If I could put one question to the banks it would be "how much debt can UK households take on before they think it is a problem?"
Current debt levels are staggering. As of January this year, the ratio of total household debt to post-tax income was 167 percent. Since 2000, this ratio has risen by about 60 percentage points. This is a huge, historically unprecedented increase. We have become a nation of debtors.
Mortgage debt accounts for the greater part of this increase. In January this year, debt secured on housing accounted for about 75 percent of the total.
Until recently, the housing bubble was the great factory of debt. It was a simple production process; banks provided the credit, which increased effective demand for housing. As people used this credit, house prices inflated. People then began to believe that prices could only go one way. They demanded more credit; the Banks provided it; and prices went up further.
Last summer, debt production ground to a halt, at least in the housing sector. Banks went on strike and as soon as debt factory stopped, house prices began to tumble.
However, it is not just housing debt that has been increasing. Unsecured debt - mainly credit cards - is also on the rise. Again, in terms of household post tax income, unsecured debt is up around 10 percentage points since the beginning of the decade.
I look at these debt numbers and three thoughts enter my mind.
The first is a sense of detachment. These numbers have nothing to do with me. I have no debt, and my personal finances simply have no connection to this deeply troubling vista. Moreover, I know some people who, like me, have avoided personal debt. So, these debts are concentrated in some but not all of UK households. This suggests that on a personal level, these debt numbers understate the problem.
However this sense of detachement is limited. I know plenty of people struggling to cope with debt. Within my circle of family and friends, those who went down the rocky road of debt found only misery and unhappiness. Debt ruined their peace of mind. It raised stress levels and just brought unnecessary financial pressure. It also prompted a lot of futile consumption, as if a flat screen TV could make debt worries disappear.
Second, these debt levels look like modern form of serfdom. Debt limits one's options, it compromises one's independence. It forces people into crappy, marginally better paid jobs, just to pay off the banks. When you owe debt; the bank owns you.
Finally, the overall magnitude of personal debt is now so great that it has distorted economic policy. Rather than pursuing the objective of low inflation, which would require significantly higher interest rates than we have now, the bank of England have cut rates. Low rates are necessary because commercial banks could not absorb even a modest increase in household default rates.
This brings me back to my original question; how much more debt could UK household possibly accept? Would the banks be happy if the ratio of household debt to income crept up to 180 percent? Would they feel comfortable if it tipped 200 percent? Could the banks live with a 220 percent ratio?
Perhaps the question should be how much debt are we willing to accept from the banks? Over the last decade, households have taken on too much. Perhaps the credit crunch is a blessing in disguise. It may begin a process where household debt levels begin to fall to lower and more sustainable levels.