The plan revealed

Following on from plans to bail out banks and borrow up to the hilt (well possibly 50% of GDP anyway...) we now know that from 1st December there will be a drop in VAT to 15%.
WHY?
On the surface, this is to stimulate economic activity but the reality is that this will make little difference apart from a small impact on Christmas shopping. For those who are already feeling the pinch, they are struggling with their fuel bills and food shopping, clothes for the kids... Will any of these things become cheaper? Yes - junk food, sweets, biscuits cakes.... genius!
Any essentials such as wholesome foods and children's clothing are already tax-exempt - electricity and gas are only taxed at 5%. What items from the shopping basket have rocketed in the last year? Fuel costs and food in the supermarket...
How long will this measure last? 13 months - right up to the next election by any chance?? and then what? Already there are denials that there is a proposal to hike VAT up to 18% after an election. So how on earth will they fund the shortfall in taxes raised? There is talk of taxing the super-earners in 2011 (once again after the election), but these people have been so far forewarned that they have plenty of time to cook the books before this tax kicks in. The clever accountants will have already formulated a strategy to make sure that this tax raises next to nothing.
What conclusions can we draw?
Simply that these measures are politically-motivated at a time when we really need politicians to forget their differences and genuinely try to help the country (and the world for that matter) out of an economic mess. What we need is a leader who can cut through the dross of political jousting and get to the heart of the matter - sadly I know of no-one with the qualifications for the job. I have always been one to wholeheartedly believe that no-one who craves leadership should actually be given a position of power. Unfortunately we have a system that dictates that whoever wants it the most and is prepared to sell everyone down the river to get it, will be our Prime Minister.

Related posts:
Is there really a credit crunch?
Is this a recession?
How to survive recession
Gordon Brown rescue plan

The cost of economic rescue

Governments around the world are listening to Gordon Brown's ideas of how to borrow and spend our way out of financial crisis, but the real cost will be in the long-run.
Normally, the boom and bust economy model allows for a relatively short 'bust' period which may lead to recession like the situation we find ourselves in now. However for some time, government intervention has been staving off the inevitable instead of letting the market take it's natural course.
Now there is no guarantee that things would have been any better if they had left it alone, but there will now certainly be a cost to pay for the short-term fixes that will be put in place. National debt is set to rise to unprecedented levels and that means just one thing, these debts will have to be paid.
How do governments pay off their debts? TAX TAX TAX - oh yes in a couple of years we will ALL be paying the price of this bailout with increased income taxes and maybe even VAT. By all reports there is likely to be a package of deferred tax rises announced very shortly by Gordon Brown at the same time as he is announcing the short-time tax-cuts. What does that mean for the general populace?? Well, just when you think you've survived the worst of the recession, you will be clobbered by huge tax hikes - and the danger? The thing that is confusing is that the bailout is supposed to raise expectations and rebuild confidence to encourage spending - the likely tax announcements are going to have exactly the opposite effect - I for one will be holding onto every last penny to make sure we survive not only the recession, but the years of excess taxation which will follow it.

Related posts:
Gordon Brown rescue plan
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The Bush rescue plan begins
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Selling a house in the current market

Now may not be the ideal time to be selling your house, but there are a number of approaches which differ from the norm that you might be able to take advantage of, if you are in the position where you really must move.
There is the option to sell and lease-back over either a long or short term, and there are two reasons that I can see that you might want to do this:

1. If I needed to Sell My House, but I had not yet found my ideal new property. This would be a short-term leaseback scenario where I could effectively rent my own home back whilst looking for a new home.
There is an advantage here in the current climate in that property prices are dropping so the 'ideal' property could be cheaper by the time you buy it than when you sold your own property.

2. The second scenario is that you need to sell your home and you are concerned about the approaching threat of negative equity in a falling property market. You will effectively be swapping your mortgage for rent, and be able to hopefully realise some capital out of the deal if you are not already in negative equity.

If you need to sell and you are having trouble finding a buyer in the conventional way, you can take solace in the thought that there are organisations out there in the current economic climate that will be willing to guarantee to take your property off your hands.

