Who else gained from the recession ?

We are now living at the really excited time. All of the banks in the UK are now having the financial crisis, at the same time. This is the situation that has ever never been in history. The recession is soaring and seems to be unpredicted about the end. People’s confidence and expectation about the economy is falling to the lowest point. Investors are now withdrawing away from the economy.

But it’s not hopeless about getting advantage from the situation. I think that, people who are flexible in market share prices and have little bit lucky, can earn a lot of money. Let’s take a simple example in real life. Most of us tend to buy more, or just buy things when the prices of them are at the lowest. You often buy clothes after Christmas, when the prices are discounted into 70%. It’s same with the share prices. When the business is not doing well, investor’s confidence is low, then they will withdraw their money and massively sell it. And when the prices of shares become cheap, it’s now the time for people to make the choice. In my opinion, company which has big affect on the economy is a good choice, because the government might not let the company go into bankrupt due to its strongly effect. An example is the AIG in America. When the price of share of AIG reaches its warning low point, the supply of shares of AIG was increase very fast while people expected the continuous falling in its share price. But finally, the American saved this company and this company turned over the difficult time to reach the growth after that. So a lot of people were profited by buying shares at the right time.

Why is the pound falling ?

Firstly, I agree that the falling of the Sterling is most caused by the recession in UK now. To deal with the fall in consumer and investor confidence, the MPC has been dropping the rates of interest to the lowest level that we’ve ever seen before, with the aim of pumping cash into the flow of credit in the market. As we know that the interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange. By cutting interest rates, the immediate result received is the withdrawing of foreign currencies away from the market. Traders tend to move from one currency to another to take advantage of price movements or take advantage of better return in other countries. It leads to the increase in the demand for foreign currency such as Euro and Dollar and the Supply of Sterling increases as well. Therefore, the value of Sterling falls.

With the low exchange rates, UK traders can decline the Trade deficit because of the increase in competiveness in foreign market when the price of exports becomes cheaper. But it might be a bad effect to the economy when the cost-push inflation occurs due to the rise in import prices.

The prices in house market can increase when the interest rates is set low. But it can’t be true for the UK economy in this circumstance. The world house market just experienced big failure leads to the recession spread over many economies and caused the fear of investors about another crisis in this market. So that now, even with the low interest rates that can make them easier to enter this market but with lack of confidence, they will tend to invest on production which is now strongly supported and encouraged by the government.

Measuring the National Income

How best to fight the recession?

While the cutting of interest rates into 2.5% last three months seems to be not efficiency to the recovery of the economy, now government is considering whether there will be a continuous cut. The main purpose of the government to boost up the economy now is to increase the consumption, investigation and production in the economy. So that, the government expected that with the low interest rates will lead to the rise in the flow of credit by borrowing money and then, boost the economy to go up again. But the debate about which parallel of rates is enough is now a hot topic for economists. Three members of The Times Monetary Policy Committee are calling for a cut into 1 percent, drastic cut over 3 months and this is a level not reached since 1694. But this idea is argued by other members while the large cut last three months just lead to a little effect on the economy. They assumed that increasing the flow of credit can be solved without cutting more rates by issuing a new policy to force banks to lend money with state guarantee. This suggestion reached into the crux problem of the economy because now there is a lending drought that leads to the loss of confidence of many parts in the economy. Mr Pennant-Rea,former Bank Deputy Governor, agreed. “The best option is for the Government to guarantee bank loans, for specified purposes and for a limited period. It is high time the monetary debate concentrated on the banks.