Chaos Theory

[Rhisiart]

Forget butterflys flapping their wings in Brazil (or wherever).

Greedy profiteers sell dodgy mortgages to American and British home buyers who can't afford the repayments and the next thing we know we're having to cancel our holidays to Majorca/Cuba/Seychelles this year.

Add to that millions of people in China who suddenly fancy a juicy steak and fries instead of boiled rice, causing farm and produce prices to take a hike all round the world.

And let's not forget the Iraq debacle and rising oil prices.

Are we all going to Hell in a handcart? Should I move to China? Anyone want to buy a house?

[symphonix]

Are we heading into another depression? I sincerely believe that it is unavoidable, at least for the USA. I doubt it could ever be as bad as the Great Depression of the 1930s.

I also sincerely believe that the US government is trying everything they can to play down the very real and obvious problems the economy is facing. Their reasons for doing this is to try and maintain consumer confidence and their own credibility for the next election. Their methods, though, are quite remarkable; in the past few years lots of indexes and reports have changed so that anyone not paying close attention won't notice what is happening. The unemployment index was adjusted to no longer count anyone who has been unemployed for more than six months, making the 18% figure (nearly as bad as in the 1930s) appear on reports as a more reasonable 8%. GDP and inflation figures have been tweaked as well, to try and make them appear more palatable.

I also think we are unwise to blame "greedy profiteers" at the banks: the banks will loan as much money as they are able to according to the money supply. In a Reserve Bank system, the government can and must regulate the availability of money as well as the interest rates charged on loans. The current US government has kept interest rates low and money supply ridiculously high in order to finance the ever-increasing cost of the Iraq war; in essence, every time you take out a loan in the USA, you are buying war bonds!

I believe there is an attitude in all levels of US government and finance that the USA is invulnerable; that they can do whatever they want to do and there won't be any bad consequences. It is this attitude that is to blame for the current worries, and not the banks which respond only to market forces.

I've thought a little about how this will affect me, and my part of the world. Australia is in the midst of a mining and industrial boom. We have a new government that has cut spending significantly. And our economy is very closely tied to China and Asia. While I believe interest rates here will go up a fair bit - and believe me I know our house repayments will really start to hurt soon, we'll be fairly insulated from the financial trouble soon to affect the USA. I can only hope that Europe also manages to avoid most of the worries as well.

My advice: make subtle plans for the worst. Prioritise your life and work out what you can afford to lose. For instance, my wife and I have discussed it and if it came to it we would both sell our cars and ride bikes to work before we would ever dream of giving up our house. First, though, we could do without home phone or Internet service. This means if we ever do have a really big crunch, we know what we're going to do, which will ease the pain a little.

[Rhisiart]

Preparing for the storm by sorting out our needs from our wants?

[symphonix]

Exactly. I realise now I was a bit wordy on that last post.

[Rhisiart]

Life's too short to perfect the ideal length of a forum reply.

George Bernard Shaw once wrote to a friend and said, "I am sorry this letter is long, but I didn't have enough time to write a short one".

[Viro]

Originally Posted by Rhisiart

Add to that millions of people in China who suddenly fancy a juicy steak and fries instead of boiled rice, causing farm and produce prices to take a hike all round the world.

Yes, those damn Chinese are developing a taste for luxurious foreign food. What is this world coming to?!? What next? The Africans asking for a more varied diet? How terrible!

It should only be the West that has access to Chinese takeaways on every street corner. Heaven forbid that those Chinese get Western takeaways like we do in the West.

And let's not forget the Iraq debacle and rising oil prices.

But I thought the Iraq war brought us cheap oil? That's what it says on the t-shirts the cool kids wear.

Should I move to China?

No. Unless you fancy living under a real dictatorship with real censorship and real state funded terrorism.

Anyone want to buy a house?

I do. Hopefully sometime later this year or early next year. The trick is to save up enough for the initial down payment of the mortgage and not to take a mortgage that is too large for you to handle. If its a choice between getting a £250k house by pushing the limit on your finances or a £200k house that gives you more financial breathing space, most people are greedy and opt for the former. When you have practically no reserves, any change in the economy is going to bite you hard.

Also don't buy to let. The way most people do it here in the UK, it is tantamount to gambling since you are gambling on property prices continuing to rise. The lure of quick and easy money from the buy to let phenomenon is what's caused the housing market in the UK to be in such a mess.

[Rhisiart]

Viro. I'm not so mean as to deny the Chinese a change of diet. I'm glad they are in a position to do so.

You're right about not taking out too large a mortgage. We opted for a newly built village terraced house. Very small, but well designed. I think we can ride out a recession excatly for the reasons you spelt out.

My initial diatribe was just tongue in cheek.