So where has all the money gone?

[Bugsy2]

I just don't get it & I need someone within an economics sort of mind to explain - please!
We live on planet earth, there are currencies circulating all around the world, people buy & sell things. How can it be that 10 years ago the economic outlook was good & certainly in the West most people were buying houses, getting more wealthy & everything was fine & dandy. Now, it is all doom & gloom, countries are going bust, people are losing their homes & its all going tits up. So where has the money gone? Who has it, where was it, where did it go to?

@unreasonableme... whether it would be worse is difficult to say. However, since sterling and the UK economy are adminstratively separate from the Eurozone (although it is still a vitally important market for us), we have a lot more wiggle-room to make decisions unavailable to Eurozone countries.

The eurozone was never going to work the way it was set up. It had the ability to set interest rates but couldn't affect other equally crucial financial decisions such as tax collection in the member countries . Germany and Greece are like 2 people in a marriage but with very different financial habits. One is a grafter who saves and the other likes spending but in comparison earns very little .A recipe for disaster as any marriage counsellor will say.

Apparently Europe is nothing like as in debt as the US. I've been reading about the huge balance of trade deficit there and the fact that Illinois is bankrupt (larger than Greece in itself). CA and NYC also have major economic problems. I guess my question is, is this correct? What are the implications?

No Eastern European countries are in the Euro, some are members of ERM, but they have their own currencies.

but, living,

the drachma would not be completely worthless. It wouldn't be worth much but it would be worth something. Say a euro would be worth 100 drachmas. Greece's £X billion of euro loans would become £100x billion of drachma loans. The loan would still be owed. Greece would still have to pay it back if it ever wants to get lent anything ever again. Obviously it would take a long time, but at least in the meantime it could boost its exports, tourism etc due to the devalued drachma.

If it sticks with the euro, that doesn't mean it has any better chance of paying off its £x billion debts. In fact it has a less good chance as can't boost its trade. All it can do is hope that other countries will pay off its debts for it. But those other countries don't have money either. So those other countries will have to borrow more (using their better credit records) in order to pay off Greece's debts. So then those other countries will become less good credit prospects because they will be saddled with more debt.

And of course if the other euro countries take out extra debt to bail out Greece, that makes them less able to take out extra debt to bail out other countries (Italy etc). So in some ways, the fear about other countries should be worse if Greece is bailed out, not better.

?

It seems like Germany is acting as the Bank of Europe a lot of it is to do with confidence. People trust Germany not to repeat past mistakes. The Germans are used to being sensible and not expecting money to grow on trees. A countries deficit is how much it spends each year - how much it makes (the ones in Europe all spend more than they make so are all in debt). Germanies is low - no one doubts that the Germans can pay up if necessary. Countries like Greece and Spain have big ones.

Greece would still have to pay it back if it ever wants to get lent anything ever again. Obviously it would take a long time, but at least in the meantime it could boost its exports, tourism etc due to the devalued drachma

the problem is that no one would want to sell anything to Greece. So where would it get the raw materials to make things - and in particular where would it get oil? With no oil how would they move food around? Remember every society is 3 meals from revolution.

One way to understand - look out your window now at your garden (assuming you have one). Imagine trying to be completely self sufficient - grow enough to feed your whole family using only your land; provide all your own medical care; fuel; make your own tools by smelting your own iron etc.

Life would be pretty rotten :) and most of us would probably die. Now think how much better life actually is - th ediffernece is there purely because we have trade, economic systems, a structure to society etc etc. This is all based on confidence - we mainly go to work and get paid in arrears because we trust our employers to pay us and then we trust that there will be food in teh supermarkets which the supermarkets will swap for the money etc etc. Without the trust it can all collapse very quickly. Also without imports most countries today would find life very hard. You need a trusted currancy to import, especially if you want to import more than you export.

Yes the US is ruining the biggest deficit of all. The dollar however is still considered a "safe haven" currency, so in this world of uncertainty there are people who will buy US debt. Namely China. 10 year treasury yields are below 2%. In lay man terms, US debt has never been more expensive despite it's huge deficit.

Running not ruining! Although a prosaic typo!

Germany produces far more tangible goods than it consumes
when the Englist stop buying Beemers then the Germans have a problem
also after the 1930's and partition and occupation, German fiscal rules are very tight and boring

THe US debt is eyewatering
BUT
the single biggest expenditure BY FAR is the Military and Obama ain't gonna cut that
www.usgovernmentspending.com/classic.html

we are talking about two different things here.

Debt - how much a country owes - how many government bonds are out there needing to be repaid at some point (like your mortgage)

Annual Deficit - how much a country over spends each year.

Also you need to consider each relative to the size of the country's income.

So someone who earns £100K and has a mortgage of £300K is probably okay whereas someone who earns £20k but has a mortgage of £200K is probably stuffed.

The US has a huge debt but it is also a huge country with a huge income (GDP).

