OK can someone explain to me what is going on in plain simple English? I'm afraid I flunked Economics in High School (OK I didn't pass by very much which is the same thing in my book).
If I don't understand the whys of something then I tend to either hate it or ignore it. The economy has gone into the ignore pile.
Now from my limited understanding, the following situation has occurred:
Some people (called Wall Street and US Sub Prime) played hard and loose and lost heaps and heaps of money.
This means that the US economy has no spare cash.
So their govt is putting more cash back into their system so that these companies have some pin money to play with.
What does this mean for the ordinary individual in the US?
OK so because the US Economy has no cash, they are not buying Australian goods.
SO, to entice the US economy to spend money that it doesn't have, the Australian dollar is devalued until such time as the US goes, hey yeah, lets spend some of our govt provided pin money on goods from these guys.
The Australian dollar a couple of months ago was 96 US cents. Last night it was worth 62 US cents. And its still falling.
To me this means in the short term that buying cross stitch supplies and books direct from the US is becoming unaffordable and I have to cancel some Amazon pre-orders and my Silkweavers fabric club. I can probably cope with retaining my Down Sunshine Lane floss club.
The problem here is that the devalued dollar is devalued against every currency not just the US Dollar. So everything that is imported into this country, clothes, books, manufactured items, food stuffs you name it - will be that much more expensive.
Where is the logic in some financial guys in another country losing all their cash, causing prices to rise for my goods and services because my govt thinks my dollar should be devalued so they guys, with no money, can buy our goods (with what? They have no money?)
Can someone explain this in simple English please? Because I really do not understand why our financial system works the way it does.
21 comments:
Simple....substitute a "W" for the B in bankers and there you have it.
The world economy is played with by politicians and high level bankers.
They do not think of the ordinary person on the street.
That person is a miniscule ant to them.
Cynical, moi? Yup.
My cynical reply: this is what happens when you give people from the ghetto $400,000 home loans.
I'm also questioning the practices of my own economy here - why devalue our dollar so badly when no-one has any money to buy from us anyway?
I don't know if lowering most of the currencies lowers the floor for all? I am so not a finance person. If I understand it correctly, all economies affected have to make similar adjustments to prevent another Great Depression, which affected all gold-standard (silver-standard?) economies to soem degree. Though, I would think, with absolutely no basis on any actual knowledge, that if the Asian markets stay strong, yours would, too? Or is AUS too closely embroiled with western Europe/US?
The Asian markets buy our raw materials - so they're loving our cheap dollar!
US/Europe buys our manufactured goods - so our dollar is linked with yours instead of the Asian markets.
So yeah - we're getting screwed any which way you look at it.
But so far I have a job that pays enough for all the basic goods and I'll have my debts paid off in two years under the current situation. Just like everybody else I'll be stitching from the stash pile and using the library more often :)
As I understand it, Karen, we're no longer basing our money on gold, anyway. I don't know what it's based on now, and I cold be wrong about that. From what little reading I've been doing in the local paper (and believe me there's not much in the St. Joe paper about anything but who got arrested and why), the Asian dollar (yen..whatever) IS backed by gold and they have a lot of it. Since we've so stupidly farmed all our stuff out to China and other countries buying those same things back cost at least twice what they should.
And Mel, dunno if it makes you feel better or worse, but last trip over, for every pound I spent, it was actually about $2.20. Totally embarrassed the day we went shopping at at the last store my card was declined! I had NOT spent $1000!!!!......oops.... well....maybe I had....ahem
$2.51 here right now :) :) :)
Let's see if I can explain a bit of this in plain English. The current meltdown is not actually being caused by subprime mortgages (aka "people from the ghetto getting $400K home loans" but rather by the totally unregulated practice of bundling mortgage loans into securities and selling them to investors. It's effectively making bets against bets against bets (where does it stop and who do you actually owe money to?). And yet the companies who
packaged these loans together have managed to succesfully argue that since these "derivatives" (because they're "derived" from these loans) aren't actually securities (as in shares of stock), they're not subject to regulation by the Securities and Exchange Commission (SEC). In fact, there is no regulation about these derivatives are traded. And because they're not traded on an open, regulated market, no one actually knows what they're worth, since the originals were traded at pennies on the dollar. Put it this way, the amount of bad mortgages is completely dwarfed by the amount of these derivatives that have gone south. So while it's easy to blame bad banking decisions for this mess, it's really these investment banks that promoted the derivatives (and made a huge amount of money doing so) without really understanding what they were selling, those are the ones who are responsible. And the US government just bailed them out.
