Same problem, different perspective

who what when

Ok so im a bit thick and all this NAMA, banks and general economy talk makes my head hurt because I just dont get it.
So I had an idea, why not just try to explain it in terms of a household budget. So correct me where im wrong and feel free to add to!

Income - €35,000 pa
Expenditure - €50,000 pa
Debts - approx €90,000

Now as the head of the household is **** with money we're spending €15,000 pa more than we spend at a time when interest rates are going up Not a great situation but since our debt is less than 3 times our income its hardly the end of the world either!
Oh and our credit rating is excellent So what am i missing?

Welease

I'll tell you what.. Starting spending 40% more than your income in real life for the next 10 years (and keep adding the interest).. then pop back in 2020 and tell us how that worked out for ya

rumour

who what when wrote: »

Ok so im a bit thick and all this NAMA, banks and general economy talk makes my head hurt because I just dont get it.
So I had an idea, why not just try to explain it in terms of a household budget. So correct me where im wrong and feel free to add to!

Income - €35,000 pa
Expenditure - €50,000 pa
Debts - approx €90,000

Now as the head of the household is **** with money we're spending €15,000 pa more than we spend at a time when interest rates are going up Not a great situation but since our debt is less than 3 times our income its hardly the end of the world either!
Oh and our credit rating is excellent So what am i missing?

The bank manager that was lending to you is fired. New Bank manager calls you in for an interview:

• BM(checks credit rating):Now you've got €35,000, lets talk about the €90,000.
• YOU : Well i didn't really come here to talk about that, what are YOU doing about getting my €15,000 that i need because well i'm worth it.
• BM: Indeed Sir, what about the €90,000?
• YOU: What have you no confidence in me? I told you I'm worth it, where's my €15,000.
• BM(checks credit rating again): Sorry Sir we really can't go much further until we know how you are paying for the €90,000. By the way having a closer look at your €35,000 how secure is that? Is your company doing well at the minute?
• YOU: What of course, we are dependent on exports and weexpect growth of 4% its all in the business plan, everything is fine, whats the point?
• BM(checks credit rating again): The global economy is struggling with 1-2% growh and your going to achieve double that?
• YOU: As I said we're fine, growth will be 4% we've turned the corner on all that global economic nonsense. Sure its in the business plan
• BM(checks credit rating again): Sir may I have a copy of that plan
• YOU: Sure I gave it to your fella's ages ago, they all signed off on it.
• BM:Well sir the previous chap you were dealing with as you may be aware was sacked for reckless lending.
• YOU: (oh ****, think, think,think can't go home with no money they'll go nuts, mustn't let this arrogant **** know) Well i'm appallled at your incompetentence, how am i to live without my €15,000 its morally unacceptable.
• BM: Indeed Sir, while we've been talking you credit rating has been downgraded and I am not permtted to lend to you any more. I am furthermore instructed to secure recovery of our €90,000.

Canis_Lupus

Brilliant analogy, all its missing is "YOU: Well we are where we are, now gimme my 15000"!

who what when

Welease wrote: »

I'll tell you what.. Starting spending 40% more than your income in real life for the next 10 years (and keep adding the interest).. then pop back in 2020 and tell us how that worked out for ya

But the government hasnt been spending more than 40% of its income for the last ten years. You might as well have told me your dog has just had puppies for all the difference it makes to this discussion.

cavedave

So I had an idea, why not just try to explain it in terms of a household budget. So correct me where im wrong and feel free to add to!

Income - €35,000 pa
Expenditure - €50,000 pa
Debts - approx €90,000

One thing is we are not a household. In the sense that the people in the country have their own debts and earnings to look after. The only debts we have to worry about are not the governments.

In a sense it is like a plumber who works for people with the financial situation you talk about. She earns 35k, She spends 50K. She owes 90K but does have some assets. How does she pay next years expenses?

It is worth thinking about who is more trusted with cash than the government. I can borrow money at a lower interest rate than they can. This means a Friday night tipsy person is more reliable than the government. Internet explorer users are also. Can anyone else list people more trusted than the government of this country with cash

The_Honeybadger

Countries don't function like households, countries roll their debts over rather than pay them off as they don't have to worry about retirement age etc, in theory we have an infinite amount of time to pay the debt off and inflation reduces the amount we owe. That is why the spread the bond markets demand for our debt matters so much, we can just pay the interest on our debt for the forseeable future providing the bond markets are willing to lend to us. Our major problem is that the percentage interest demanded by the markets on our debt now is nearing 8%, on a debt of our size this will kill us and our debt is growing by the second with no credible plan to get things under control. Even if the budget goes through and cuts 6bn out of the economy that won't save the exchequer 6bn as tax receipts will fall as people have less to spend, rolling the problem into next year and the year after. In any case the game is up, nobody believes we have things under control. Something will have to give as we are past the point of solving the problem for ourselves, EU / IMF will step in and give us a bridging loan at 5% most likely and even then we will all have to get used to living with less. Alot less in many cases.

