Credit Crunch & Economic Crisis?

Question

Please explain to me about wages, interest, inflation etc. I watch the news and read the papers but i want to UNDERSTAND this, i know how important it is and want to get my head around it

Thanks in advance

Answer 1

ok, the wages are always the same but the price of food and petrol is going up, so the people are poorer.

The food and petrol are more expensive because the speculators now are very interested in them becuase they can't more speculate on the price of houses because the market of houses is in crisis and the have moved their greed from houses to food and petrol.

The market of houses is in crisis because in the last years the greedy bankers gave money to buy a house to evrybody, even to whom was clear that he won't pay the mortgage but the bankers did the same this thing because they wanted to show that their bank had a big turnover (so the bank cuold pay a rich wage to their employees)

those are some of the reason we are now in this situation

from italy

Answer 2

Credit crunch -- this is the realisation by US banks that they have lent a lot of money to bad credit risks. Now they have a lot of bad debt, they won't lend to each other either. Because finance is now a global business, this is hitting us here in the UK too. Basically it means it's a lot harder to borrow money than it used to be.

Economic crisis -- this is the assumption that we're headed for a recession. Much of the economic growth of recent years was fuelled by low interest rates and easy debt. The credit crunch is putting an end to that, together with rising prices. If people have less money, they'll spend less, so businesses will do less well, some will go bust, unemployment will rise, etc etc. All this may or may not come about.

Wages -- people will obviously respond to having less money by asking their employers for more, especially where they have bargaining power (e.g. fuel tanker drivers, big unions). Higher wages mean higher costs for manufacturers, distributors, retailers, etc., so prices will have to rise as a result. You can see that this is a particularly nasty sort of inflationary loop that's very hard to break out of.

Inflation -- this refers to rising prices in general. Wage inflation, price inflation (as measured by the CPI and RPI indexes), and inflation due to "endogenous" influences: world oil prices and world food prices that are outside the control of the UK economy but still affect us.

Interest rates -- the monetarist view, now widely accepted, is that inflation is due to increasing amounts of money in the economy, while the goods and services don't increase much. For an excellent example of this, see Mugabe's Zimbabwe, where a loaf of bread now costs billions (trillions?) of Zimbabwean dollars, due to the government printing huge amounts of money so it can pay its armed forces etc. So how can interest rates control inflation? If interest rates are high, people won't want to borrow money and it will encourage saving. So this reduces demand for the goods and services because there's less money available to buy them. Basically interest rates control the amount of money generated by banks' lending (good trick, this one!). Normally if inflation starts to rise, the Bank of England can raise interest rates, this will reduce demand, and inflation will fall. For example, retailers won't be able to raise their prices because they need to compete for the fewer customers. However, when inflation is due to endogenous factors such as an oil price hike, raising interest rates runs the risk of plunging the economy into a deep recession. This is why the Bank has been slow at raising its base rate even though inflation looks like taking off. It may have to raise rates soon, though, judging by what's happening in other countries.

Tough times ahead!

Answer 3

Well, we all know the the current economy is depressing. People say we're heading into a recession, I believe we are already in one. The credit crunch started with the forelclosures. Many American's thought they could buy a house, but did not consider how they will pay the mortgage. As a result, many chose to foreclose their homes to the banks, which led to the collapse of Bear Stearns.

Economic crisis is when, the dollar has depreciated, and continues to depreciate against Brazil's Real and other currencies. Not good if a currency depreciates, but it is good for our exports, since many countries will find our products more cheaper if the $ continues to drop. Interest rates are another problem. With the Fed slashing interest rates to 2%, this results in foreign and domestic investors to invest in other countries that have a higher return. And as this happens, the money supply decreases, and leads to higher prices. So not good.

Hope this answers your questions.