effects of bankruptcy to our economy

[bullboy8]

With interest rates going up later today and a record high people going insolvency, what does this mean to our economy? I mean, when an individual goes bankrupt, money is written off (wiped off our economy), shareholders will take the direct impact because less dividend. Which causes knock on effects.

However, can the government not jsut print more money into our economy. IT WILL NOT increase inflation if the same amount written off is put back into the economy right?

For example....£1mill written off in year 2005, this will cause less spending for people which cause a lower inflation rate if no debt was written off. Governmenr steps in and put the £1mill back in.

In reality, does the government do this?thanks

 

[ewilcox]

Insolvency won't bother the government one bit. Companies will have insurance against just these sort of bad loans. Whats much more significant with rate rises is the raised cost of mortgage payments (albeit often offset by 6-12 months as a result of fixed/capped mortgages) raising the risk of financial problems and negative equity for many more. Having said that I would expect rates to have to rise much more before this sort of scenario really kicks in. While people still don't trust pension funds (and I don't blame them) they will continue to invest in property just fueling the boom even more. All IMHO.

 

[bullboy8]

yes..companies will have paid insurance , but t would mean that either the insurance companies and the company themselves will loose money. This will lead to higher premiums for everyone which means -inflation...so, we have....high debt causes deflation but also causes inflation in terms of insurance premiums...all so confusing

Why do you say that the government will not be bothered....each year billions are written off...increasing at a rapid rate.

 

[in2uxs]

Put simply.

Paper money printed by his holiness Tony Blair has to be pegged to something – it cannot exist in a vacuum. Paper money is nothing but an IOU (hence the wording I promise to pay the bearer the sum of … printed on each note). In the good old days people would exchange these IOU’s for the real wealth of gold. In order to keep in balance a country could therefore print as much money in IOU’s as it had in gold reserves. If a country’s paper money found itself abroad then governments at the end of every year had to send the equivalent in gold overseas and vice versa.

Unfortunately, Richard Nixon thought this a rather old fashioned view and welched on this old understanding, and instead of pegging paper money to the rare commodity of gold he instead pegged it to the financial sector of stocks and services etc etc. In his belief companies are a more genuine instrument of wealth as companies create things we actually want whereas gold is a rather useless metal that is only good for bling kings.

In essence if someone goes bankrupt for £50,000 then that person has received £50,000 worth of company goods and services more than he/she has created. If an insurance firm wipes off that money all they are doing is taking x amount fof gold rom your pocket and my pocket to pay off their debts. Every bankrupt hits us all indirectly, and as such they should be beaten.

 

[bullboy8]

IN2UXS...so, do you mean that when bankruptcy occured...everything is balanced because the debtor has consumered £50,000 worth of goods and services they consume. The companies he spent it with benefited, whereas the companies that lent him the money looses out? Therefore our economey does not shrink in terms of the money going round our economy....

ok..think i get this now..lol

Ok, so, as a result...bankruptcy go up and more claims for bad debt...premiums goes up then mean inflation.... right? So, how does high rate of insolvencies cause deflation? news always say this..that will mean less domestic income...

 

[in2uxs]

Let us imagine that the whole world revolves around 6 people. One of which is a manufacturer, and the other 5 are consumers. The manufacturer produces 6 pencils a week. He sells 1 pencil per week to each of the 5 consumers, and one he keeps for himself. That is 6 pencils a week been made and sold.

If one of the 5 consumers were to go bankcrupt (loser) that person can no longer afford pencils - he is now a non net user of pencils - and as such only 5 pencils a week are now sold. The manufacturer, however, is still geared up to making 6 pencils a week, but only 5 are required creating a surplus. The economy has therefore shrunk - a cause of deflation.