G20 seeks financial recovery

A number of measures will be tabled at the G20 summit in Washington which will hopefully serve to boost ailing economies world-wide. This will be centered around tax-cuts and public spending to boost regeneration.
Whether this type of tinkering with the economy can have a significant outcome remains to be seen, I am sure that the 'confidence trick' of being seen to be doing something, is as least as important as whatever 'something' ends up being done...
Certainly there is no doubt that the right sort of public spending can help to retain jobs and boost the economy, but I honestly don't see a small tax break as having any real effect.

Interesting to see China amongst other nations included at the summit, but puzzling that it centered around George W Bush when he is very much on his way out of office. Nevertheless Gordon Brown has taken his chance to raise his profile internationally.

Related posts:
Gordon Brown rescue plan
The Bush plan is approved
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Credit crunch advice

One of the main themes of conversations at the moment is how to survive the credit crunch and the coming recession. Everyone has their own ways that they have found to promote frugal living and as I have been doing this seriously for a couple of years already, I think I am well-placed to offer some advice.
Here are my hints and tips:

1.Look after the pennies - it's an age-old adage but one I have been forced to use as the bedrock of my financial planning. I don't smoke or drink to any degree, I hardly ever go out for meals or entertainment (such as films or clubs) these days, so where are the savings to be had?
Take a look at the smaller expenses, the snacks you buy on a daily basis, the regular outgoings that you don't really use (gym membership etc..). Imagine the money that you spend this way in a month is sitting in your pocket as a lump sum - does that feel good?
I have a simple strategy for coping with impulse buying including snacks (I have a very healthy appetite), my strategy is that I don't carry any money, therefore I can't impulse buy! If I feel the need to supplement my (home-made) daily lunch, then I make a special trip to the supermarket and buy cheap snacks in bulk packets to make sure I get the best value for money. This usually has to wait for the weekend because I just don't carry ANY money on a day-to-day basis.

2.Make a budget - if you do only one thing after reading everything written about saving money let it be a BUDGET. You cannot seriously engage with your finances without getting busy with a spreadsheet whether it be in EXCEL or an a scrap of paper. List ALL your monthly outgoings that you are aware of - every regular payment and include anything that you can think of even haircuts and anything else that involves money leaving your pocket or bank account. Balance that against your net income for the month and calculate the difference - hopefully this will leave you some spare 'disposable' income - but in the event that it doesn't - get busy with the red pen and strike out any stuff that you don't need - even if you thought you needed it, ask yourself if it's worth going bankrupt for and I bet the answer is no!
If you still come up short, and you have a mortgage, get in touch with the mortgage providers straight away and start a dialogue with them. If on the other hand you have come up with an amount you can work with, this is the money you can spend - this and no more!

3.Don't spend twice - This is the favourite trick of the optimist - if they have a disposable income of £50 for this month, and see just what they always wanted in a shop for £49.99, the temptation is to say 'I can afford that' without remembering to stop spending the £10 a week that the budget usually allows for. The easiest way to cope with a tight budget initially is to deal in cash. Have your monthly disposable income in your pocket and you will be completely aware when it has gone! I would recommend this as a way of doing weekly shopping too - take your shopping budget in cash to the supermarket and calculate your spend on the way round, this is by far the best way to discipline yourself to stick to a budget.

4.Pay off your debts - this should be a priority, and if you have not allowed for paying off debts (not just minimum payments) in your budget, then you must allocate some of your disposable income to actually reducing your debt. I recommend keeping track on a spreadsheet (or even a graph) so you can see your debt coming down - this will encourage you when it all gets a bit much (see how I made a graph of my debt). When you are finally debt free, all the money that was going towards this will then suddenly become disposable income. Until you are debt free, my advice is not to even think about 'saving for a rainy day' - I would pump everything into paying off the burden of debt and think about how I can invest some of my income later. The only time this is not advisable is if you can make more interest on an investment than you are paying for interest on your credit. This includes 0% interest deals - all 0% interest for balance transfer deals are time limited, often for 12 months - you should really be making good use of this interest-free period to pay as much off your card as you can afford. If you are not making use of it in this way, you are just putting off the inevitable and no advice I can offer will help.

