By Irfan Jalil
For the past year and a bit the world has been going through a financial crisis. People have been unable to pay back debts that they owed and now there is less money going around in the world economy. Businesses are going bust. Prices are getting higher and higher. Banks are running out of money and people are losing their jobs. This is leading to a global economic meltdown.
Some banks have failed and others have been taken over by governments. In the UK Bradford and Bingley is no more and Northern Rock has been taken over by the government. One of America's largest and oldest banks, Lehman Brothers, has collapsed. With many banks it's the case that if everyone who has a bank account wanted to take their money out in one go, the banks would not be able to pay everyone. Things are so bad that banks aren't even lending to each other.
How does this affect me?
"So, some faceless money-hungry banks are in trouble. What's that got to do with me?" I hear you ask. Well, because banks don't have as much money as they used to have they're not likely to be giving out loans as much as they did before. This means you'll find it harder to get a mortgage and if you wanted a loan to start a new business you'll have to ask your parents to sort you out. But even your parents might be in a tight spot. Their bank might decide to up their mortgage repayments.
If you've been saving up to put a deposit on a house, what's gonna happen to your savings if all these banks are going out of business? Barring a major catastrophe where all banks everywhere lose their money and you are forced to swap your Nike Classics for a tin of baked beans your savings up to £50,000 should be safe. Without going into too much detail the government covers the first £50,000 of your savings. In the event that you are a jammy geezer who has been blessed with £60,000 pounds saved in a particular bank which then goes bust, the government will give you only up to £50,000. So, it's best to split your savings between two banks. Say, £10,000 in one bank and £50,000 in another or £30,000 in one bank and £30,000 in another. If you have a small business account then that account can also recover £50,000 if the bank goes bust. Don't worry too much though. No-one who had money saved in a British bank has so far lost any money. Nevertheless, you might want to consider waiting a while before getting on the property market.
Economic mumbo jumbo
Economies boom and bust. Sometimes things go well but then things go badly, there is boom then there is bust. This is the bust after the boom. After a hundred years of following these up and downs, people found that from the 1990s onwards things just kept getting better. Governments started to think that busts were a thing of the past and they thought that economies could just grow and grow. Businesses were allowed to grow bigger and bigger and governments shied away from bringing in new regulations and imposing existing ones. Firms were allowed to do whatever they wanted to do.
Banks in the US used this freedom to lend money to people who had bad or no credit histories. People who were in fragile financial situations were lent money by banks to spend on homes, cars, credit cards, businesses and whatever else. From 2004 and 2006 interest rates in the US rose from 1% to 5.35%. People who had borrowed money only a few years earlier found that they were unable to keep up with their interest payments. House prices fell and banks started to sell their bad debt to each other. The longer that debts went unpaid the more money the banks lost out on.
But banks going bust is only the beginning. This is a warning signal of bad times ahead. Businesses are going bust and governments around the world have spent money on trying to keep their economies afloat. With all this happening you might lose your job, especially if you work for a construction or financial firm. If you do lose your job and want to start a new business, remember it'll be harder to get a loan to get you business started. Existing businesses are also finding things tough. With less money going round, people are spending less. Even big businesses are finding their values decreasing. People are buying less products. The less products people buy, the fewer employees businesses are gonna need to make those products. Ipso facto there'll be more and more people out of a job.
Feeling the pinch
People are generally spending less. Any spending they are doing is on essentials and less on luxuries. With less money floating around, food prices are getting higher. Supermarkets want as much of your money as they can get. It's no surprise that sales at discount stores like Lidl and Aldi are on the up. You're pretty safe if you work in these places. On the other hand businesses that depend on bank loans, construction and financial markets are doing badly. With people spending less on themselves they are also giving less to charity. Given that these are desperate times, there'll be people trying to take advantage of people's misfortune – watch out for con-artists selling you CDs, books and courses with "expert" information on how to buy and sell shares.
If you've recently started a family and have a Child Trust Fund then you should know that the value of that fund depends on how well the economy is doing. At the moment it might be worth less than it otherwise would have been. But seeing as your child gets to take the money out when they're 18 it might have increased in value a lot by then.
On the upside oil prices are falling. Businesses aren't doing well, so they don't produce as much and so don't need as much oil. If the price of oil is too high they are less likely to buy a lot of it. But if the prise is more reasonable businesses won't cut their use of oil too soon.
What's being done?
Governments are investing in banks trying to stop them from going bust. The US is spending half of its GDP to get American banks out of trouble. That's $700 billion. The war in Iraq is costing the US $600 billion. In other words America is having to go to war to get out of this financial mess. The UK on the other hand is prepared to spend almost as much trying to get banks out of trouble. That's 80% of British GDP – 6 times the amount of money the British government spends on education. However, Barclays Bank has gone the way of Manchester City and been bailed out by rich Arabs.
The economy is bound to pick up. But it may well get worse before it gets better. The government may increase taxes to pay for rescuing the banks. Over the next few years banks will be unwilling to lend to consumers. This will make it more difficult to get a mortgage. The fact that there'll be fewer banks around anyway won't make things any easier. But mortgages aside, with a slowdown in the economy and people having less disposable income there'll be many more job losses and ever-higher food prices.
With so many people going through gloom and grief it's a good time to show that you love your neighbour. And it's not like things are bad only in this country and other rich countries. You can still afford to feed yourself, right? But it's not like that for most of the world's population. People in poorer countries have been living with ever-rising food prices for the past couple of years. So, this is an opportunity to fulfil your duty of helping to alleviate misery and hardship.
It's difficult to tell how bad things will get until the economy starts to improve. That's my way of saying I don't what will happen. This could be repeat of past recessions – a part of the normal ups and downs in the economic cycle. Or we could emerge from this with the dollar no longer being king. But all that doesn't matter if you can't make ends meet. For now it's probably best to watch what you spend on and try to make your money go as far as it can.