Jun 122012
 

Money and Banks

Spain will be getting a bailout package up to €100 billion from the Euro zone.  The idea of injecting this new money into the system is to help stabilize the banks and the economy. It sounds like a good idea on paper. Below is a funny comic I found showing the effects of lending money to an indebted economy.

source: via 9gag.com

But the reality of bailouts are more complicated and sometimes bring more bad news than good news. In the comic strip above the net debt everyone owes is zero. But in reality Greece, Ireland, Portugal, and now Spain all have a negative net worth. Instead of “he owes me and I owe her,” the situation in these countries is more like “we all owe the bank.” But the banks are sitting on mountains of debt as well from bad real estate loans, similar to what happened in the US.

Also, money is not free. So unlike the comic, when Spain takes on a bailout package it has to pay interest on it. Normally if a person was in a lot of debt, the best thing to do is cut discretionary spending, find ways to make more money, and save, not borrow even more money. But Spain is doing the opposite of that, taking on up to €100 billion ($125 billion) of more debt with no plans to cut its own spending. This is why stock markets have reacted negatively to this news. Bailouts are temporary solutions to a long-term problem. But to have a sustainable economy everyone has to pull their own weight.

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Random Useless Fact:

Men’s shirts have the buttons on the right side, while women’s shirts have them on the left.

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Liquid IndependenceAndreaLifeInTransitionMyMoneyDesignJeremy @ Modest Money Recent comment authors
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Not Working

Saw that comic on 9gag haha liked it ! The visitor took his sweet ass time to visit the rooms haha

Liquid
Admin

I like how everyone has the same expression, haha.

Amanda
Guest
Amanda

LMAO, I won’t be able to resist thinking about this story next time I stay at a hotel.

Liquid
Admin

I haven’t stayed at a hotel in years. My friend works at one, maybe I”ll send this to her.

Jeremy @ Modest Money
Guest

Pretty funny comic. You’re right that it doesn’t really accurately depict the debt situation over there, but it does show debt creates a bit circle with everyone suffering. It is a bit scary seeing those countries taking on massive amounts of additional debt while doing very little to fix the actual problem. That’s one expensive bandaid.

Liquid
Admin

Sometimes I feel sorry for politicians because they have to deal with these kinds of things every day, but then I realize they’re the ones responsible for plunging their nations into debt in the first place.

Amanda
Guest
Amanda

Whats that they say about politicians and diapers, BOTH should be changed often, BOTH for the same reason.

Liquid
Admin

thumbs up for the truth.

MyMoneyDesign
Guest

Love the comic. The sad part is that it is probably more real than people think. This situation is concerning, but it is still a natural part of what happens in the global economy. I’m sure many people we’re worried about the US back in 2008.

Liquid
Admin

Yeah I was too young back in 2008 to understand what kind of impact Lehman Brothers can have on the world economy if the Fed didn’t step in to bolster the markets and people’s confidence. I think the ECB will likely do the same for Europe. Waiting on the results of the Greek election now.

LifeInTransition
Guest
LifeInTransition

I don’t really understand how all the bailouts work so your comic was enlightening! I agree that is a messy problem and bailouts won’t be a permanent fix.

Liquid
Admin

I didn’t understand either when I was your age. I started by learning personal finances first, and then slowly learned about global economics. Keep an eye out. I’m sure you’ll learn quickly ;).

Andrea
Guest

Great graphic to help explain the problem… I’m wondering, which country is next, the uk? Love the random stat at the end, lol.

Liquid
Admin

Almost all the industrialized countries are in a pickle these days. Fortunately we’re in really good financial shape compared to the others. But Switzerland, Germany, and Australia are doing quite well too.