The Trickle Down Factor

The City of London is the centre of the financial world. It’s a place where wizards and magic makers of old would feel very much at home. In fact, one of the country’s greatest corporate investors is called Alchemy!

It affects all of us, even down to pocket money. OINK! calls it the Trickle Down Factor. Whilst we all lead separate lives, we are strangely interlinked. Look at football (see Money Matters page 3). So, what is the Trickle Down Factor?

The Price of Pocket Money

Your parents decide they want to give you about £40 a month pocket money, which is roughly the national average for pocket money. Nice. They’ve worked out their financial budget consisting of how much money is earned, any tax due on those earnings and what the monthly household and other daily family expenses are going to be.

There’s a comfortable bit left over for restaurants, cinemas or theatre, the odd footie ticket, clothes, bits and bobs, a few treats and the pocket money. Brilliant. In short, everything is worked out; everything is hunky-dory.

Then, all of a sudden, a number of unexpected events happen - not here in Britain, but thousands of miles away.

A group of homeowners in Middle America can’t pay their mortgage. An oil pipeline in MidWest USA breaks. Fresh attacks in Iraq. Russia decides to increase the price of gas to Ukraine. The Ukraine threatens to increase the price of pumping Russian gas from Russia to Europe. China and India consume more steel than any other countries on the planet.

The problems in America trigger a loss of confidence in some of the US banks which have sold their loans to British banks who suddenly realise they don’t have an asset (something a company owns) worth any money. This is repeated around the world, again and again. Panic.

This affects how much money the British banks can borrow and lend each other, which in turn has a direct effect on how banks are able to, or want to deal with their customers. Almost overnight things change.

The Interest in Borrowing

Credit - money we borrow now to pay back later - which was easy to get, is all of sudden difficult to come by and very expensive. The banks increase their interest charges and reduce the amounts they are willing to lend.

This squeezes shops and manufacturers who rely on the banks to keep cash flowing by borrowing money secured against their future sales. Shops start to charge us more for the things they sell, but in turn squeeze suppliers to charge them less for the goods they supply.

Suddenly everything is costing more, and credit card companies are increasing interest rates or reducing the amount we can borrow.

Shares on the stock exchanges start to wobble, many in a downward spiral, wiping millions of pounds off the value of the companies. Some of these companies’ shares may have been bought by your dad and pledged to the bank as one of his assets for borrowing money.

Paying it all Back!

Financiers who were able to pick up a phone and call the banks to lend them millions of pounds a day to buy and sell property and shares on favourable credit arrangements, are being asked to settle their debts quicker. They have to start selling their assets, sometimes for less than they expected, just in order to pay down the debts.

The Politics of Money

Then, it gets worse. Political problems, foreign unrest, wars, natural disasters, accidents on oil pipelines, Russia playing power politics. Result: a general unease; a loss of confidence. Fewer banks are willing to lend money to people to buy properties. There are, therefore, more properties for sale than there are buyers willing or able to buy. Consequently, and for the first time in a long while, the price of property goes down. This means that the value dad thought he had in the house you live in, called equity, is less.
So not only are things costing more and money is more difficult to borrow if you need it, but the values of the things we own are worth less than they were, even six months ago. So, very quickly, the amount of money we have available to spend each month has shrunk, and your parents are hanging on to more of it in case matters get worse and things get more expensive.

How Did That Happen?

Result? There is less money to spend and - perhaps - one of the casualties of this might be the weekly pocket money being reduced from £40 to, maybe, £30.

What does this mean? It means you’ll spend less money, which means the shops will have less sales, and the shop keepers will have less money, so even their children may receive less pocket money.
The trickle down factor - all the way from the financial heart of the world… to you! SCARY!

Glossary

Mortgages:

Money borrowed from a bank or a building society in order to purchase property - a house, for instance. Under the Mortgage Agreement, the borrower agrees to make a series of payments back to the Lender. The money lent by the bank is secured against the value of the property, which means if the payments are not made by the Borrower, the Lender can take back the property.

Credit Agreement:

An agreement to repay a credit loan.

Financier:

A group of people, companies or banking institutions that club together for a common purpose. They usually do this because when the amount they have to invest is so large, it’s better to divide it up - and spread the risk!

Assets:

Things you own which have financial value, like a house or a car.

Interest:

Interest is the money banks will pay you for keeping your money. It is also what the banks will charge you for lending you money. Generally, interest is expressed as a percentage over a period of time, like 5% per annum. In this case, the borrower will pay 5% of the amount of money borrowed each year, on top of the total amount borrowed. Bank interest is higher to borrow than to deposit.

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