It is now just over two years since the BNP Paribas stopped withdrawals from an investment vehicle that was invested in sub-prime mortgages, this spooked investors and the credit crisis unravelled. The depth of the difficulties were yet to come to light and over the past two years or so the limits of peoples worst expectations have certainly been tested.
In this article we want to look at how the world has changed around our character Bob Hope and also how Bob Hope can change the world. Bob is a middle manager in his mid 30’s who lives in America. He is your typical American, if there is such a thing. He earns a good wage, always believed he was in stable employment, he pays his taxes and generally is a very law abiding citizen.
A year ago Bob walked into his local electrical goods store; he was looking for a new TV. He considered his options, spoke to the sales assistant and was thinking of buying a 46’ top brand LCD flat screen. He decided not to go ahead with the purchase.
The fact that he didn’t buy the product had lots of knock on effects both locally and globally, but why didn’t he buy the TV.
The previous night Bob was down in his local social club, there are 100 members in the club. Bob got talking to most people that evening and discovered several things that were of concern to him, he discovered that of all of his friends 6 of them were out of work but more worrying he did a quick tot to find that it was expected that soon about 10 of them would not have no job.
The people in the club who worked in construction seemed to be the badly effected and a large local builder was telling him the amount of houses he had completed every month was falling rapidly. In fact he said on a unit for unit basis the most houses he started in a month was in January 2006, but since then he has been slowing down.
As Bob went around the room he found everyone was feeling pessimistic about the prospects of the economy. His friends who worked in finance seemed to be completely shell-shocked. They had never witnessed the current falls in stock markets and were not sure where it was going to end.
They spoke about the credit crisis and all the events surrounding it, how incredible it was that some of the biggest institutions in the country were being affected. Big names like JP Morgan, and Bear Stearns had already been hit. But what seemed to be of most concern was that there were very strong rumours in the finance world. Two of the largest owners of mortgages Freddie Mac and Fannie Mae were going to have to be bought by the government. There was also one suggestion that Lehman Brothers a company that was 160 years old and a giant in the industry was about to go bankrupt.
He didn’t bother talking to the lads in the corner who were sinking in their chairs after a days work in the local car dealers.
In general, there was a lack of confidence in the current Government administration but there was some hope on the horizon that Obama might win.
When he decided not to buy the TV it also had a knock on effect, immediately the sales assistant lost out on the commission he would have been paid. The store also missed out on the revenue. At the end of the week the store manager decided he had enough stock and so did not need to make an order of new LCD TV’s.
This knocks back to the importer. He starts to get nervous and reduces his order for next month considerably because he doesn’t want to be left with the stock particularly after the conversation he just had with the bank manager who told him there will be no extension to his overdraft facility.
The Chinese then see the drop off in orders and they consider whether it is wise that almost 20% of their exports go to the US, in 2008 they sold almost €175 billion worth of electrical goods into the US.
As the production starts to drop off the need for staff at the plant is reduced and the need for maintenance work that is done on the machines is reduced. The German who was on site constantly maintaining the machinery is now sent back home to tell his boss at the machine manufacturing plant that demand has dropped and the Chinese won’t be needing any of our machines for a while. The cycle continues.
Last night Bob was back in the club. He hadn’t been in for a while because he has been saving his money on a month to month basis. In fact similarly to here the rate of savings in the US has increased dramatically over the last 12 months.
Bob couldn’t get over the difference; the lads from the banks were in much better form. The stock market although expected to drop off a bit before year end has now shown that it still works and some of them had made profits of 40% since March of 2009. Thanksgiving bonuses were also back on the cards.
The new Obama administration introduced a “cash for clunkers” scheme for the lively lads in the corner who work in the local car dealers. They say the surge in car sales over the summer was something they had never witnessed before.
He got chatting to the builder, he explained that for the first time since February 2006 the amount of houses he started to build every month is increasing rather than falling.
In fact he spoke to all the business people in the room to find that 53 out of the 100 business people in the room were now positive about the economy.
Although there were more people in the room unemployed that evening than ever before the significant thing was the amount of people who lost their job last month dropped off considerably. He worked out that for every 3 people who lost their job last January only 1 lost their job in July. In other words in the US almost 750,000 people lost their job in the month of January, in July that rate dropped to 250,000 people.
Some of the lads had been talking to their old employers and they said there was hope in the future, business was picking up but they needed to keep costs down for a little longer to make sure that when they get their job back they will be able to keep them on the books.
The next day Bob used some of his savings and bought the LCD TV he had been waiting to buy for the last year. Although it might be considered a little far fetched that little Bob can have such a dramatic impact on the world economy it is realistic when you consider that the US consumer, Bob and his buddies represent almost 17% of the worlds economy. What the world needs is more Bobs spending more of their savings. The power of one!
About the Author
Eoin McGee is the owner of Prosperous Financial Services, an independent firm regulated by the financial regulator as a multi agency intermediary and mortgage intermediary. He has over 10 years experience giving advice to both individuals and companies in relation to their finances, he can be contacted on firstname.lastname@example.org, 045 841 738 or 087 6 44 55 33.