Wednesday, September 3, 2008

The debt mountain keeps growing

Despite all the anguished talk of collapsing credit markets, lending to individuals continues to grow. According to the last Bank of England data, in July lending went up ₤84 million compared to a year ago – a 6.2 percent increase. Of course, new mortgage approvals have slowed dramatically, pulling the plug on housing market. However, remortgaging activity is holding up comparatively well, while credit card debt is still increasing, albeit at a more relaxed rate. If individuals are still piling on the debt, why is there so much concern about a credit slowdown?

The problem is not the growth rate, but the level. After a decade of unfettered borrowing, households now owe a back-breaking ₤1.4 trillion to the banks. This is equivalent to about 100 percent of GDP, and it is up 186 percent since the first days of New Labour. We are not talking small insignificant numbers here.

Debt has become the primary source of economic growth. Like a dog chasing its own tail, more debt meant more spending, which kept the economy growing, which in turn, facilitated higher debt levels

As the debt stock spiraled upwards, the UK economy’s vulnerability to a credit slowdown increased. Before the credit crunch, personal sector lending was growing at between 10-15 percent. Now it is down to 6.2 percent. It didn’t take much of a slowdown to send the UK economy sliding towards a recession.

What do they want?

During the last 12 months, one over-riding objective has dominated UK economic policy; sustain credit growth to prevent house prices from falling. The Bank of England cut rates twice, and introduced a special liquidity scheme. Darling just launched a housing rescue package that envisages interest free loans and efforts to reduce repossessions.

This raises a perplexing question; what kind of credit growth rate are they looking for? Would the BoE and Treasury like to see a return to double digit growth rates of personal debt? Even they must recognize that there is a ceiling to how much debt people can absorb. The UK must be extremely close to this ceiling right now.

This “keep the credit flowing” strategy has no sensible, orderly terminal point. If consumers stop borrowing; the economy falls into the recessionary pit. If consumers keep borrowing, the day of reckoning is delayed, but the magnitude of the crisis grows.

The vulnerable state of UK banks is another worrying factor. As the economy slows, household default rates will soar. A recession could quickly metastasize into a banking crisis. Banks simply do not have the capital to absorb a serious economic downturn.

Start downsizing the debt

Ideally, the UK needs some kind of orderly reduction in household debt. Household balance sheets need to recover. In order for households to reduce their debt levels, they need to save more. This means consuming less. It is hard to see how this could happen without a significant downturn.

The UK has become grotesque debt dependent economy, facing the fact that it has to kick the habit. However, rehab will be a tortuous experience, but the sooner we enter the clinic the better.


  1. It would need a very brave politician to speak the "We in the UK have been living a fantasy for the last decade and your lifestyles are based on borrowed money.
    The government has squandered tax revenues, sold off gold reserves, fiddled inflation figures, cooked the books on public spending and unemloyment is actually nearer 4 million if we include incapacity claimants and tempoary workers etc...We are going into recession and there is little on offer in the UK that will bring us out of it. We need either to borrow more money and kid ourselves that all is well, or we need to start producing our own stuff and take a reduction in standard of living at the same time.
    This regeneration of the UK manufacturing base, reopening mines and the like, will take about 2 decades and during that period you can expect the average standard of living to be akin to that experienced during WW2."
    I don't think that would go down too well eh... but the sad thing is that it's probably not so far from the mark !

  2. we can't compete with china and india re manufacturing...the answer is the advanced services that we have; finance, law, design etc.

    all have value. anyone who proposes building cement factories negates anything else sensible that they might say.

    we may be in debt, the past is not the glorious success you think it is though.

  3. Annual growth in lending at 6.2% is really about flat, given the real rise in prices.

    Mmm, there's that three-to one factor again: growth in lending up 186% since 1997; last year interbank lending dropped two-thirds; c. '97-'07 house prices grew by 200%+

    This implies real house prices have to drop by around two thirds before the economy can normalise - but if present easy money
    policy persists, that will just be the beginning of another unsustainable boom.

    Isn't economics easy!!!

    B. in C.

  4. Can we produce a knowledge-based, post industrial economy faster than other countries that have been pouring resources into their universities and research institutions for the last decade and a half while Brown spewed wealth into clientilism? Or are we left with the 'dirty' research - the experiments on populations and individuals that need a mid-level health service and no governance or morality? An unsupervised financial and trading world for what others don't want to trade or wash?

  5. yo! NB.
    DARLIN GET A KICKIN(from all an sundry) FO TELLIN A TROOF!

    BROWN tryin ta fix the boom wotz bust...will not let it lie man...

    they inna bind cos they gettin foun aht!

    cradle will rock, housing will fall, down will come 'flation, LABOUR an all!