Tangential, but relevant. From a friend in England.
I've worked in electronic supply-chain software for many years (electronic ordering, electronic invoicing, electronic delivery notes etc.) and so I am quite aware that when, say, Tescos buys something like eggs, it can buy the complete output of many hundreds of farms, and so it can go to an individual farm and say "you want 10p per egg. We'll buy *all* of your eggs at 6p, or we'll go to the farm next door and buy theirs and you will get nothing" and the farmers often have to take the 6p, even if it costs them 5.9p per egg (and sometimes, when fuel prices and feed prices and everything else increases, when it costs them 6.5p per egg)" ... that's all well known.
What is less well known is that Tesco also say "and we'll take the eggs now, and pay you in, oh, let's say 90 days time, after you submit your invoice, and you can't submit your invoice until after we confirm that you've delivered the eggs" so in practice it can be over three months between the time the eggs are delivered and the money arrives (assuming it arrives on time ... and the supermarkets have *good* financial people working to make sure the money stays in Tescos bank making interest as long as possible).
This effectively means that Tescos are selling you products now they don't have to pay for for three months ... an interest-free loan in other words. But that egg producer may not have the same clout with their feed supplier, their energy supplier, their vet etc. so they have to pay for producing the eggs much sooner. So they have to borrow now and hope their profits pay for the cost of capital tied up in "stock in production, and stock delivered that's not been paid for yet" ... plus a contingency for when the company they have delivered to goes out of business before it has paid them.
The article linked above points out that this is actually quite a large proportion of the lending in the financial system at the moment and that it is based on the small companies being able to get borrowing to pay for the feed etc. and then making enough profit 90 days after delivery to pay for that borrowing ... and with the banks closing down, not lending or raising borrowing costs, small businesses may not be able to continue getting that financing. Which mean the big businesses that depend on that invisible lending will find their suppliers either going out of business or needing to say "sorry, if it's a choice of 6p an egg, then we need payment in 30 days, or on delivery, or on order ... or it's 8p/egg ... or we have to go out of business" ... one or two suppliers try that and the supermarkets have the power to go elsewhere ... but if a large proportion of suppliers are affected by the credit crunch, and suddenly the suppliers have power and the supermarkets are in trouble.
And for supermarkets, replace with large furniture suppliers, car manufacturers and any other industry that relies on a supply chain and delayed payment terms.
Which means that it's quite likely that prices will have to rise to cover not only the increased cost of borrowing, but quite possibly for the reduction in the supply-chain delivery-payment period. Tesco has an annual worldwide turnover of £48 BILLION, which is £4 BILLION a month. Just for sake of argument, say that they have to pay for 25% of their turnover on 90 day terms, that's £1 BILLION a month, and say those 90 days drop to 60 days for that sector ... this means that they need to find an extra £1 BILLION pounds of borrowing to pay their suppliers sooner (luckily they made nearly £3 BILLION pounds profit last year) ... so Tescos are probably safe ... but what about other companies?
I couldn't explain it in difficult English.
Very true - the whole mess here is using delayed payment terms by large ompanies to drive supply prices lower which has caused havoc with our farming industry leading to wholesale bankruptcies and mass importation of basic foods. A lot of compaies here are using cheap loans to shore up their accounts and are now coming unstuck as the supply of credit dries up - XL holidays anyone?
Also the wholesale acceptance of JIT ordering strategy means there are no stockpiles of supplies so if a supplier fails, the knockon effect is enormous and immediate. As this crisis develops, we are doing the see a lot more large scale failures. This time around it will not be the small companies that suffer most but the medium and large scale over-extended businesses who have borrowed heavily to finance expansion. I'm watching and waiting to see who will be the next casualty. Two chains of companies in this postion have already folded - one will refinance (again) but the other is gone.
