How Does Stress Affect The Human Body

Stress is the way our bodies respond to physical or emotional demands. The body responds in two ways neurologically and chemically. The neurological response is a very fast process where our bodies prepare us to fight or flee. Adrenaline is produced in huge amounts and our blood changes its course to our extremities. Instead of going to the internal organs like digestive system and others the blood is directed to the muscles so we are prepared to fight or flee.

The chemical response is not as fast as the neurological one but is more worrying because it can be activated by thought. Just by thinking about a stressful situation will cause our bodies to respond by realising colossal amounts of the two hormones Adrenaline and Glucocorticoids (the latter more commonly known as cortisol).

By flooding our system with these stress hormones our body will stop crucial activities like regeneration and repair, digestion, taking up glucose which may cause diabetes and our immune system will be put on temporary hold. For the immune system be put on hold is quiet a disaster for the body defences as it stops the fight against viruses and bacteria that can lead to infection and illness. An efficient immune system can detect and get rid of cancer cells in their very early stages. Unfortunately cancer cells multiply at a merciless speed once they gain a foothold.

Stress has always been part of our lives and our bodies have developed to cope with a reasonable level of it but if we are constantly living in survival mode our bodies will not be able to cope because we are not designed to live under continuous stress. Whether we are running from a bear trying to save ourselves or having stressful thoughts like trying to meet deadlines, the body responds in the same way to give us the extra energy and other important functions are put on temporary hold.

How about our heart? Again, no matter if the stress is physical or mental the response will be the same. If we see a bear in the woods our heart beat increases and the blood pressure rises to store additional energy to send to our legs for running or to our arms for fighting. We do not need to be brilliant to conclude that this will continue until the danger is past, causing arrhythmia, tachycardia and high blood pressure.

In stress mode even eating healthily will not be of much help as the digestive system is compromised and cannot metabolize the food properly. Similarly, even exercising is not as effective in relieving stress if your emotional state is upset.

Recent studies have shown that as many as 90% of people visit their doctors because of some physical illness which is stress related. Pain in the shoulder, migraine, stomach ache, or high cholesterol is just a few that can be connected with stress.

Building Society or Bank?

By Derek Beese

What’s the difference you will probably say. They do the same thing. To some extent that is true but to say that they are the same is totally incorrect and the best way to understand the difference is to go back to the start for each.

The origin of banks has been seen in a previous post on this blog and the purpose of their formation was to act as middlemen to make trade easier. Their aim was to give credit, effectively temporary loans, to businesses so that trade could be done and these were then repaid when the whole deal was finished. This type of financing was essentially of a short term nature rarely extending beyond say, one year. They later became places which were trusted, so people and businesses who had surplus money used them as a safe place to keep it - that is to store their wealth. They were able to withdraw this at any time unless they had entered into an agreement to leave it there for an agreed time (term) for which they received a better rate of interest. If this was done then the bank could use this money to lend to businesses provided it was repaid before the bank had to pay it back to its owner and thereby the bank earned a higher rate of interest than it was paying. This process became known as “borrowing long and lending short”. That means lending for a time that is shorter than the borrowing time so that repayment can be made on the due date. Over the centuries as banks grew to the enormous size that they now are this principle has been diluted somewhat so that banks do in fact lend for longer times for a proportion of their business, but the basic rule of banking is, and must be, to “borrow long and lend short”.

There is one difficulty with this however and that is if a person wants to buy or build himself a house, he cannot borrow any money to do so, because that is a very long term affair. This was the situation in the mid 1700’s in the UK when people were starting to want their own homes rather than renting them from their employers. This was the early Industrial Revolution when money was becoming more plentiful and living standards were rising.

So in 1775 a group of workers banded together to form a self-help group with the aim of paying money into a fund which was used to build each of them a house, at the end of which the group would be disbanded. A very good idea and it worked so well that within 50 years there were hundreds of these groups. Then someone had the bright idea that these worked so well that they should be permanent, not temporary. This was the start of Building Societies trading as separate businesses, helping anyone who joined them, to obtain their own home. They paid interest to the people who deposited money with them and lent this to member borrowers at a higher rate and any surplus left over after paying their own expenses was kept in the business to build up additional funds to help members and to ensure that they were able to repay any withdrawals on demand. Lending members were happy to leave their money in the group for as long as possible because it kept them in the group with its associated benefits.