These are the thoughts that occur to me now, by no means are these exhaustive, I'm sure I will be able to come up with more, and I really feel I can expand on the o% interest credit cards as these have been the main vehicle that I am using to be debt-free by before the end of next year. Feel free to suggest your own money-saving ideas in the comments.

Related posts:
How to survive recession
Worth investing in a pension?
Will we all end up broke?
How long will the credit crunch last?

How the credit crunch affects us

We know from the news and media that some banks are in trouble and some mortgage houses have had to be bailed out, but I hear many people asking how the credit crunch will affect other aspects of the financial infrastructure in ways that might have an impact on the wider populace.

The initial impact that I have experienced first-hand has been in the mortgage market. For first time buyers, a new mortgage not only entails more stringent rules (a good thing..) but the cost of the 'product' itself has become more expensive even if you are just renewing (blatant profiteering..). Since the base rate went down, you will also notice that many tracker mortgages have been withdrawn because the lenders have less scope to make a profit.

Now, you might wonder how credit card balance transfers are shaping up in the credit crunch, and you might be forgiven for thinking that the 0% credit card for balance transfers is doomed. It transpires however, that this is not the case, and what is actually happening is that charges are sneaking in 'under the wire'. In the small-print, you will now notice that handling fees are increasing and transfer fees are now less likely to be capped. The good news is that good deals are still available, my advice is that you really need to compare credit cards small-print to make sure you are getting the best deal.

Housing market update

Property agents remain optimistic in the face of dropping house prices and a lack of house sales that shows little sign of relenting as we approach the end of the year.
Britain's foremost house-builder Taylor Wimpey has reported a 27% drop in house sales since the summer, and it's order book is 40% down compared with 12 months ago. RICS (Royal Institute od chartered Surveyors) figures for sales from estate agents shows an average of less than 11 sales per surveyor in the last three months the lowest figure ever recorded. This figure was 11.5 in September and 12.7 in August.

Note that the industry is gauged on the results of the surveyors figures - do you think that's because they cannot rely on the estate agents themselves to tell the truth??

There are several factors that are affecting the current housing market:

• Market uncertainty - where prices are perceived to be falling there is a reluctance on the part of the buyer to spend now, also a reluctance for the buyer to think about selling.
• Job uncertainty - with the recession just around the corner, most people will be thinking twice or thrice about making a financial commitment which could be jeopardised through job-losses.
• Credit uncertainty - there is no doubt that credit will become harder to obtain, with more people being turned down for mortgages, some products being withdrawn form the market and mortgage companies mercilessly jumping up the price of a mortgage with no justification.

Ultimately the slow-down in the property market will harm the mortgage houses, so it would make sense for them to make the market more attractive to new customers. It seems however that the attitude of lenders is that they will exploit the clients they can get, rather than pass on benefits of lower interest rates.

Related posts:
When will the property market recover?
25% house price drop expected
Worse-case scenario for house prices
Sub-prime mortgages to blame?

Trying to talk the crisis down

Anyone who knows about economics knows that it is common to try to 'talk' markets up and down as demand can respond to confidence with or without substance. I have seen countless comments on the web implying that the media is 'talking up' the coming crisis and making it worse, but I have to say that the truth as I see it is that industry and Government have been combined in talking the crisis down in an attempt to keep things on a even keel.
I refer you to the following articles which have already been reported:

CBI predicts 'shallow' recession - in which the CBI try to convince us that this recession will only be a blip.
Paulson predicts recovery by the end of the year - in which the US treasury try to pour some very expensive oil on troubled water...

Whether recovery is from the credit crunch or the recession, recovery by the end of this year was NEVER on the cards as far as I can see... On balance, the media have had their part in creating a monster, but if a monster recession is indeed on the way, then they are fully justified. On the other hand if industry and Government have encouraged an "it'll be alright" kind of complacency, then maybe some fingers should be pointing back at them.
One thing is for sure, the media did not make the current financial crisis - we can put the banking sector and possibly even Government firmly in the dock for that particular inquiry.

If we want to know the truth about what is happening take a look at the growing employment figures, the drop in the GDP and the corresponding giant cut in interest rates, the falling markets, the drop in retail sales, the drop in the housing market - if I go on I might be accused of talking the crisis up, so I will balance it with this: There is no huge panic as long as you make budgets for your expenditure, stick to them and amend them according to any change in your income. There is no mystery, if you don't overspend you will come through the crisis unscathed, however that alone does not mean that there is no crisis.