Welease

who what when wrote: »

But the government hasnt been spending more than 40% of its income for the last ten years. You might as well have told me your dog has just had puppies for all the difference it makes to this discussion.

You miss the point.. If it wouldn't be a good idea for a household, then why would the situation be any better for a country with a externally controlled currency?

Going forward it needs to cut expenditure to come a lot closer to income, or the situation become unmanagable as interest repayments get higher and fixed costs dont reduce enough..

So what it does over the next 10 years (and up to 2014 in the more immediate future) does make a big difference to what this country has to repay on an ongoing basis...

johnnyskeleton

who what when wrote: »

But the government hasnt been spending more than 40% of its income for the last ten years. You might as well have told me your dog has just had puppies for all the difference it makes to this discussion.

If the government doesn't make cuts it may well end up doing so over the next 10 years though.

But look, if the purpose of this thread is not to help you understand government finances but instead for you to suggest that the government is in a good position because it is no worse off than your typical household then there's little point discussing it.

who what when

johnnyskeleton wrote: »

But look, if the purpose of this thread is not to help you understand government finances but instead for you to suggest that the government is in a good position because it is no worse off than your typical household then there's little point discussing it.

No i honestly thought the household comparison was a good one - obviously not.

As regards cutting expenditure, isnt that exactly what the next 3 budgets are all about. I mean the gap between income and expenditure is going to be 6 billion less this time next year so surely thats a step in the right direct.

I suppose the real purpose of this thread is to give an explaination of why things are as bad as everyone says because from my very basic understanding of things theyre actually not so bad.

The_Honeybadger

who what when wrote: »

As regards cutting expenditure, isnt that exactly what the next 3 budgets are all about. I mean the gap between income and expenditure is going to be 6 billion less this time next year so surely thats a step in the right direct.

No it won't, cutting 6bn won't save 6bn as it takes more money out of the economy, less spent in shops etc, more jobs lost and more dole to pay out etc etc. We'll be lucky if it closes the gap by 4bn. Some top economists including a nobel prize winner have said this policy cannot work in a weak economy, but then again we don't have much choice I suppose

johnnyskeleton

who what when wrote: »

No i honestly thought the household comparison was a good one - obviously not.

As regards cutting expenditure, isnt that exactly what the next 3 budgets are all about. I mean the gap between income and expenditure is going to be 6 billion less this time next year so surely thats a step in the right direct.

I suppose the real purpose of this thread is to give an explaination of why things are as bad as everyone says because from my very basic understanding of things theyre actually not so bad.

Ok, well to continue your household analogy, we have been earning 30k and spending 60k for the last 3 years and only started to realise something was wrong with that last year.

At the same time, we have agreed to repay on the debts of a friend of ours who we went into business with (against advice) and who ran off leaving a pile of debt.

So while our mortgage is 90k on a house worth 160k, when the business debts are added in we are almost in negative equity on the house.

The problem with our spending is that it is not discretionary spending - we can't simply stop going to the pub or eat less cakes, the problem is that we have committed to certain spending levels. We have promised our wife (public sector workers) that she will always have enough to shop in Dunnes and will never have to strectch a food budget by having to go to Lidl/Aldi, and she will leave us (go on strike) if we don't keep her happy. We have been giving our kids (social welfare) enough pocket money to buy a big present and sweets every week and if we give them less they will throw a tantrum. We have big medical bills and big school bills, and we have taken out a number of contracts with professional advisers to provide us with enough information so that we can run our house properly.

So we have all this money going out and we should really be cutting it, but we are not a very strong minded head of the household and would rather retreat into drink. Worse, we increase rather than decrease the money we spend on consultants because we now have to see several psychiatrists to deal with stress and accountants to manage our debt.

We have all these commitments which we don't have the motivation to cut back on, so we end up cutting back by not going to the doctor, or not sending our kids to college. Rather than explain the situation rationally to our wife, children and various advisers friends and onlookers we have buried our heads.

Now, the interest from burying our heads is costing us a few k per year adding to our woes, and unless drastic action is taken we won't know what to do.

You don't see what the big problem is? The big problem is that we were overly indulgent based on temporarily high pay and now are afraid to reduce this indulgence in case any part of our family takes offence.

Plus, instead of cutting our expenditure down to our income, we are trying to gradually cut it. But the cuts from last year of 3k are more or less eaten up by the extra interest on the rest of the money we borrowed and also on higher rates on the other money that we have borrowed that has fallen due and we have borrowed again to repay. Our friends have been hit with too many loan requests too quickly, and doubt we can repay it all, so are charing us higher interest.