Now in theory this system should not work because the business is lending long term and borrowing short term, that is, it is “borrowing short and lending long”. That is the opposite of bank policy. But it was successful because it was a closed group of members who all had the same aim. Additional people could join but they must be like minded and with each year the society grew stronger and stronger because its funds were growing, built up by the annual surpluses. A basic rule was also laid down that a minimum cash “readiness” fund had to be kept to make sure that any sudden cash calls could be paid. Hundreds of the societies grew up and they banded together in an Association to help each other in times of difficulty and over time many of them merged to form much larger organisations. This Building Societies Association still controls the standards of the societies to ensure that they are sound financially.

Some important points emerge from this evolution:

1.     Building Societies lend only to buy domestic properties ( with very few exceptions ).

2.     They are “ring fenced” containing only their own members who all own a part of the society. (This is called a Mutual Society).

3.     The raising of funds to lend is restricted to the members and the society cannot borrow from outside.

4.     Each society has to keep a strict minimum level of ready cash to meet repayments to savers even if this is a restriction on the amount of mortgages they can offer.

5.     The societies grew stronger each year because annual surpluses accumulated and created an ever increasing fund which could not be withdrawn by members on demand.

The only disadvantage was that the society could only grow relatively slowly and there was always a backlog of requests for mortgages for houses. Building Societies do not finance businesses and will not normally grant mortgages on business property,

Then in the 1980’s some bright spark had a “brilliant” idea  - ” Why not allow Building Societies to convert to banks so that they could borrow money in the same way as banks and this would enable them to make far more loans on domestic mortgages?”. The necessary law was passed after sorting out the technicalities and a number of B Socs converted into banks. This however was a problem in the making because here was a bank that was now operating a principle of “borrowing short and lending long for all of its business”! Not a good idea!  In fact a bomb waiting to explode!!

When the current housing bubble burst all of these “building society banks” failed, starting with Northern Rock and also spread to those smaller true banks who had bought up the larger B Soc Banks like ”Halifax”; in this case the Halifax Bank of Scotland. So all of the B Soc Banks have now gone leaving the situation back at square one – the true mutual building societies and the true banks. The latter have a hangover however because they have become far more involved in the domestic housing market as a result of all this disruption and now have a greater lend long element in their business.

The outcome of all this is that in the UK, (because building societies are a uniquely British creation that do not occur anywhere else) the situation has now returned to sanity with good Building Society principles and true Banks operating under the sound rules forged over hundreds of years. All of the hybrids have gone except where they have been taken over by true banks or have been nationalized by the government with the aim of winding them up in due course.

There is one fly in the ointment however. The law enabling building societies to convert to banks still exists and at some time in the far future when all of this present turmoil has died down and been forgotten, a “bright spark” is again going to erupt and think of this brilliant idea.

The basic problem is that in general people do not learn from history, or from other people’s mistakes, and politicians are unfortunately the foremost examples of this failing in the human race.

An Interesting Subject?

By Derek Beese

In some of my previous posts I have discussed Interest, but perhaps we should ask ourselves “What is Interest?” Forgive the pun but it is a very uninteresting topic for non – financial people, though everyone really should take a moment to think about it because it affects all of us for the majority of our lives. If it is so fundamental to our lives shouldn’t we learn to understand its effect on us and how to use it, rather than be used by it?

Firstly, what is it?  Easy – we all know that it is the exorbitant charge that we have to pay on the money we borrow to buy our houses or it is that pittance that we are given on our savings. Two apparently different things, but in reality one and the same thing confused by that thing called Human Perception!  It is simply the “cost of borrowing money”.

Any transaction to lend money involves two people (parties), the one who lends and the one who borrows. The lender receives the agreed interest based upon the amount lent and the borrower pays it. Because the amount lent (the principal sum) can vary from very small amounts to extremely large amounts, a custom grew up over the centuries to make it easy to deal with all sizes of transaction in a way that is easily understood. This is called the “Rate of Interest” (or Interest Rate) and is normally stated as a percentage rate per annum.