Related posts:
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The Bush plan is approved
The Bush plan falters
The Bush rescue plan begins
Government Intervention

Bank Rate Cut to 3%

The Bank of England has just announced a Base Rate cut of 1.5% down to 3%. Mortgage lenders are already saying that they may not pass on all of the cut to their customers which makes you wonder how they can justify such a declaration, but we are well aware that they make up their own rules safe in the knowledge that the taxpayer will bail them out. The Chancellor Alistair Darling has gone on record to say that banks should pass on the benefit and Lloyds TSB has said that C&G mortages will drop by the full 1.5%, HSBC, Barclays and Nationwide have not yet confirmed a reduction but tracker mortgages will benefit immediately. In contrast the European Central Bank has reduced its base rate of interest by 0.5% to 3.25%.

This size of this cut in the Bank of England Base rate (the rate at which it lends to other banks) is no doubt in response to the unexpectedly large drop (0.5%) in GDP just reported for the third quarter of 2008, as a 1% base rate cut was being mooted before the GDP figures were announced. The move will ease some pressure on industry and free up some cash to generate economic activity both on the commercial and the domestic front, but only if the mortgage companies allow borrowers to have a decent amount back instead of ring-fencing it to make good their dreadful howlers that got us into this situation in the first place.

The consensus is that the coming recession will be deep and prolonged with house sales already suffering, and a drop of nearly 25% being reported in vehicle sales last month, dropping the base rate to 3% leaves little room for future cuts of this magnitude.

Related posts:
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Economic meltdown
CBI predicts 'shallow' recession

Queen questions the Crunch

HM Queen Elizabeth II visited the London School of Economics yesterday and had a question for economics professor Luis Garicano:

Why did nobody notice?

The professor replied that everyone seemed to have been relying on someone else - which is probably about right. He went on to say that everyone thought they were doing the right thing, which seems a little kind on those that mis-sold mortgages in the sub-prime market unless you argue that they thought the right thing was to raise as much commission as they could regardless of the consequences to their clients. But to be fair, even these sharks would not have been aware of the effects of their actions, even when it got to the stage of the major banks buying these value-less mortgages.
The queen rarely allows herself to be quoted on current affairs of any kind, it shows concern for the nation, but the chances are that her own money is safe... Her verdict on the current financial crisis: "awful"...

Related posts:
Prices effected by the Credit Crunch?
Effects of the crunch in the UK
Is there really a credit crunch?
Mortgage lenders in trouble

Keeping ship-shape in the current economic crisis

A lot of people are anxious to know how the recession and the credit crunch will affect their lives and what they can do to minimise the negative effects. the one piece of advice that can be applied to households and businesses alike is to run a tight ship - make sure you are as efficient with the money that you do have, as you possibly can be.
For the business that means cutting down on waste, maybe even trimming off excess labour - many contractors are finding themselves surplus to requirements recently. Businesses will need to be ultra-competitive, prepared to take a drop in profits in the short-term in order to maintain the business in the long-term. The crucial thing is to have control of the money that is going out of the business and patch up any leaks...
For the household, again controlling outgoings are the key and having a realistic budget is a major part of the strategy that will keep your head above water during the crisis. The vital thing is to remain flexible and match any drop in income with a corresponding drop in expenditure. Shop wisely and put a stop to compulsive spending, move any debt onto a 0% for transfers credit card and put as much as you can afford to paying off the balance.
Of course, not all businesses will be in decline, there will always be those that respond well to an economic slump. Capital-rich investors can add to a property portfolio as the housing market slumps, but I would wait a couple of years for the market to bottom out. Thrift-related business such as eBay trading will no doubt benefit from the inevitable bargain hunting and corresponding need to convert goods into cash quickly.
One surprising development has been the upturn in home brewing - seems that there is a growing trend to spend a night in with some home-brew replacing an expensive night down the pub...

Related posts:
Worth investing in a pension?
Will we all end up broke?
How long will the credit crunch last?