So debt wise the US owes in total about the same as it makes each year. Greece owes about one and a half times as much as it makes each year. How much the UK owes is either about three quarters of what we make (leaving out public sector pension commitments) or about the same as what we make (including public sector pensions - notice how important they are).

deficit wise - ie how much you overspend each year - at the moment we are overspending as much as the Greeks are (as a percentage of income - nearly 13%) and the Americans are overspending by less than us (about 11%).

You also have to look at a countries natural resources and the US has lots of these.

Again a bit like a household - you need to think about how much a country earns (GDP), how much it owes (debt), whether or not it is under or over spending each year (deficit) and how much it is "worth" (natural resources).

US debt/GDP is around 80%. The Greeks and Irish look a lot worse because they've put their bank bailouts on their balance sheets.

The US deficit is the elephant in the room. The current administration cannot raise taxes, and next republican one won't. How to raise income becomes let's cut expenditure. A large deficit is not good for any economy.

What do people predict will happen?

I think that eventually Germany and France will leave the Euro

France and Germany will never leave the Euro. It was their idea. What is more, monetary policy was dictated by what was going on in their economies not the periphery. To a large extent this, along with the loose fiscal policy of the peripheral economies governments is what has caused much of this problem.

France and Germany will continue to bail out Greece etc until the situation has stabilised sufficiently to permit an orderly exit of the weaker members.

Livingontheedge, another font of knowledge! Your analogies are very good - they make it easy to understand. I just can't help wondering why so many countries owe so much. Also, when you say "we" are overspending, do you mean the Govt or the population as a whole? Are there countries with good standards of living that aren't deeply in debt?

The scandinavian countries have a high standard of living but low debts as they have comparatively small populations and high tech lucrative industries . Switzerland is another one has huge wealth from Banking as they don't ask too many questions as to where your money comes from!

National debt far outweighs personal debt. It's not a bad thing for a nation to owe money as long as, most of the time, it's being used for capital investment, infrastructure projects and other items that will improve the prosperity of the nation long-term. Like taking out a mortgage on property - it's a sound investment. Where it becomes less advisable is when the debt is being taken out to cover current expenses - the deficit element. You'd know you were in trouble as a household if you were remortgaging your house to pay the bills and put petrol in your car. But, even then, it's OK on a national level providing you're predicting that the economy will grow, more tax will be coming in and that, at some point, things will flip around so that you are operating a surplus.

Most nations operate a national debt that goes up when times are bad and down when times are good... if they're managing things well. If a government plans borrowing on too optimistic a forecast of growth that never happens or if they fail to anticipate a crash (which do come round with a reasonable regularity) then the debt and the deficit become an issue.

And the tricky thing we have in Britain is that our Government debt is massively understated because of the PFI repayments due over the next 25 years
That nice Mr Broon did not get that you have to mend the roof while the sun is shining so borrowed when he should not

and PFI payments are not capital expenditure - the most expensive and rising every year part is the building management fees : ie cleaning and changing lightbulbs - and because the income stream is guaranteed by the taxpayer there is a significant "secondary market" in PFI contracts for considerable more than their face value

All of the UK's Tax offices are owned by a Bermuda based company whose directors are probably hedge funds !

That makes sense Cogito. So how do we get growth again?

TP2 - why does the Govt having to repay private finance initiatives? Gads, another layer of stuff I don't understand!!! I thought the whole point of them was that the Govt wasn't paying?

Queen Alexandra Hospital in Portsmouth

Method A : Government borrows the £320 million and builds it and then the Health Authority runs it. BUT to borrow that £320 million would have broken Broon's "golden rule"

Method B : Sign a PFI deal with a private company who will build and manage the hospital and charge an annual fee for doing so. THe build fee is fixed, the management fee increases each year. Fee during Broon's time only £32 million.
Cost to the taxpayer over the 30year term of the deal £960 million minimum.

Repeat for every PFI deal in the country.
Personally I think PFI deals should be forcible nationalised.

Can I just say how much I'm enjoying this thread.
Apart from one knobjockey activist, who scuttled away sharpish, we seem to have been able to share so much information.

Can I ask, if anyone is still around, whether it would be better or worse for Greece to remain. IYHO natch.

One of the big reasons why people are going to such lengths to keep Greece in the Euro, even to the point of throwing the Greek people like lambs to slaughter is because everyone is scared of what happens next.

Greece is a small economy which can be bailed out. And we've all seen how hard it's been to get political consensus even in Germany whom without, this would all fall down.

But if Greece go, all eyes will be on Italy, Spain & Portugal. And there's no way on earth even with the collective might of the other EU nations that Italy can be bailed out, let alone Spain & Portugal too.

So the ultimate fear is that if Greece is forcibly ejected from the Euro then the whole thing will collapse.

And I agree that the elephant in the room is the US. Not because they have an unsustainable amount of debt. The numbers are frightening but they have a huge economy still. No, the real problem in the US is the political deadlock which is preventing them from dealing with the problem.

You have the Republican's whom are dominated by the tea party whom refuse to cut taxes even a penny, especially not on the rich. And the democrats whom want to raise taxes on the rich. Between them it's simply deadlock. Unless that's resolved soon then it's going to be a whole new financial crisis.