As we have seen before the word percentage is derived from Latin, as are so many words in the English language, and means “for every hundred”. The words “per annum” are also from the Latin meaning “for each year”. So 1% per annum (one percent for each year) will be “one for every hundred for a period of one year”. 2% pa is two for every hundred for every year. 3% pa is three for every hundred for every year, and so on. The kind of money whether it is Dollars, Pounds, Euros or whatever then defines what currency is involved. So if Mr A wants to borrow from Mr B let’s say $1000 for one year at 5%pa then at the end of that year he has to pay back the $1000 plus $50 as the cost of borrowing the principal amount. If the term ( duration of the agreement) is say two years then the repayment will be $50 at the end of year one and $1000 plus $50 at the end of year two. Easy.

What happens though if Mr A wants to borrow $1,000,000 and Mr B doesn’t have that much? Then Mr A either has to find someone with enough money or has to find a group of different people who will lend him enough small amounts to make up his total. That makes life difficult, so as we have seen before in these blogs, the custom of a middleman grew up, whereby the middleman (a bank) paid the interest to people who had spare money  and then lent this money in larger chunks to businesses so that they were able to trade and collected interest from them. The first group are the “savers” and the latter group are the “borrowers” However the middlemen incurred expenses of their own in giving this service which they could only recover by creating a “spread” into the rates offered. For example, the rate offered to savers would be say 4%pa and the rate charged to borrowers would be 5%pa and the 1%pa difference was used to pay all of their own costs and give them a payment for the service.

But then the governments step in, in the nature of the taxman, and say ” I want a bit if that too” so the rates have to widen to say 4%pa and 5.5%pa so that the tax can be paid.

A word of warning though to all of you borrowers. Most lenders are very reputable organisations but there are always some unscrupulous people out there whose sole aim is to take you for a very expensive ride and these people avoid using the standard custom wherever they can. For example, if Mr A wants to borrow £120 he may be offered it for 24 monthly repayments of £7. It sounds reasonable because it is only £7 per month, but 24 x 7 = 168 so the interest charge is £48 over two years. A simple calculation would be one half of 48 for each year = 24 based on a loan of 120 therefore the annual rate of interest would be 24 divided by 120 multiplied by 100 = 20%pa. That is a very expensive loan!  BUT, the true position is much worse because the original loan was being paid off at the rate of $5 each month within the £7, so the true rate has to be calculated on the average value of the loan over the two year term. This was 120 for the first month, 115 for the second month, 110 for the third month, 105 for the fourth month, and so on until the final payment is made to clear it on the last day of the two years. The real rate of interest charged is therefore £24 per annum based on the AVERAGE amount lent and this is £60. So the real rate charged is 24 divided by 60 multiplied by 100 = 40%pa!!

Because many people in the UK were being caught like this, particularly poorer people who could not afford it anyway, a law was introduced which says that ALL loan offers have to quote what is called an APR. This means Annual Percentage Rate and is the true annual rate of interest being charged on the loan. ( In the illustration above it would be 40%pa) So look out for that APR it is very important to your financial health.

Then for savers there are two types of interest – Simple and Compound. Simple interest says that at the end of each calculation period ,usually one year, the amount of interest will be paid out in cash leaving the principal sum to start earning interest again. So it becomes a regular source of income of a regular amount provided the rate and the principal do not change.

Compound interest does not pay out the interest but leaves it to be added to the principal amount so that the principal grows bigger and bigger each year and consequently earns an increasing amount of interest each year. In other words it earns interest upon interest and grows more rapidly as time progresses.

Compound is obviously the better if the money is not needed but many pensioners rely upon simple interest to boost their pension income when they retire from regular work.

Finally, the rate offered is affected by a number of things. Two of the most important are Risk and Supply. The greater the risk that the principal will not be repaid promptly by a borrower then the higher will be the interest rate charged, until very high risk means no chance of a loan at all.

The other thing – supply – we have seen before when discussing inflation. If there are too few lenders and money is consequently in short supply then the rates will increase to persuade people to save more and this increase will deter borrowers and bring supply and demand back into balance.

So you see, interest does affect you and your finances, so think about it and try to use your knowledge to make your life easier.

So Does This ‘Interest’ Thing Always Work?

By Derek Beese

In some of my previous posts I have commented on money, value and inflation and that governments use interest rates as the first and principal means of stopping monetary inflation, or to be more accurate, to control the degree of inflation to a level that they want.

