Originally posted by LilyMaree
My teacher earlier was talking about a world recession...
I didn't understand it, so I looked it up and found this :
recession |riˈse sh ən|
noun
1 a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.
It seems that the US' banks have lost millions, maybe billions of money. I'm not sure about this. The recession is already happening in the US, and Europe is already hit by it as well. If not, Europe probably will get hit soon.
My teacher also said that Asia will get hit soon enough this year.
I need someone to explain it to me
I still don't really understand.
Any thoughts?
there is several main things which a countries economy is based on...spending in the shops, house prices and industrial output being the main 3
over the last 15 years house prices have been going up and as such people need to borrow more money to pay for them (mortgages from the bank) and so they get into more debt
the banks charge for these loans and it's called interest... and when things are good they keep that rate of interest low
problem is that interest is also low for people saving their money in banks so they get less return on that
now...when a recession starts it effectively means that money isn't worth as much...that is why prices in the shops go up....this is because shops buy stuff at higher prices because industries making the stuff charge higher prices...and down on the chain it goes
house prices generally and banks dont like to loan money to each other...which means they cant loan to people to pay their mortgages
when house prices are falling people tend not to buy houses because their house ends up being worth less than what they paid for it....so less people borrow...less people spend...prices go down...and the bank tries to make the same money so interest rates go up
interest rates go up on one thing they go up on everything...and thus the prices on everything go up
its all linked....and it's all over how much money money is worth
stupid concept really...but thats what it is
recession is basically when the money in your pocket isn't worth as much...meaning it cant buy you as much as it did before because things cost more
the reason it goes global is because all the worlds stock markets are linked
the main reason for this recession is because people are way over their heads in debt and now that interest rates have risen...even though it's only slightly....people dont have as much extra money as they did...their spending goes down...and one of the 3 main stays of the economy breaks
then of course there is the sub prime mortgage fiasco
these are basically dodgy lending to people who's credit rating is shit...people who would otherwise be refused a mortgage because their history shows they dont pay their debts (data is available through credit reference agencies)
they get mortgages from less than reputable companies...default on these loans and thus everything goes to shit because these companies charge higher interest than normal...and when the interest goes up even slightly..the payments the customers have to pay goes up massively and they cant afford it
