Monday, October 06, 2008

Another Reason I Wish I Was an Economist

Here in New York we're waking up to worldwide market crashing. So if we assume that...

- the missus and I have no investments,
- we don't own our own home, or any homes at all,
- we both have gainful employment...

Does any of this affect us at all?

And who's the bald lunatic screaming about money and taking it all so personally?

Man, the morning routine without NY1 totally blows.

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At 4:52 PM , Blogger bshort said...

So, there are a couple of things going on in the economy that could affect you.

1. The markets are down. This won't affect you directly if you don't have any investments, but if you have 401k's, this could delay or change your retirement plans. If you don't have a retirement plan, now is a great time to get one, as investing in an Index fund will enable you to get in either at the bottom or close to the bottom.

2. A credit crunch. This is what happens when no one wants to lend any money to anyone else because no one trusts anyone else. When your friend won't lend you 10$ when you need a taco, it's bad, but when one bank won't lend another $1M over night, it's a crisis.

When the credit markets start locking up it causes problems throughout the economy. Businesses often take out short term loans ("commercial paper") to finance paychecks, purchases, etc. and when they can't get these loans it causes big big problems.

Another way this can affect you is if you try and get a loan from a bank. Mortgages right now are extremely hard to get, even for applicants with pristine credit records, and personal loans like hen's teeth. This means it's harder to buy a house, and we're going to see housing prices continue to fall as the pool of available buyers continues to shrink, and the pool of sellers continues to grow. The record number of foreclosures we're seeing makes this even worse, as it increases the number of sellers even more.

This also hits CDOs (Collateralized Debt Obligations). Since CDOs are just bundles of mortgages, if the value of those mortgages drop then the CDO becomes more worthless. It's the CDOs that are causing most of the problems in the banking system right now, so this will weaken banks further and cause more bank failures, necessitating more bailouts.

3. Inflation! When the Fed decides to make money cheaper (reduce the interest rates), they effectively increase the money supply. This drives up prices since the value of each individual dollar goes down.

This means any savings you have is worth less, but it also means any loans you have are easier to pay off, assuming your wage increases at least keep up with inflation.

4. Jobs! As the economy gets worse it'll be harder to find a job, especially in certain industries.

There are some good things happening right now, though.

1. Oil is cheaper. This is a short term improvement, but since so much of our economy depends on cheap energy (oil), this means inflation won't be as bad as it could be.

2. The dollar is strong. The dollar is up to $1.30 to the Euro. This might also be a short term change, but it means travel won't be as expensive, and consumer consumption won't take as large a hit.

At 7:04 PM , Blogger Dan G said...

A fine explanation. Thank you, good sir.

The good news is that having debt and no savings has finally paid off!

And bshort, if that is indeed your name, you eat expensive tacos. May I recommend the taco cart outside the as-of-yet unfailed Capital One Bank at 41st Street and Queens Blvd?


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