Does this always work? A good question and the answer is yes and no. It depends on where you are standing at the time. A man, who had lost his way, met another man along the road and asked him how to get to his intended destination. The answer he got was “that is very difficult and if I were you I wouldn’t start from here”! So the short answer for interest rates is, yes it will always work given enough time — but — if you are so far off course that everything is going pear shaped it will not work quickly enough to get back to where you should be.

Ha – Ha, very clever but what does that mean?  Well, if the supply of money is well balanced with the amount of product and both are growing at the same rate the amount of inflation will be negligible and under control and small tweaks in interest rates, up or down, will keep everything rosy. But if the national interest rates have been kept too low for too long this will encourage the country’s people (and businesses) to borrow more and more money to spend which increases the money supply but not necessarily the amount of product. Result = inflation. If this goes on for too long without being reversed then the result is very high inflation and people begin to chase after their belief that this illusion of increasing value is real and will last forever. The Emperor’s New Clothes Syndrome or the Tulip Mania again.

House prices raising so rapidly that people can no longer afford them – very bad news. Increase interest rates to slow demand and get things back towards a balanced situation and those people who have borrowed right up to their absolute financial limits cannot afford the new increased repayments and in time their homes are forfeited and sold to repay the debt. At the same time the demand for houses goes down because the borrowing cost has gone up meaning, fewer buyers, houses for sale are more plentiful and the prices start to drop. Those people who have borrowed the full value of the house now have a problem because their borrowings are more than the value of the house —a thing called Negative Equity. This sequence is like a snowball rolling down a hill, it gathers pace and size as it goes and becomes unstoppable until it eventually reaches the bottom and loses its energy. People lose confidence in the value of the product and that means its monetary value sinks.

When this “fully inflated balloon” situation has been reached, the necessary reduction in demand has very bad side effects because people lose their jobs, which reduces the demand still further and the problem spreads to other product items and affects shops, motor vehicles, transport, holidays and most other things The money supply is contracting dramatically because no-one wants to lend and no-one wants to buy (they are all saving for all they are worth to make sure they do not run out of money to meet their debts). So what is the government to do? The immediate response is to reduce the interest rate rapidly and keep on reducing it until the position stabilizes again. If this does not work and it is unlikely to do so for a long time because confidence has been lost and the rate cannot in any case go below 0%, then the powers that be must start flooding money into the system to support the businesses and services that otherwise will not survive. But the government has to borrow this money which will make the present position easier but at the same time makes “tomorrow” much more difficult when these borrowings have to be repaid. It is a repeat of the original cause of the problem.

If this move fails to stop the slide then lack of confidence in the value of the country’s money will mean that the government will be unable to borrow any more and the last resort is to print its own money which, as has been explained in a previous blog, is self defeating.

This is the point where recession becomes slump as in 1929 and the early 1930s and can only be followed by a surge in inflation many years later when the effect becomes apparent.

This is the present situation in the USA and UK and many other countries throughout the world because in these days of globalisation, the problem spreads worldwide like a disease, but those countries that have been more vigilant and careful can now reap the benefit by being less badly affected.

So this interest thing does indeed always work but it is slow and takes a long time to take effect. If the ship has gone off course too far for any reason and is heading for the rocks there is no time to wait and coarse action must be taken. This can make it heel to an alarming extent and throw all of its contents and people onto the decks and some people will get hurt in the process. But when the correct course has been recovered everything settles down again and it is time to start picking up the pieces. Recessions and even slumps do not last forever but they certainly are not comfortable while they last.

So How Does a Government Control Inflation?

By Derek Beese

Well, a fairy godmother with her magic wand to put everything right would be marvellous, but unfortunately, real life doesn’t work like that. In real life when things get out of control they can only be brought back under control by straightforward blood, sweat and tears, and it is the people of the country who have to pay the price.

A small degree of inflation, say 1% or 2%, is used by the powers that be to keep industry and commerce rolling along nicely and to give all the people a “feel good factor”. Industry produces hard goods like tools, machines, cars, food and clothing whilst Commerce produces services like banking, transport, postal services and so on. Governments in a democracy have an immense desire to keep the people content because that means they keep their vote and stay in government. But this can influence thinking and lure them into making bad policy that as the saying goes “looked good at the time”!

A sound policy will keep inflation of the country’s money under very strict control and to do this it is necessary to keep the supply of money in balance with the product. If the money supply grows too rapidly the result is inflation, or if the product grows too quickly there is disinflation or deflation.

