Imagine walking your dog and BOOM! your US Dollar is reduced to 64 cents. Hanging out in the south of France, POOF! the Euro vanishes and reappears from paper money to less value coin. Downtown London and your pound takes a beating like a fight with Nathan Cleverly for the championship belt. Over the top, yes, but certainly no over exaggeration. During a recession, reduction of currency is one of the many things that affect us all due to the rise in goods and services. The cost of living has skyrocketed since our parents were this age. Who do we blame? Government, job markets, violent conflicts that depreciate value of land? Let’s try ALL OF THE ABOVE!Now, check your pockets and bank statements. There is a strong possibility what you just saw in your currency just lost value in the last few seconds. I wish I was joking. Don’t worry, by the end of a stock market day, it may return to normal. (Fingers crossed!)
Just a few things that has affected your currency in the last decade:
USA:(Credit Default Swaps + Home Owners = Disaster) circa 2006
This resulted in millions of homeowner evictions and a devastating blow to the US and neighboring economies, totaling an estimated loss of over $400 Billion in revenue. A Credit Default swap is defined by Investopedia as:
The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.
Think of a loan, except, if you default, someone else will pay to handle your account and collect money from you; similar to collection agencies but backed by whole banking systems and governments profiting revenue from the ordeal. End result: a catastrophe that sent the US Dollar spiraling out of control and a complex formula that requires an extensive background of economics to compute. Stemming from the economic downfall, the US received a downgraded credit rating and increased interest rates in case the country tries to borrow again. As of today, January 9, 2012, US Dollar is estimated at 0.64 for exchange rates, showing very little signs of recovery and affecting the following nations: Belgium, Greece, Hungary, Iceland, Ireland, Latvia, Russia, Spain, and the Ukraine.
United Kingdom: “Don’t forget the oil” circa 2008
Meet Brent and Crude, oil. At £72.47 a barrel (1/09/2012 Stock Market close), the rising cost of oil has yet to remain calm. Amidst the oil spike, slow economic growth, high unemployment and the “banking crisis” were red flags seen throughout the land. How does this affect your currency? Simple. A lack of jobs provides less taxable income for your government which slows down economic growth as there is less revenue for the country to develop and expand. This ultimately leads to a recession. Growth projections in the housing market fell with 70,000 homeowners in negative equity in 2008 followed by the unemployment rate climb.
A premier stimulus package was generated to increase consumer spending. It failed to upstart the country’s economy, alongside a “bank-bailout” plan suggested by the IMF, an organization that focuses on stability and promotion of employment. The United Kingdom has maintained an impressive yet complicated struggle of currency exchange from (GBR 1.1232) in 2009 to a (1.5473) (Market Close on 1/9/2012). Maybe the pound has strength after all, but the consistency of world growth, infrastructure for banking and job stability will provide a challenge for the Commonwealth Nation.
France: “Influence Gone Wrong” circa 2008
Dirigisme. Noun. “Control by the state of economic and social matters.”. (Sigh) This country is run with heavy decisions from private corporations and entities. Where have we seen this before? Borrowing €1 billion to pay for cabinet employees’ wages was seen as a necessity. There’s no denying: France was in bad shape. Sovereign nations took a hard hit once the dust had settled, courtesy of your bank institution with the pleasantries of, drum roll, derivatives. These are credit risks transferred to other parties. and similar to credit default swaps, if someone was to default the payment, it would be covered.
How did this affect your Euro? A word called regulation. Banks are regulated to be in compliance with federal and state laws, some moral standards and treaties. Credit swaps and derivatives are not. Shocker! So imagine if your nation’s bank bought these insurance contracts and voila! They were worth the skin of a peeled orange. No one monitors the swap, and you take a huge loss. Apply this to France, with less money, a slow economy, and you know the rest. For now, France has strived to regain its footing. As one of the first countries to repay debt after additional spending cuts, and debt reduction plan, France has made a clear step in the right direction for the economy.
China: “The Banks’ Bank” circa 2009
If you ever had to ask who bailed out whole countries from failure, the answer begins with a “C”, ends with “hina”. *Hint*. You may know of their cuisine, fashion, and martial arts but did you know who played a major part in taming the economic threat of the west? China. It is estimated that over $112 billion (£73 billion), since 2008, has been spent by China in rebuilding economical threats worldwide. This is more than the World Bank has contributed for financial aid relief. Exactly how does one country contribute so much? China has maintained reform and structure by the simple methods, careful government spending, social reform, and consistent growth with exports; a job well done by the eastern nation despite the Yuan hitting a low point this week (01/11/12 Stock Market close).
The question of when China will stop lending scares citizens and economists alike. Don’t be alarmed if a Chinese consulate or armed base appears on your nation’s border, it probably was part of the deal. A meeting in December with the Prime Minister of Japan has brought China in works with developing a new currency, stemming away from adopting the US Dollar. Perhaps the lending country will develop a world currency that is accepted worldwide, since heavy contributions were delivered to financial divisions around the world for aid.