Financial Implosion

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Readers Question: What do people mean by countries/society/financial implosion?

Financial implosion implies a serious financial crisis where a country experiences a severe economic and financial crisis. The concept of implosion suggests that a crisis in one part of the economy would have a knock on effects to other parts as well – leading to a significant decline in living standards and creating a serious of economic problems such as inflation, unemployment and rapid decline in living standards. A financial implosion could come in various forms. For example:

1. Sovereign debt crisis. If a countries government debt becomes unmanageable and the government are unable to pay back the debt, it would have to default on repayments or print money to pay back debt. If it defaulted on debt, investors would lose money and would be much more unwilling to hold onto future government bonds. If the government dealt with insolvency by printing money (e.g. Weimar Germany 1922), then it would create inflation and likely hyper-inflation. This would cause an effective default for those holding bonds.

Negative Impact of a Sovereign Debt Crisis

If a country experiences a sovereign debt crisis, it could have a serious knock-on effects for the rest of the economy.

  • Individuals and financial bodies who held bonds would see a fall in the value of their savings.
  • Hyperinflation – if the country responds by printing money. Hyperinflation would cause instability and wipe away people’s savings
  • Capital Flight. If a country is insolvent, there is likely to be capital flight away from the country. For example, foreign investors wouldn’t want to hold on to the countries bonds any more. Even domestic investors would fear losing the value of their money and make seek to save money abroad. Therefore, there could be a sharp fall in the exchange rate and a fall in living standards as imports become more expensive.
  • Austerity policies. As a consequence of a sovereign debt crisis, the government would be forced to cut government spending rapidly and or increase taxes. This would lead to unemployment and a fall in aggregate demand. Therefore, it could push the economy into recession – making the government’s budget position worse (due to falling tax revenues). To a large extent, Eurozone economies are facing this kind of deflationary debt spiral – efforts to slash budget deficits are causing a rapid fall in economic growth. In a country like Greece, there is a strong element of economic implosion – policies to deal with the crisis are only making it worse – it is hard to see a way out. (the tragedy of Greece)

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Is the French Economy at Risk?

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The French are not too happy. The rating agency Moody have stripped France of their triple AAA rating – downgrading French debt to AA. [link] It probably wouldn’t be so bad, but their English neighbours still retain a AAA rating, despite having a much higher budget deficit. As the English would say, that’s just not cricket. To rub salt into the wounds, the Economist recently ran a cover with several baguettes wrapped around with a lit fuse ready to explode – The French economy on slow road to Crisis at Economist.com.

Is the French economy really at risk? or is the Economist just indulging in the traditional game of baiting the French?

Positive Signs for the French Economy

1. Bond yields.

french bond yields

So far, the French have been able to weather the Euro crisis. Markets have been reassured that the French economy is strong enough to deal with the twin problems of debt levels and sluggish growth.  Furthermore, if you take the optimistic point of view, there are some signs that Eurozone bond yields have fallen from their previous peaks. The Spanish premier has recently claimed the worst of the Euro crisis is now over.

  • However, as the crisis drags on, the debt to GDP ratio show little sign of immediate improvement, The Eurozone economy is getting dragged into a recession, and  the French look more vulnerable at their exposure to other countries debt, and the growing possibility of years of economic stagnation. Optimism is a good thing, but in the context of the Eurzone, optimistic forecasts for recovery have shown a depressingly regular habit of proving to be wrong. You are hardly reassured when the Spanish Premier claims the worst of the crisis is over.
  • For France, low bond yields are good and they have enabled them to borrow at low rates, but should the economy deteriorate, the markets could quickly turn.

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Falling Price of Mobile Phones

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The mobile phone market is a good example of how to explain some basic concepts of supply and demand. For example, it shows how improved technology and increased supply – can reduce price, even as demand rises.

According to Evalueserve – Nokia, one of the world’s largest mobile manufacturer, recorded an approximately 39 per cent fall in its average selling price (ASP) between 2005 and 2009.

