Sunday, 13 September 2009

Where Has All Our Money Gone?

Wandering through St Albans market yesterday on a lovely September afternoon, I couldn't help noticing that the stalls, the shops and the restaurants seemed far busier than they have been for a while. Now that Lord Mandelson has decreed it, are we really out of recession?

There does seem to be some encouraging signs and we should be thankful that we may be through the worst of things even if 'The Dark Lord' and other like Stephen Hester of RBS warn that we should not assume that everything will be rosy from now on. Even so, perhaps there are signs that we are getting a little more confident and spending more.

Perhaps different to the last recessions when there were similar effects on jobs and industry, this time around we are left with an incredibly large bill as a long term legacy of the crisis we have been through. Some stark facts reveal the cost of the credit crunch and recession combined has been around £1.5 trillion which was the total amount we spent, collectively, on bailing out our financial system.

We recapitalised and provided loans to the banks to the tune of £289bn which included the nationalisation of Bradford & Bingley and Northern Rock as well as our shareholdings in RBS and Lloyds Banking Group - we are still around £10bn to £20bn down on this but the shares in RBS and Lloyds have recovered significantly and we may get our money back soon on those particular deals although the other two may take a good deal longer. We gave a further £200bn in general liquidity support to banks - which prevented those we rescued and others vital support to stop them going bust.

We spent a further £400bn in purchasing and lending money to buy assets. It is unclear how much of that money can be recovered. Then, of course, we have guaranteed a further £650bn to banks to cover their losses. In theory, we should get a good proportion of that money back providing banks remain solvent and there are no disasters ahead. Alan Greenspan, former head of the Fed in the US, recently said we would get another crisis at some point so we should still be wary that all this money is certainly at risk. It does make you wonder why we continue to condone and aid the machinations of the financial system when we know it has such inherent risk if it is not properly reformed and regulated as the last thing we need is for the whole thing to happen again - then the money would have truly been lost and we would require a great deal more to perform another economic resuscitation.

The £289bn of loans to risky banks is equivalent to £11,500 of liability for every household in Great Britain.

That's an awful lot of money for a society that already has around £1 trillion of unsecured debt, masses of mortgages, diminishing household income and more uncertainty on jobs. I certainly don't have the money lying around if it was required.

National Debt was around £466bn in 2007, £526bn in 2008 and we thought it was really bad when it would rise to £609bn in 2009. But by 2014, debt is forecast by the Treasury to rise to £1.37 trillion - and remember, we have revised these predictions every month so far as lower tax returns and higher benefits pay outs due to greater unemployment has affected the wishful thinking calculations to date.

In 2014, we will pay £60bn in interest on that borrowing alone.

£60bn in the context of the total bail outs does not seem much. But to put into proper perspective, that's equal to the entire Education budget for the year or just over half the budget for the NHS. It is that huge and it is why the world's formative credit agencies are beginning to believe that Britain's ability to service and repay the mounting debt will get progressively harder. As we borrow more and more, confidence will get lower and lower as there is only so much that everyone of us can afford to keep up with the repayments, particularly as we are all affected by the fall in the housing market and the uncertainty in the job market.

For us as individuals, our household net income has dropped over the last 10 years. We supplemented our earnings by a rich source of money - the rising equity in our homes. Sadly, in this crisis as much as 15% has been wiped off the value of our homes which is equivalent to around £422bn.

It means that we are collectively worth around 10% less in terms of our personal wealth or around £393bn has been wiped off our collective value. Finally, between 2007 and 2008, around £815bn has been wiped off our value in total.

That is equivalent to about £31,000 less wealth per household in Britain in just two years. Given that we are liable for £11,500 per household too, our actual drop in wealth is closer to £42,500 per household.

I don't suppose those milling around the market had actually thought that through as they started spending again as if there was no tomorrow.

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