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?

to reiterate what novice said - awesome thread with some great first hand experience of events leading up to this crisis.

i would add a couple of other things into the mix. first, we had another boom before/concurrent with the housing boom - ie the tech boom of the mid-to-late 90's which imho really upped the ante in terms of the financial rewards expected by the financial/legal community. however on the plus side new technology helped businesses become more efficient, reduce costs and so on - so the immediate effects of the tech crash were not more obviously felt in the wider economy and the housing boom could continue to gather steam. it was almost as if the baton passed from one to the other so the boom could continue a little while longer.

re the ability of the BRIC countries to save the global economy - i think that assumption is over-stated. the uber-rich in most countries these days - including the multi-millionaires of Shanghai and Mumbai - are all about retaining more money for themselves and splashing out on status symbols for themselves (eg skyscrapers/multi-million pound yachts) rather than investing in their local communities and/or awarding themselves financial rewards that are in any way related to what is earned by most people who work for them. so one person might be able to buy a superyacht but most of the people who work in their empires still will not be able to buy a toaster/curtains/hi-fi (to use the example above). arguably the economic health of countries relies upon the latter rather than the former....

posters who have lived/done business there will be able to confirm/deny this but my understanding is that while china and india have many millions of potential consumers, their nascent middle class is comparatively small and not enough to fill the hole that would be left by a massive drop in demand from the west. so there may well be problems in the chinese economy that would add to the problems of the west rather than save us all...

If it's in the average deposit account earning sub 3% and inflation's at 4%+ for much longer than 'wiped out' is precisely what it will be. Low risk = low reward. As ever, don't invest what you can't afford to lose.

Agree with Cogito. I am also back in the market because I think its a great time to pick up good stocks cheap but I am looking at it as long term investment. Sovereign wealth funds, who are really good indicator of where markets are going are also buying. As are hedge funds that have an element of long term holdings.

teejwood, the research and analysis that I have read showed that given the middle classes of the BRIC economies are the folks who are expected to fuel the growth in the global economy. Caveat is that I think I was looking at this (in a work context) about a year ago.

I will leave all the economics to the well-informed people who have written such interesting posts above, but I would like to give some more insight into why people are so angry in Greece.

I have lived in Greece for 12 years now. It's true, as the other poster said, that public sector corruption is rife. But now people are hearing that even though the country is in a terrible situation, NOTHING is being done about the people who have stolen, embezzled or whatever from the public purse. NOTHING is being done about tax evasion. Ordinary low income families are being hit with massive tax bills while the wealthier classes, with their Swiss bank accounts are carrying on as they always have done.

This month I received a letter on 20 Sept demanding that I pay an extra tax bill of over a thousand euros by the end of the month. They have named it "Solidarity Payment"(eisfora allilengiis). Next month's contribution has been named "Special Property Tax". The month after they will find another label.

I don't have the money. Where am I supposed to find it? I am already required to pay for all my disabled son's healthcare. I have had to withdraw him from some physiotherapy sessions as I cannot afford it. I have just had to find nearly 40 euros to pay for materials for my son's school. With salary reductions, increased taxes, I have just 200 euros to buy food and pay soaring utility bills, and now they want this solidarity payment. Among my inlaws, several have lost their jobs, one his house. They don't have the money for the solidarity payment either. They haven't been demonstrating yet, but they are getting pretty angry.

I know all this does not excuse the corruption and frankly stupid economic policies Greece has seen over the years, but I am simply explaining why a lot of ordinary people here are angry.

Alexpolismum explained the anger felt by Greeks far better than I can. The key point she made, for me, is that the Greek government haven't started to reform their grindingly old and burocratic institutions as the Greek people, the EU and the IMF are all demanding. The Greek government simply issues more tax demands to ordinary people when they haven't collected the billions in tax that they are legitimately owed from previous tax years. Hence the anger - no reform - just printing a different sort of paper to raise money to pay civil servents, when before it was Bonds.

But to start collecting unpaid taxes would mean most of the political class and their rich shipping magnate friends getting hit in the pocket. I read somewhere (must see if I can find a link) that there are only 11 millionaires living in Greece according to Greek tax returns....

I would add that the other Eurozone countries will never let Greece fail - they simply can't afford to.

The German perspective is that they are furious at having to, once again, bail out profligate counties who are still refusing to reform, and effectively pay Greek state pensions at 55, when Germans retire much later. But the German political class don't see it that way - they'll vote the do anything necessary to save a default by Greece. The German policitcal view is that Helmut Kohl sold Germany and devalued their own Deutschmark to the Eurozone as part of his personal vision for a united (politically too, eventually) Europe. The Euro was the first step towards that. Kohl had one eye on his political legacy, i.e. to be remembered as a great German Chancellor; a new Bismarck, but uniting Europe rather than the German speaking principalities.