The good news for users is that over the next five or ten years, the price of mobile phones is forecast to fall. This is primarily due to the increased competition and increased supply from major producers. As markets reach saturation point, demand will increase at a slower rate. (5% a year until 2015)

Supply and Demand Diagram for Falling Mobile Phone Prices

supply-increase-demand-price-lower

This article, suggests that a key factor in reducing prices will be the growth of markets in developing economies, such as India and China. Typically, these economies have smaller disposable income, so there will be greater pressure for manufacturers to price competitively. Combined with improvements in technology, and greater competition, prices could fall up to 70 per cent (4.8 billion of active mobile phones across the globe are below USD 100 by 2015), according to a recent study.

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Food Poverty in UK

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The past few years have seen a rapid rise in real food prices – especially, fruit, vegetables and meat. At the same time, we have seen falling real incomes for low-income decile groups. The consequence is that those on low incomes have been changing their diet in response to higher prices. With squeezed real incomes, there has been a greater preference for ‘cheap calories’ and lower demand for ‘more expensive calories’ – such as fruit and vegetables. Some fear the poorest are struggling to buy sufficient food.

The consequence of a switch to ‘cheap calories’ (e.g. saturated fats, processed sugar, less fruit and veg) has been to contribute to concerns about the nation’s health. During this period, obesity has continued to increase.

Price is not the only factor to influence the demand for food. But, increasingly, consumers are mentioning food prices and promotions as key factors in determining choice.

Income Decline for low-income groups

food poverty

 

Median income after housing costs fell 12% between 2002-03 and 2010-11 for low-income decile households – while rising in all other income groups.

Food prices have risen 12% in real terms over the last five years taking us back to 1997 in terms of cost of food relative to other goods.

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Is 24 hour, 365 day a week shopping a sign of progress?

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Recently a reader asked whether economic growth was increasing living standards and why economic growth was not leading to more leisure time in developed economies. – Is economic growth necessary?

Not only is leisure time not increasing, but it is becoming more common for ‘special holidays’ to become just another retail day.

In the US, stores used to be closed for the whole of Thanksgiving – an important national holiday. Traditionally a time for families to spend time together. However, the day after Thanksgiving is such a retail bonanza that shops are moving opening times earlier and earlier. Now, big stores like Walmart, Gap  and Target are opening on Thanksgiving – hoping to benefit from the earliest rush of consumer spending. From a business perspective, it makes sense to capitalise on this boom in retail sales. Shops which stay closed on Thanksgiving missed out on this surge in retail sales. But, the extra time for shopping  comes at the cost of workers being pressured to work on national holidays and miss an important chance to spend time with their families.

Companies may point to the fact that some workers don’t mind working on national holidays, and are grateful for the opportunity to earn overtime. However, labour unions argue this ignores the reality that most workers would like to spend time with their family, but feel no alternative but to work.

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Triple-dip Recession Could Lead to Lower Credit Rating

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Recently, a report suggested austerity can increase debt levels. Now, there is an indication that austerity could cause a decline in credit ratings. This has certainly been the experience of many European countries – who since they introduced austerity measures – have seen a reduction in their credit rating. Austerity hawks have often sold immediate …

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Impact of tax avoidance by Amazon

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Directors of big multinationals such as Amazon, Google and Starbucks received a challenging investigation by MPs annoyed that big multinationals are avoiding paying corporation tax. An Amazon director was described as being ‘deliberately evasive’ and being unacceptably ignorant of who owned the Luxembourg based Amazon company – used to avoid UK tax. According to Conservative …

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Have the Government misled the public on UK debt?

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Readers Question: The government keeps claiming that their harsh (but very necessary) austerity policies are working and that they have reduced the national debt by 24%, yet your graphs seem to totally disprove this claim. If anything, your graphs seem to show that the national debt is continuing to rise quite steeply, despite the government’s austerity policies, primarily because tax revenues are down and welfare payments are up because of the rising unemployment across the country (caused as far as I can see by the government’s austerity policies). Is the government painting a misleadingly and unfounded rosy picture to prove their policies are working, or am I failing to read your graphs correctly?

deficit

The government is correct to say that the budget deficit (Annual borrowing) has fallen by 25% since the peak of 2009-10.

debt

This means the national debt (total amount government owe) has increased at a slower rate than it might have done. But, it is still increasing rapidly.

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