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Monday 20 November 2017

20 things you need to know about the economic crisis

1 We're all in this together: While some countries are faring better than others, no economy can remain immune.

The losses just this week alone amounted to $2.5 trillion and those losses will make their way into investments and pensions all over the world. Also if America goes into a second recession this has global implications -- for example each 1pc of growth in America feeds through to almost 0.5pc of growth in Europe.

2 The Europeans will struggle to fix it: While everyone scoffed at the political circus in the US over their recent debt problems, the EU has been even more disorganised.

The European Council agreed a comprehensive package in July, but nobody thought it was worthwhile at that point getting it approved by national parliaments, which have now gone on summer vacation.

3 Nobody else matters but Germany and France: While there are various parties trying to solve Europe's ills -- the EU Commission, the ECB, the IMF -- none of them can get anywhere without German and French agreement. As the largest contributor to Europe's rescue fund, Germany has an effective veto over whatever solution emerges. France is very much a secondary party to Germany, but its role is magnified as Britain is not in the eurozone.

4 So far Ireland has actually benefited from the chaos: Yes, it is hard to believe, but it is true. The interest rate on Ireland's bailout loans has been slashed and Ireland's borrowing costs are being reduced because the ECB is buying our bonds, in the absence of other buyers.

Also yesterday, despite all the plunging stock markets, Standard & Poor's, a credit ratings company, said Ireland would not have to put any more money into the banks.

5 In a storm it's better to be in a bigger boat: Despite all its recent problems, the US is proving to be the main safe haven, as investors park their money temporarily in the US. The main asset these professional investors are buying is US Treasury bonds, issued and guaranteed by the US government. They don't pay much -- 2.5pc over 10 years -- but when markets buckle it is where investors go.

6 The euro is not going to collapse (at least not yet): The single currency has only been around a short while -- 12 years -- and even less in terms of notes and coins.

Its obituary has been written on several occasions, but it has proven resilient despite the storms surrounding it.

For now it looks safe, particularly as long as Germany sees it as essential.

7 The crisis has implications for your mortgage: Unless you're a lucky owner of a tracker mortgage, your mortgage is tied to what happens in the money markets. Banks borrow the money they lend on to you, so if their own interest rates go up, that ultimately will lead to your mortgage being more expensive. When major instability occurs, banks don't like to lend to each other at all, pushing up the cost of funding that is available, feeding into higher mortgage costs.

8 This crisis will also influence what taxes you have to pay: The Irish economy is heavily dependent on trade with the outside world. If the latest instability sees growth around the world slowing down, that means the Irish economy will shrink even more, making our national debt even bigger, forcing the Government to impose even higher taxes to bring down the scale of those debts.

9 The AAA rating of the Unit ed States is vital to everything: Rumours circulated throughout the markets yesterday that the world's only superpower could lose its prized AAA status. This AAA status allows the US to borrow money at ridiculously low rates and means that investing in the US government is virtually risk free. But without this rating anyone owning US assets is no longer as secure.

10The big countries can afford the bill for now: Germany's economy is worth €2.4trn, so the €119bn the country is standing over in the European rescue fund is more than manageable. In fact, a major expansion of this fund could also be met by Germany. But this would come at a cost, and the larger the bill the bigger the danger Germany itself will be downgraded too, forcing up how much it has to pay to borrow money.

11For some, the only answer is gold: Gold is up almost 20pc so far this year and is likely to go higher as the crisis deepens. This may seem strange when one considers that there is very little practical use for gold, except as jewellery. But investors continue to regard it as the safest haven of all.

12 None of the central bankers can agree: Put simply, US Federal Reserve chief Ben Bernanke believes the problem is a lack of money in circulation, ECB chief Jean Claude Trichet believes the problem is not enough spending cuts, and the governor of the Bank of England believes the problem is selfish banks.

13There is nothing the Irish Government can do: The Government here is a hostage of outside forces. After nationalising most of the banks, there is nothing else the Government can really do, except keep chipping away at the deficit in the Budget in December.

14 Ireland would not be better off leaving the euro: This so-called panacea is nothing of the sort. Apart from the logistical nightmare of changing every ATM and cash register in the country, there is also the problem of how the Government borrows in Irish punts and how the banks pay back all the money they've borrowed in euros with their less valuable punts. There is also the slight problem of all the Irish companies that have outstanding euro loans.

15 Greece is not the only bad boy: Virtually every country in the eurozone is currently breaking the rules in regard to budgets. These say you can only run a 3pc budget deficit, but even Germany is running a figure of 5.5pc as its taxes fail to cover all its spending.

16Ultimately our destiny will be shaped elsewhere: The most likely solution to all this European stress is that all governments will borrow together -- a mechanism known as a Eurobond. This has advantages, but will mean even more sovereignty going to Brussels and Frankfurt.

17 No, this is not the Great Depression: Two figures will clear this one up -- on one day alone the Dow Jones fell by 12.8pc at the start of the Great Depression, on Thursday the same indicator was down by about 4.3pc. Unemployment is below 10pc in the US, during the 1920s and 1930s it was over 25pc.

18It's all about jobs: Among all the indicators that are mentioned the only one that ultimately matters is unemployment. When you see Irish unemployment dipping below 10pc you will know the Irish economy is finally making progress.

19 China is on the margins and will play a part: Ultimately the key problem is debt, too much in the case of Europe and the US. But China has gigantic foreign exchange reserves, putting it into a pivotal position. It actually pays its way in the world, so expect it to have a crucial role.

20 This will cost us all a lot of money before it is over: The last three years of recession in Ireland have cost us all €281bn in terms of lost wealth. Further destruction is on the way, but hopefully nothing on this scale.

Irish Independent

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