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? mainly the givenrment is overspending on stuff for the population - mainly on pensions, NHS, welfare and education (each roughly similar) with a fair chunk (about half as much) on defense. In total in 2009 the government spent nearly £700 billion but only got about £500 billion income (from taxes and things).

Put simply the amount of tax that evreyone is paying is consistently less than the cost of the services they receive.

You can do it for yourself - imagine if you'd had to pay for everything that you get for "nothing" - ie imagine that you had to pay for all the school fees, hospital treatment, bin collections, street lights, roads, etc etc and subsidise anyone who coul dnot afford to pay - then think about how much tax you have paid.

Alex and Yoko
thank you SO much for your posts
they have made so much more of it make sense

Living
I utterly agree that many countries have been told - and chosen to believe - that they can have Scandinavian style services with American Levels of taxes

And sadly the last government encouraged the "they" mentality by interfering in everything and making people feel helpless
then again this lot ---- Pickles and his bloody bins !

Sadly the older I get the more Libertarian I get
Here's a good weekend read.
www.amazon.co.uk/Eat-Rich-Treatise-Economics-ORourke/dp/0330353284
He can be a bit of an arse and he strangely believes in trickle down BUT he makes some REALLY good points about :
if you want it done, be willing to either pay for it, or do it

The government in the UK and Eurozone (and US for that matter - look at its deficit) largely mirrors the population in its "buy now, pay later" approach to consumption of cheap credit. The Blair/Brown governments' continuation of the Tories PFI idea for public sector borrowing will mean a very heavy price to be paid for shiny schools and hospitals in the future, but which partly gave the Blair years their feel-good prosperity. No polician has the balls to cut spending by THAT much to balance the books. Rising standards of living are what gets policitcians elected. You could blame democracy for that

just wanted to add that I have enjoyed reading this thread and have learnt loads!!
wrt property prices - I live in NE Scotland near Aberdeenand here the prices are fairly steady, they continued to increased though more slowly post 2007-8 and are now static but not really dropping .... so will we have a delayed property crash as is happening further south, or can pockets remain stable (there is still a lot of wealth from Oil industry up here)

With the lack of confidence in politicians and the financial sector, it will be countries who produce/manufacture goods who will pull through and countries which trade in more dubious value added services, especially financial services, which are going to take a huge and prolonged hit. Unfortunately, the UK falls into this category.

If you are to what was the single cause of the current crisis I would say that "money" was to cheap throughout the noughties which resulted in the fundamental mispricing of assets across the board.

In the aftermath of 9/11 the Fed dropped interest rates fearing that the US already destabilised by the dotcom bust would slip into recession. By dropping rates they not only hoped to stimulate growth by making capital investments cheaper, but also drop yields on govt bonds. Lower yield makes govt debt less attractive, so investors looking for better returns switch into equities and credit (corporate bonds/debt). A more buoyant stock market in turn increases the perception of wealth so people spent more.

The flip side of this is that borrowing became cheaper for all. Banks were able to extend credit to more customers as their funding costs dropped too. Investors on the other hand needed better returns so turned to riskier assets such as mortgage backed bonds. With more investors chasing better returns the yields on these dropped too, pricing them at a level which no longer reflected their risk appropriately. This happen across asset classes, but particularly credit, and asset backed bonds.

By 2006 mortgages began to reprice at a higher level, not because base rates had risen, they had actually fallen but because the initial teaser low rates expired. The higher rates triggered lots of defaults. These in turn meant that the bonds that had been backed by these mortgages were worth less than had been paid for them. Banks that held these bonds had to recognise their losses. This helped trigger the credit crunch as no one was certain who held what and who might go bust. Banks stopped lending to each other. The credit crunch also crushed corporates ability to borrow. Lay offs ensued and the vicious cycle starts.

So if you're still with me and looking for someone to blame, it's all Alan Greenspan's fault.

talkinpeace2 what you just posted above is so scary because it applies to individuals as well as governments.

What happens when the BRIC middle classes get caught up in a credit crunch?

This is the Galbraith book I read
The Great Crash 1929: The classic account of financial disaster by John Kenneth Galbraith

I am going to white wash the walls and live on minimalist futons and be a vegan with energy generated by solar panels. If everyone did this would we avoid economic disaster?

If everyone did that, it would cause economic disaster! Demand keeps everything going.

Seriously, the only thing George W Bush ever said that I agreed with was in the wake of 9/11, anyone seeking the appropriate response should go and buy a car.

ninedragons Isnt that the 'keynesian' solution? The Brown solution? The solution which Osborne is saying doesnt work?

"I am going to white wash the walls and live on minimalist futons and be a vegan with energy generated by solar panels. If everyone did this would we avoid economic disaster?"

