Whats happing to the economy?

[Scottly]

And etcetera? Basically explain whether I'm going to be raped by the credit crunch and spend my life miserable and in debt

I'd love to be able to predict what things are going to be like in 5 years, I could make a fortune. Unfortunately, I can't.

I don't think anyone can give you much advice in your situation - there are too many unknowns. All I can say is keep your financial wits about you: keep costs low, save where possible, don't get into unnecessary debt. Make a budget and stick to it, get yourself a spreadsheet or something that accounts for everything. If you're going to have a job, save as much as possible.

As far as the 'credit crunch' goes, it will in all likelyhood be over by the time you graduate. House prices will be anyone's guess, people are predicting anything from large drops to small gains over that time, and it varies depending on where you want to live.

Basically, just be sensible and play the situation by ear when the time comes. In the meantime enjoy university, it will be the best time of your life. This stuff can wait, and to a large extent it will work itself out over the next few years anyway.

Oh, and one thing that I found useful. Get a credit card and use it for most purchases (food etc), just make sure you pay it off in full each month. Showing that you can sensibly use credit over a period of 5 years will give you a decent credit score and hopeful teach you some financial responsibility.

 

[HangTime]

I kept thinking to myself that I should be going with a tracker as it's extremely likely that interest rates will drop a fair bit over the next few years

I wouldn't bank on it:

-Inflation is rising and is currently well above the target level
-The pound is growing weaker against the Euro
-Unemployment is falling
-Retail sales are rising

These are all indicators which suggest that any substantial reductions in the interest rate are unnecessary (and possibly foolhardy) at present.

OF course, that doesn't mean to say that a tracker is a bad idea (I've got one myself). But personally I have doubts that we will see rates slashed to the extent that some are expecting, and certainly not to the level seen in the US.

 

[HangTime]

-- Less money for mortgage deals or mortgage deals not as good. If you need a 25% deposit instead of 0% or 10%, then people will not be able to buy as big houses -> Small houses go up in price (due to the demand), large houses go down.

I get where you are coming from, but I think it is important to remember that the traditional market for large houses has not been first time buyers, but rather existing homeowners who typically have more cash available for a deposit (due to positive equity in their existing home).

Due to market forces I think 90% LTV is here to stay anyway - just it will be more expensive. Lenders know that there are plenty of people out there earning good money but who maybe are short on cash, and it would be a bit risky to exclude them from being customers at a nice high interest rate.

A house costing £250001 with a 25% deposit would need an upfront payment in excess of £70k once stamp duty is taken into account, so once the other costs of moving are added some people probably can't afford it - including some with high earnings potential. Therefore, a 10% deposit product with a higher rate of interest could attact plenty of punters who know they can easily afford a £200k mortgage even if it means paying an extra 0.2% or whatever.

 

[Kitchster_uk]

Yeah, whatever. All I said was that you couldn't prove that the minimum wage was a major cause of rising house prices - and I was right! You can't prove it because it's not true. And I don't know where you're getting this socialist paradise stuff from - I'm not the raging socialist you seem to think. I suggest that you need to take a greater look at the situation, because you blatantly don't know what you're talking about.

Also spelling lol.

Right. I'm fairly happy I've seen and read enough to know that the economy has been over-inflated over the past 10 years through mis-management of public finance and lack of general financial control from the government. House prices have tripled in that time and it isn't the money fairy that puts it in people's banks now is it? More support for families (tax credits etc) and greater incomes mean there is more money in the economy. It's tantamount to sticking a '0' on the end of everyone's salary and then a 0 on the end of house prices, goods in the shops and services then telling us how good the economy is as little Joe barman is earning £120k and we're all richer. We're not.

Interestingly, the Bank of England monitary policy committee could also shoulder some of the blame as they have kept interest rates low, making borrowing more affordable. They have sdone this because the economy has been funded by and built on debt but upping raes would have caused a slow-down and nobody wanted that. THe BoE couldn't be held responsible for a recession....

Our economy has changed so much since the 80's it is untrue. We have gone from manufacturing-driven to a service-based economy so now the man in the street has a much greater impact on the economic climate. The economy requires people spend their money in bars, restaurants and cinemas much more than 20 years ago and when confidence drops, these places start to close. Of course this in itself does issue some protection from massive down-turn - one bar closes and 10 people lose their jobs, Rover Longbridge cost 6000 jobs plus an estimed 4000 in ancillary/associated businesses.

Whatever the 'tructh' behind the current slowdown, the policies of the past 10 years have lead to over-confidence in the financial markets that should have been removed by the bearings collapse and an over-reliance on debt as a fuel for growth. Both of these things SHOULD have been controlled better but hey, who want's to pee on the parade?

Finally, try looking up the forthcoming problems with the futures markets - that is VERY worrying...

 

[thephantom114]

etc

Basically, just be sensible and play the situation by ear when the time comes. In the meantime enjoy university, it will be the best time of your life. This stuff can wait, and to a large extent it will work itself out over the next few years anyway.

Oh, and one thing that I found useful. Get a credit card and use it for most purchases (food etc), just make sure you pay it off in full each month. Showing that you can sensibly use credit over a period of 5 years will give you a decent credit score and hopeful teach you some financial responsibility.

I'm budgeting for booze already. I just wanted to get an idea of what the playing field was going to be like, as it is I'm just gonna have to enjoy the ride. I know I'm gonna be skint though as my rent for this year is 4k. So much for places like Cornwall being cheap.

Yeah I had heard about the credit card thing, I'll go one with a low limit and knock about with that.

 

[Scottly]

I just wanted to get an idea of what the playing field was going to be like, as it is I'm just gonna have to enjoy the ride.

