next week-need to get some water in-Oh and put the bins out.
(Don't worry about the meteor-according to the title all of you guys\gals on here will be fine).