You may avoid personal economic disaster because your living costs would be very low but cattle farmers would struggle if everyone went the same way. And if everyone stopped buying other goods, the people who make and retail those goods would have to lay everyone off... not helping the problem. If you put your money in the bank and count it rather than using it (which is happening at the moment as people pay down debts rather than borrow or spend) this lowers growth. Spending money you have is prudent. The Keynesian theory is spending money you don't have to generate demand and jobs. Which is what we've been doing, personally and nationally, but which came unstuck in 2008.

The solar panel comment is interesting, however. The successful businesses of the future, rather than necessarily 'manufacturing' could easily be in energy production, water conservation and other innovations that reduce reliance on fossil fuels and enable greater self-sufficiency. America, I think, is very well placed for this next phase.

A question to the economists out there. What will it need to happen in the domestic/ international economies for it all to go tits up in the UK ie .sky high interest rates, mass unemployment, house price crash , serious negative equity and repossessions. I ask this as was working during recession in early 90s when all above did happen and it was very grim but people are saying the financial situation is worst now but we don't seem to be suffering as much?

The main danger IMHO is if unemployment gets out of control. If the markets dry up for our goods, if we are uncompetitive, if companies relocate elsewhere etc. Unemployment costs the state money and the people who are unemployed are not productive & have no purchasing power. It's the vicious circle that we saw in the eighties. The relative price of housing is only important if you want to sell/buy a property or if you default on the mortgage... but there, mortgage companies are being more flexible about repossessions than they were 20 years ago. Interest rates going up wouldn't be a universally bad thing. Borrowing money would become more expensive and there would be more people going bankrupt but, at the same time, many pensioners and savers rely on interest to supplement their income.... when interest rates dropped, they suffered very badly.

BRIC middle class is unlikely to get caught up in a similar credit crunch as

1. Their banking system have a much healthier funding structure than developed economies.

1. Interest rates charged in these countries are higher and more adequately reflect the risk in lending.

1. And because individual credit is much lower in these countries.

Clean energy companies have been around for decades, such as Vestas. A big push was made about five years ago into bio fuel crops. The problem is you need a consistently high oil price to make them viable i.e. Above $100 a barrel. With global growth on the wane, and fear that there would be significant demand destruction, farmers switched back into food crops as prices here remained buoyant. That oil has remained high in dollar terms is down to two factors 1. The dollar has appreciated against other major currencies 2. There have been supply issues, such as the Arab Spring. Demand has not increased.

Sterlings weakness has been great for domestic manufacturing and a real boon to exports.

The biggest threat IMHO opinion is that political activism takes root and the
London riots are replayed again and again. Apart from the huge costs incurred, no one will invest in the UK.

Iirc in 1990 we used interest rates to control inflation and exchange rates whereas this time round we have let inflation rise and kept rates low. I do wonder whether there will be a point where inflation is so high that low interest rates becomes an unsustainable fiscal position. At that point, I think homeowners who got out mortgages between 2002 and 2007 are the ones who are most exposed to being unable to afford mortgage repayments. However high inflation will already have hit lower income households and the "working poor". I think that between those two things plus the effect of public sector cuts that's when a very sizeable proportion of uk will feel the pain.

The difference between 1990 and today is that the inflation being generated is largely coming from external sources rather than internal. The price of oil and other fuels is knocking to make other goods and services more expensive... food is a good example. If the BofE were to raise interest rates substantially, it would not bring the oil price down but it would risk dampening down growth.

To me it 'feels' more like the mid/late seventies than the early nineties.

Cogito, thanks for that, makes total sense. Do you know how we got out of it in the 70s? Just thinking about the question you posed in your plan B thread that got a tad derailed. Ie is there anything from history that helps give clues as to what the govt should be doing? I believe that much as it hurts that keeping rates low and making cuts is the right answer but what I haven't heard thus far is a good strategy for stimulating the economy. Was it the strides in technology that did the trick in the 70s and/or less influence of the unions? Am probably just posing your question right back at you!

It may feel like the seventies with high oil prices, inflation on the up and strikes etc... but there are some important differences. You can't mention the 'T word' round here without being stomped on from a great height but I'll risk it :) The response by the new government in 1979 was to privatise a lot of the nationalised industries that were costing so much, cut public spending, put a block on wage increases and change strike legislation. But, since that's already been done, those aren't available. Neither is the big reduction in basic rate income tax that created the 'loadsamoney' era. The surge in home-ownership when council houses were sold off can't happen again because they're already sold. And we all know where the 1986 'Big Bang' deregulation of the City got us :)

I actually think a lot of the solution is going to lie in infrastructure projects. Things that can create training opportunities & work short and long-term, but which also generate income and improvie the country for the future at the same time. An echo of Roosevelt's 'New Deal' of the 1930s

Thanks for that Cogito!