All this is happening because we have a weak FSA and no regulation of the financial markets. What we are seeing is in all probabiltiy a beginning and not a middle or an end
I *think* it's to make the importation level look better vs the exportation level. Exporting goods is more important than importing goods, because exportation means money coming into the country vs money flowing outside of it.
Other than that I think it's either your government or your trade representatives or your stock exchanges are fooling with you Aussies.
The va-banque of international finance sharks of the last roughly 20 years is finally coming back to bite them in their arses and it really makes me absolutely mad that governments should now pay the debt of these people to help them scratch up even more money for themselves and even less for everyone else.
Plain enough?
That said, luckily the Swiss money policy responsibles seem to stay on ground so far as the exchange rate has been very constant on just around 1 CHF to 1.05 CHF for the dollar for months.
I could still say a LOT on that subject, but I'll sit back and hold my mouth...
Correct. You haven't since 1974 or 1973, not sure which year exactly, but it was around these years. Might have been some time between 1968 and 1974. Back in those days we paid more than 5 CHF for one dollar!
And as far as why the US economy crash is affecting so many other countries, well, we owe most other countries billions. With our economy down, they are wondering if they will ever get their money back and what value it will have if we do ever pay them back. Our nation runs on credit, from the household level to the highest level of government. The debt has been building since the 1940's or so and everyone now realizes there will never be enough cash to pay it.
Not only that Sisu, but when the real estate market was flying high just 3 years ago, foreign banks poured a lot of money into the US, looking to cash in on the real estate boom as well (one reason you saw such ridiculously easy loan standards). These foreign institutions also bought derivatives but since that whole market has imploded, they've lost those investments. One more thing to add to the messy pile: big insurance companies like AIG made a killing selling insurance for these derivatives. They had to back up the insurance policies with some sort of collateral, in case claims were made. Well, the claims have been made, AIG didn't have enough collateral to back up the policies and the whole company was threatened with collapse (taking a lot of other companies with it). So the US gov't had to step in with an $85 billion loan last month. Then during Congressional hearings last week, it comes out that AIG paid for a plush vacation for its top salesmen that cost $442,000 held AFTER it got its giant loan. The excuse was "the event had been planned for months." Ever heard of cancellation??
Are we doomed to keep repeating this cycle, bigger and wider-reaching each time?
We don't have the money anymore!
Not entirely - Clinton left office after even several years of positive closures.
And there were other periods of time when the US household was in the positive since the 40s. But you'd be hard pressed to hold up positive figures with spending money like crazy on warfare and at the same time sucking every dollar you can out of social welfare.
Everything else you said holds very true, but it also holds true for a number of other nations who are now drawn down along with you guys...
UBS comes to mind... the bank is worth about half of what it was worth a year ago. And it's THE one huge Swiss bank corporation (the other, Credit Suisse, did a good bit better, but they weren't that strongly represented on the US investment market or invested more conservatively, but they also lost a couple of dozen billions).
I've just read about that AIG bit this morning and I have to say, those managers have a lot of chuzpe to even accept that paid vacation! But it seems that in that business, people have completely lost their sense of shame!
Three or four years ago when our unemployment rates ran over 6% (and believe me, that's a HIGH percentage here in Switzerland) I was outraged when the UBS director of the board had the nerve to announce the bank's yearly benefit of over 4 billion CHF! And he had even more nerve to claim that he was sure they could do even better. Didn't have his mouth so full anymore this spring and had to quit. Successor has the pleasure of cleaning up the shards now...
Again another tangent on the whole thing - or more a questioning of the way we do business globally - rather than this current issue.
Why have we regulated everyone's currency?
Why can't we all work for the same dollar or pound and pay in the same dollar or pound?
That way our exporters could still drop their prices on say wheat and sheep to the US without *automatically* giving our coal away cheaper to say the Asian economies ....
It also gives us little people a better shot at importing :)
Well that's always been true - look at what Richard did to England during his crusades ....
Does this mean that countries can only go to war when their coffers are full?
Maybe this economic "collapse" will end wars?
Maybe I'd check my glasses - I definitely can see some rose-tinting coming through ...
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