3 Ways A Financial Crisis Can Benefit Savers
Clever Money Men Invest In External Markets
It's fair to say that when our economy goes into decline, even for a short while, we can suffer quite badly. It's not quite the same as being strapped to an old-world torture device and slowly stretched until you scream in agony (even though it might have the same psychological impact), but it does cause pain none-the-less. Making ends meet can get very difficult. Budgets are squeezed and we all suffer. So how could the economic collapse help us?
It's all to do with investment. When the local currency, say the dollar, starts to decline, the price you pay for imported goods in the U.S goes up. This is quite obviously a bad thing - for some people. When the economy starts to look sluggish or starts to experience a dip the clever money men take the cash and start to invest externally. Likewise, savvy savers start to invest the money in external funds.
But why is this good? Surely sending our money abroad is a guaranteed road to financial oblivion? No! You see, when a local currency loses value the corresponding cost of imports goes up. The rising costs are then passed on to the consumer. By investing in external markets we boost the external currencies. When the local currency experiences a fall, the revenue derived from investing in stronger, external investments helps to offset the impact of any dip.
The Big Five Banks No Longer Rule The Roost
For many savers, their hard earned cash is locked up with one of the big five banks. As we've seen, it doesn't always pay to simply accept that the mega-banking corporations know best. In fact, the wild excess and blatant disregard banks seem to have for savers' and investors' money has left many of us with a very bitter taste in our mouths. Tales of huge bonuses handed out to cowboys who take massive risks with our money have upset a lot of savers. As has the fact that many of the banks taking the risks were subsequently bailed out with tax payers' money when everything went horribly wrong. But what if we could finally knock the banks down a peg or two? Is it possible? Would it actually benefit us?
Actually, yes it would. You see, as you know, the big five banks control most of your money which means they control your lives. Want a loan? Thanks, but that's a no! What can you do? Visit a loan shark? Take a payday loan? Not what you need when you're already broke. By taking down the big five, competition gets a chance. Competition is good. Competition is healthy. Competition allows new banks to start operating in sectors that have been traditionally dominated by the big, big money making financial organisations. With this competition comes better interest rates, improved levels of competition and a wide range of options tailored to the specific needs of individuals or small groups of people.
Investors Learn How To Read The Signs
Fortunately for our finances, global money crises and recessions don't come along very often. Unfortunately for us, as savers and investors, they don't come around often enough. Whilst there have been a number of 'blips' between the Wall Street Crash and the disaster that hit in 2007 - 2008, most, such as the decade long, Japanese recession, have been isolated in their impact. Others, such the 1997 Asian financial crisis, were wider in scope but left the rest of the world relatively unscathed. So, given the potential damage that results from this kind of event, why would we, as both investors and savers, want to see more of them?
It's all part of the learning process. 1929 was the last time we had a major crash in the money markets. Since then we've had nearly 80 years of rising prosperity and living standards. Money has greased the wheels that have driven both technological innovation and advancements in both health and improvements to the way we lead our lives. The problem is that we've become lazy. Computers are responsible for controlling the fast paced world of trading, but they can be overruled by humans. And humans can be greedy. A prime example of how one man can affect an entire company is the case of Nick Leeson who single handedly destroyed Barings Bank in 1992. A few more crashes like this would be an incredibly effective way of learning how to spot the danger signals and plot a new path that could avoid a financial meltdown.
It's fair to say that, in isolation, each of these events would mean little (apart from some major financial pain). But taken as a whole, the next big recession could actually be a huge benefit to the everyday man and woman in the street (once the financial apocalypse has been cleaned up).
Written by James Redden
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Last update: 08 May 2013
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