The Economy Explained
Category: Economy. Date published: 19/09/2008
Economy explained...in five minutes
Trying to understand what has happened in the last six months to our economy is not easy. The media paint one side of the picture stating that the credit crunch has had a big impact. To understand what has happened we have to understand what the government use to control the economy.
The government try to control inflation, unemployment, economic growth and the balance of payments. In the last decade the bank of England has controlled interest rates and this has then controlled inflation. Unemployment has remained relatively low, the economy has grown steadily and imports and exports have not differed significantly (also know as the balance of payments).
The government try to control the economy by controlling interest rates. This limits the amount of money in the economy and controls inflation. As long as unemployment remains low then the economy can be controlled in this manner until an outside event has an impact on our economy. In the last six months the problems in the American housing market led to banks loosing near £500 billion on sub-prime mortgage products.
Then oil prices have increased because of the shortage of oil (and growing demand in Asia) in the market and our own stockbrokers bidding up the price of this commodity. This does not just influence the price of petrol, it also influences the price of all products delivered using petrol which is more or less every product in our shops. Inflation then begins to rise and interest rates in theory should rise, which would then worsen the problem.
The last time we had an oil price shock was in 1979 and our economy went into recession for 3 years until 1982. Clearly the same problems could have a similar effect in our times.
It seems crazy but what the government was not prepared for was a shock from the world economy and they were naïve enough to believe everything would just keep increasing in value, producing steady economic growth.
Wake up time for everybody now!