That's what everyone else will have to do, until crystal balls are invented. If you're going to be a lawyer, you should have much fewer money worries than anyone else. £20k straight after your 3 year course is a pretty good starting salary, and presumably that will go up after the initial 2 year period. I doubt you'll be able to afford a house straight away, but it should be fairly simple for you to rent and save up a deposit over the 2-3 years after you finish.

I think a decent goal financially speaking for you as a student is to avoid unnecessary debts - if you can graduate with no overdraft and no credit card debt, that's a very good start. Student loans I wouldn't worry about. The rates will always be lower than commercial loans and will in all likelyhood be lower than interest rates in savings accounts, so you should only pay off the minimum required (which should come straight off your paycheque before you even see the money anyway). Just treat the repayments like an extra tax that you can't avoid.

 

[Andrew_McP]

we are currently actively TALKING ourselves into recession.

While you make some interesting points, I fundamentally disagree with the 'talking ourselves into it' thing.

The way life works is that you're supposed to save money during the good times to keep you safe during any bad times which might lie ahead. That applies to us as individuals, and our governments.

The last fifteen years of so has been pretty good, with stable conditions across the globe and artificially low interest rates thanks to the global carry trade (borrowing money from places like Japan at interest rates of about 1%) and countries like China and the Middle East buying up our government debt with their mountains of money made from selling us their products.

But instead of savings going up during those relatively good times, they've gone down. In fact the clever ways debt culture has been sold to people means that both businesses (via private equity) and households (via high house prices) have loaded themselves up to the eyeballs with credit. That is money which has been borrowed from the future because we all seem to think tomorrow will be a better day when we'll have plenty of money to pay for it.

But tomorrow's arriving, it's time to start paying all that debt off, and we've suddenly realised the global economy's shifting eastwards where people can outperform us on almost every level. Throw in the rise in oil price (and oil & gas underpins everything from fertiliser to petrol) caused by rising demand in the East and profligate use in the West and... well, you have a recipe for very tough times indeed for service based economies like ours.

So now's the time to fall back on our savings. But most businesses are geared up to the eyeballs thanks to private equity buyouts & sell-offs, and many home owners are sitting on huge mortgages which were only ever viable at the unnaturally low interest rates on offer in recent years.

The economy will not crumble; this isn't Zimbabwe. But we are about to find out which of our neighbours have been living on borrowed time and money. It might not be pretty, but it will hopefully lead to a more honest economy and fewer granite worktops on which to put our microwaved dinners.

Andrew McP

 

[Scottly]

Words

A very good summary.

I find it hard to blame the government for this like some people seem to want to - sure they maybe could have done better, but this is a global problem and it's hard for one government's policies to have much of an effect in this situation. The financial system is far, far beyond the control of any one group or individual - that's why herd dynamics are studied so carefully by economists.

In our situation, the herd has been borrowing too much and saving too little.

 

[The Dread Pirate]

Just a quick question is it a Bull(Moo) Economy Or a Bear(RAWR) Economy ATM

 

[Mad old tory]

Ok, none of you can agree on much lol.

But I have a question or two. I'm off to Uni in October so obviously I am going to skint, this also means my debt will be ever higher at the end with higher interest rates yes?

Now I should be in around £24k worh of debt, round about with interest >I think<. So after 3 years of Uni, and 2 years to full qualify (I'm doing Law) and a wage of £20k during those two years what is the likelihood of me being able to secure a decent house and will the housing market have dropped by then in my favour?

And etcetera? Basically explain whether I'm going to be raped by the credit crunch and spend my life miserable and in debt

Hang on a minute, are you doing a law degree? If so you'll have your degree to fund and then your LPC or Barrister equivalent which is blooming expensive unless you get a training contract. I wouldn't even think about buying a house until you're fully qualified and have been working for a couple of years. Good news is if you get a decent job you'll be earning megabucks

 

[Mad old tory]

A very good summary.

I find it hard to blame the government for this like some people seem to want to - sure they maybe could have done better, but this is a global problem and it's hard for one government's policies to have much of an effect in this situation. The financial system is far, far beyond the control of any one group or individual - that's why herd dynamics are studied so carefully by economists.

In our situation, the herd has been borrowing too much and saving too little.

The government has done the same as everyone else though and hasn't cut the deficit while the times have been good. Herd dynamics are very interesting and important and that's why I think v0n is at least partially right when he says we're talking ourselves into a recession. Economics is heavily influenced by expectations and if enough believe something will happen, it invariably will.

 

[Andrew_McP]

Just a quick question is it a Bull(Moo) Economy Or a Bear(RAWR) Economy ATM

It's a mouse economy. Eeek! Where did all the cheap cheese go? Gimme more cheap cheese!

Andrew McP

PS The rest of this year may start to look bullish as everyone congratulates themselves on looking into the credit crunch abyss and taking prudent measures to step back to safety. But whatever financial wriggling goes on you can't get away from the fact our economy has been propped up by borrowed money for too long. Either we borrow more (from who and at what price?) or we start to spend less and pay some of it back. Once the US elections are over I think we may see the next phase in this global correction.

PPS I agree that it's not fair to blame governments for trying to give people what they want. However the real job of government has always been to do the unpopular stuff which businesses can't deal with. It's called leadership, and although I started off liking Gordon Brown (who initially started paying off some of our national debt as Chancellor) I think New Labour have failed to show true leadership, wasting money on misguided warfare and incapacity benefit instead of investing in things like the energy supply issues which will soon bite now we're a net oil importer again.

 

[Scottly]

Economics is heavily influenced by expectations and if enough believe something will happen, it invariably will.

In that case, I believe £10,000,000 will land in my bank account soon

I take your point though.

 

[Mad old tory]

In that case, I believe £10,000,000 will land in my bank account soon

I take your point though.

Nobody else does, that's my point