The difference between these two words is very important because it describes the degree of severity felt by the people. Disinflation is letting the air out of an inflated balloon slowly and in a controlled way so that nothing drastic happens, whereas deflation is letting go altogether when the balloon flies off in all directions and is totally out of control. The former is using policies which correct the situation gradually and brings everything back to the required normality over an extended timeframe and makes life easier for the people by protecting the maximum number of jobs possible. Deflation is the crash, course, kill or cure, and usually means that a large part of the population loses their jobs and their livelihood, giving great stress and anguish. If bad policies are followed for too long then the only way out is deflation - not good and normally called a “slump”. The last slump started in 1929 and continued until the late 1930’s. The result of disinflation is a “recession” which is a slowdown but not a case of falling off the edge of the precipice.

So how is this controlled?

Firstly, we have to understand that all countries want to keep expanding their output of product because that provides the people with jobs to earn a decent living. Provided there is someone to buy all of this “growth” all will be well. You will see growth factors quoted in the financial news all the time and this is what they mean. If the factor is positive then that means the product is getting bigger and if it goes negative then the output is shrinking.

Secondly, we have to keep the money supply expanding at the same rate as the product growth. There are a number of ways of doing this and some are very complex and difficult to understand but the predominant method is to persuade all of the people in the country either to use more of it (that is to spend more) or to use less of it (to spend less and save more). If they spend more, that means a greater demand for product and if they save more that means a reduction in demand for product. When the former gets out of hand the result is not enough product to supply the demand and scarcity makes the price rocket as recently happened in house prices. There was too much money easily available at very low cost chasing after a much more slowly growing product output. (It takes a number of years to plan, acquire land, obtain planning permission, and then build a house). This was exaggerated to an alarming extent because the policies in the countries affected encouraged people to borrow money to do so even when those people could never pay back the loan from their income. The lenders believed that provided the borrowers could pay the interest charges there was no problem because the house prices would keep rising and eventually take care of the repayment of the loan itself. Another case like the “Tulip Mania” and the fable of the “Emperor’s New Clothes” where people saw what they wanted to see until someone broke the rose tinted spectacles.

The method most used to control this demand is the rate of interest paid on borrowed money. The national bank sets a rate which periodically moves up or down and this normally is taken as a guide by all financial institutions for the rates they offer to borrowers and savers. A reduction in rate encourages borrowers because they do not have to pay so much for their loans but at the same time discourages savers because they receive less on their savings. An increase in the rate does exactly the opposite. The big problem associated with this system is that the decision has to be made after seeing what the effect of the current rate has been (that is, in hindsight) and it takes about six months for the statisticians to make their report on this. A lot of damage can be done in six months of the wrong policy when the ship is already off course.

An example of this can be seen in the current financial turmoil. Most governments kept their base rates (national interest rate guidelines ) too low for too long which encouraged people to borrow money and also made it cheaper for them (as governments ) to borrow money themselves. (That will be discussed in another blog post). The end result was an unacceptable increase in the money supply relative to product which was seen as inflation for those products home grown like houses but was offset in the overall assessment by the increasing volume of product being obtained (imported) from overseas countries like China where the prices were to our eyes phenomenally cheap. So, house values going up at 10% each year, and children’s toys, televisions, washing machines, refrigerators, cookers etc going down at 10% per annum, resulted in a net increase of around 2%. Everything looks rosy and people are happy.

BUT, wait a minute, we said earlier that in any one country the amount of money in circulation in that country must be kept in balance with its own product to control its money inflation, so whose product are all those toys, televisions, washing machines etc? The answer must be China’s and so do not reflect in the value of other countries’ currency values. So the real rate of currency inflation was the 10% affected by the indigenous housing prices! In reality it was dropping in value and would buy less and less as time progressed. The 2% net figure is another thing called the “Cost of Living index” and measures what anyone has to pay in their own currency to buy a range of goods deemed to be essential for a comfortable life regardless of where these are made.

Over the course of many years the money inflation rate is the vital one but the quickest and easiest to see is the cost of living inflation which is why more attention is paid to this. Ultimately though, it is the value of a country’s money and the confidence that people have in it that controls how much people have to pay for that acceptable standard of living.

Oh dear, where is that fairy godmother when you really need her?