The credit crunch and other myths

Is the credit crunch real? I’ve been asked this a few times, and put simply the answer is yes. The problem is the term’s now so corrupted, misunderstood and incorrectly used that it, like many other things currently being said, has become a nonsense.

I’m continually asked by my regular media outlets to ‘do things on the credit crunch.’ When I ask what they mean, the answers are things like “the rising cost of petrol”, “people feeling the pinch”, “mortgage rate hikes” or “the recession we’re in”.

In all but one of those it’s quite difficult for me to bite my tongue and not say “but I thought you wanted me to talk about the credit crunch?” So please try my quick quiz:


Which of the following statements do you think are true, and which false?

  • The UK is in recession.
  • The UK has a problem of stagflation.
  • We’re all suffering due to the credit crunch.
  • Scroll down for my version of the answers

















    Something to think about before the answers

    Please think about this concept; you may notice something similar coming up repeadly in what follows.

    If a car accelerates from 0 – 60 mph in ten seconds, but then only gets to 70 mph in the next ten seconds, is its speed shrinking?

    Don’t confuse absolute speed with acceleration.

    • The UK is in recession. FALSE

      This is a commonly held false perception. First a definition:

      A recession is when there are two consecutive quarters of negative growth. Or in plain English, it’s when the economy has shrunk for six months.

      Yet the UK’s economy isn’t shrinking, it’s still growing, admittedly nowhere near as quickly as it used to, and we’re certainly feeling a slowdown, but it’s not shrinking.

      That doesn’t mean a slowdown is good, or times are easy, or even that we’re not going to go into a full recession (nobody can truly know one way or the other), but we’re not there yet.

    • The UK has a problem of stagflation? TRUE (sort of)

      This is the latest buzz-word, and while like most things it’s arguable, we are suffering from it. First a definition:

      Stagflation is when an economy is suffering from both inflation and rising unemployment caused by a slow economic growth.

      Certainly the UK’s inflation is on the up: it’s now at 3.3% on the official measure, and 4.3% on the more relevant retail price index basket of goods rate. Plus, many people’s personal inflation is much higher due to jumps in the cost of food, fuel, and energy.

      Equally certainly the economy is slowing down, and unemployment is rising.

      However, let’s get this in perspective. I was recently shocked to read a newspaper saying we’re harking back to the 70s. Our inflation, which we want to be 2% (because zero or negative inflation has its own problems) has now increased to 3.3%; in the 70s, inflation was well over 20%.

      The same with unemployment; yes it’s gone up somewhat, but as we’ve been at or near twenty-year record low unemployment for such a long time, it’s not so surprising. It’s no consolation to those who’ve lost their jobs, but we’re still around the one million unemployment mark, compared to 3m plus at unemployment’s peak.

      So yes we’ve got stagflation, but currently its mild.

    • We’re all suffering due to the credit crunch? FALSE

      This is false for a number of reasons: first, it’s a generalization and not everyone is suffering. Second, even those who are suffering aren’t necessarily suffering because of the credit crunch. So it’s time for another definition:

      The Credit Crunch describes the decreased availability and increased cost of borrowing first for financial companies and then consumers, who experience the knock on effect.

      Yet it’s now misused as a catch-all term for all economic woes. For example, the rising petrol cost and some of the increased food cost is caused by oil price rises (which have many causes, including antipicated increase in demand and decrease in supply), and the rising cost of energy’s determined by gas prices.

      Now of course, whilst everything is interconnected and there’s always an element of interplay, there are many other financial issues worldwide than the credit crunch.

      The house price drop is much more closely tied to the credit crunch, though equally, due to the US sub-prime problems, you can say the credit crunch is due to the house price drops.

    So where does all this leave us?

    Please don’t misread this as an essay on why “you’ve never had it so good”. I started 2008 by telling anyone who’d listen that it’s the year of the defensive consumer.

    Sadly things certainly are getting worse.

    The cost of fuel, food, mortgages, energy and more are going up (I’ve linked to the articles on how to save on these which is the key weapon against this). And this leaves lots of people with diminishing disposable income (use the Budget Planner to plan ahead).

    Add to this the fact that house prices are falling and borrowing is more difficult, and the overused and dangerous tool of spending the paper equity in a house’s value is now much more difficult.

    Things look like they’ll get worse before they get better.

    Perhaps the biggest problem is we’re in a state of flux. Things are changing, and the surety and security of economic stability and strength that many had got used to has now gone, making people nervous. This in turn hits things like the job market, and insecurity and instability mean companies and consumers retrench, leading to a cyclicality of problems.

    The real advice is to plan for the worst and hope for the best, but don’t blame it all on the credit crunch.

    Comment and Discuss.