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Wednesday 9 February 2011

Puzzled ...

Just when you think that finally you have a grasp of a particular concept there is often something that happens to make you a little uncertain about that knowledge.  I'll explain a little further on ...

Let's have a look at a hypothetical situation as a way of looking at things.  Mr & Mrs Smith and their two point four little Smithettes live happily in a typical suburban house with a mortgage, he has a good job and she helps out in a charity shop.  Suddenly without warning Mr Smith loses his good job and is sufficiently unfortunate not to receive any redundancy pay or other recompense.  Naturally the families lifestyle will have to downshift considerably very quickly to minimise domestic expenditure as their income is now Job Seekers Allowance etc.

In order to ease the severity of their domestic cutbacks Mr & Mrs Smith seek a loan from their bank with a promise that all will be well with the domestic exchequer within the next four to five years and Mr Smith will be back in afull time and well remunerated position once more.  After some due consideration the bank agrees the loan to the Smith family and things look a little less bleak for them.  This short term injection of funds allows them to continue giving money away to their favourite charities as they have always done as well as to spend on long awaited luxury improvements, a swimming pool, geothermic heating etc.

Shortly afterwards, with Mr Smith still seeking work, a close friend asks if he could borrow a largish sum of money as he suddenly has found himself in financial straits with creditors pressing for payment.  Being a friend of some years standing Mr Smith generously agrees to lend several tens of thousands of pounds to his friend to ease his plight.

The question is would you, dear reader, have done the same as you obviously are not in the best of finacial circumstances to put it mildly, bearing in mind that you are already paying interest on your loan from the bank and are now subsidising a friend, presumably with some return upon said loan.  Would that loan have been more advantageous  in your bank account than that of your friend?

Let's transfer the situation from domestic economics to national economics, those of UK plc.  The island of Turks & Caicos in the sunny Caribbean is well known as a tax haven where many of its residents pay no tax in preference to having UK residency and help funding the government.  The island has recently found itself to be in extreme economic difficulties and asked the British Government for assistance in ts straitened times.  This request was made bearing in mind that the UK government has been forced to borrow billions of pounds to repay incurred debts and shortfalls of various kinds.  In short a loan of £126 million was agreed to bale out a little island nation, which undoubtedly was very gratefully accepted.

Let's return a little closer home - if you were up to your ears in debt would you lend money to someone over a period of years?  Of course you would not because it does not make economic sense to do so.

Having latterly gained a good degree in an area which included some economics I thought that I had a reasonable grip on basic economics in the modern age.  Apparently, according to Mr Cameron et al, I do not.  Heaven forbid that the British citizenry follow the example of their leaders and decision makers because the road to ruin would become ever closer.  It is the economics of the madhouse!

And that, faithful reader, is why I am puzzled ...