  6. We could compete in manufacturing again, if all the burdens on business were swept away. It is now that we will see the true cost of all the "elf and safety" type costs imposed on businesses. No-one in their right mind would want to start a business in the UK at the moment. The bureaucracy is ludicrous. Sweep it all away for manufacturing, reduce taxation too and you would soon see a difference. If international companies could relocate to the UK, build manufacturing plants with little planning resrictions, no employment law, and low taxation, there would be a boom in manufacturing.

  7. Most working class Brits have a highly toxic, and essentialy violent, attitude to debt. The thinking goes like this: I don't need to save because this credit is what the state - and society - owes me and so I will just keep getting further in debt and I dare the state to come and make me pay! The underlying threat here is violence: gis it to me or I hurt you. This attitude is the toxic legacy of socialism and welfarism, where people believe that the state and society owe them things. This attitude will not end well.

  8. The way we're going I think that our labour costs will match those in China soon enough. I'm not so confident that our education system is up to it though, nor how ready our people are to eat bugs for their source of protein and shack-up twelve to a room - let's not discount this as a possibility just yet.

    Never mind. The majority of British people deserve what's coming to them.

  9. The period of low interest rates has ruined the economy as its been largely based on consumer spending. Its going to be a painful adjustment to start improving our more intelligent exports. This doesnt include law!

  10. Anon at 08.38,

    Do you not think it's time to redifine the class system ?

    Many 'working class' now earn far more than 'middle class' - plumbers can earn more than doctors, riggers more than solicitors. They have middle class aspirations too and have developed middle class tastes in food, housing and holidays.

    In fact most 'working class' aspire to middle class values now. Why delineate as socialists might prefer us to do in order to divide an conquer us ? Aren't we all of a new class ?

    The productive class.

    I would exclude the new breed of State employees who's instincts and aspirations run counter to the Productive Class's. They make their money trying to stifle our aspirations.

    The elite classes - the Aristocracy - is made up of footballers who's wealth is far more liquid and real than the old landed gentry who's money is tied up in ancient covenants. Ostensibly rich but living in comparitive poverty wearing tattered pull-overs in draughty bleak mansions which they have to open to the public to put bread on the table.

    The new class is the one I think you're talking about. It is used to keep the Productive Class firmly in its place if it dares to default on taxes or rebel:

    The Under Class

    A frightening and feral breed and the unwitting agents of the socialist establishment that made it profitable for them to thrive.

    These are now our real police/judges/jurors - they come equipped with a licence to administer corporal or capital punishment arbitarily by means of boot, knife or gun.

    Their reward is a few years of stir eating better food than pensioners, with heating, TV, video, internet access, porn, drugs, gymnasia, Playstation ... conjugal rights - they may get longer depending on how well they do at terrifying the Productive Class into obedience.

  11. If you don't understand what I'm on about then consider this:

    Is there anything more terrifying to an upstanding taxpayer than,

    "For refusing to pay your council tax - however iniquitous you think it may be - you are being sent to prison for a term of four months from whence you will be returned to liberty with no job and your family will forced to live on a sink estate."

  12. Mmm, I think this no-manufacturing idea for an economy really won't work, as the last two credit-based bubbles (the 'service econmomy') in the UK and US show.

    If the Germans can compete at almost all levels of automotive manufacture, from the VW Polo to the Maybach (well, they are trying at least), I think it's nonsense to say we should not manufacture any more. We do have very good automotive engineers, and in some fields our design is world-leading.

    What will happen to the currency without a manufacturing base. I wonder.

    B. in C.

  13. Alice,

    Is there any demographic breakdown on this debt figure? I'm interested in seeing who's actually doing the borrowing.



  14. You are right; the mountain of debt is growing. And this is not only true in the UK but I believe it is true all over the world. It's good that you recommend downsizing the debt. This is not an impossible task but it requires determination and discipline.

    Evelyn Guzman (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)

  15. We can learn a lot from the Germans and Scandinavia: the way they put design and manufacturing innovation at the centre. We have tried in our own way, but all that talent we have has been left to just flounder without the support, and most importantly, the cash. I work mostly with foreignors because they find my talent valuable. In the UK, despite a track record of achievement in a field strewn with failure and collosal waste, I still do not get the respect from UK bosses. One condescending interview fixated on my ability to fire people, and totally overlooked the awards, the successful projects etc. UK boses are dreadful, and I for one hope many more go down like that chap in the mansion.

  16. I have to say working in education that I have to ditto the comment about management above - and there is enough comment about generally to support the view that most public sector management is weak.

    I suspect the number of people involved in public service bureaucracy (including quangos) is now so large that a political platform of cutting back where it is necessary - bloated public service administration - i order to provided better services in e.g. the NHS and the police, would actually be an election-loser!!! I wonder what Cameron would say to that...

    B. in C.