Britain's Debt Pandemic - New Statesman. Is economic meltdown on the way ?

Remember the story of The Emperors New Clothes ? It could be an allegory for Gordon Brown and the UK economy.
"We've become so used to living beyond our means we're now in a debt
pandemic.".............
The debt pandemic New Statesman Liam Halligan Monday 24th October 2005
Between us we owe £1 trillion and we can't afford the repayments. British consumers have a serious dose of borrowing sickness and, as Liam Halligan warns, it may be fatal to the economy
Gordon Brown used to say Britain's economy was in its best shape for 200 years. The Chancellor no longer makes that claim. The reason is that the UK is growing at its slowest rate for 12 years. And that is largely because consumers - until very recently the driving forces of the economy - are buried under mountains of debt.
Britain's personal debt burden recently topped £1trn (that's 1 followed by 12 zeros), and, while the bulk of that is mortgages, more than a fifth is unsecured debt - on credit cards and personal loans. That means the average household has unsecured loans of £7,650. This country is now shouldering no less than two-thirds of all credit card debt outstanding across the entire European Union.
Brown's celebrated record of presiding over economic growth - "52 consecutive quarters of expansion" - owes a lot to the consumer boom funded by this frenzy of borrowing. Our decade-long shop-a-thon has enabled us to grow faster than much of western Europe. But with the Confederation of British Industry reporting the weakest high-street sales for 22 years, the party is over. Across the country desperate retailers have launched their earliest-ever autumn sales, but still the meltdown continues. Just too many shoppers are spooked by their growing debts.
"More and more people - particularly from middle-income households - have serious debt problems," says Sue Edwards of Citizens' Advice Bureaux. "They've borrowed to maintain lifestyles, and the 'have-it-all' culture means attitudes to credit have changed. But in recent months we've received huge numbers of debt-related calls."
Consumer bankruptcies have hit record levels. New official figures show individual insolvencies up 37 per cent on 2004, and twice as common as when Labour took office.
Earlier this month, in his most pessimistic speech to date, the Bank of England governor, Mervyn King, said: "Some of the influences that have in the past boosted consumer spending may be going into reverse." He also admitted to "concerns about the increase in personal debt, particularly unsecured debt . . . which may cause difficulties in the months and years ahead".
A recent Bank of England working paper, which King will have overseen, is also worth noting. "Household indebtedness has grown sharply in the UK in recent years," its authors said. "The rapid debt accumulation raises questions about the ability of people to repay what they owe."
And there may be worse to come for debt-soaked consumers. With inflation at an eight-year high of 2.5 per cent, many economists believe interest rates will soon rise from 4.5 per cent. Certainly, with high oil prices driving inflation, the chances of any more cuts are receding rapidly. And if rates do go up, so will personal debt, with inevitable consequences for consumer spending. The Chancellor, who has already revised his 2005 growth forecast downward once, could have to do so again.
Until recently Sam Drew was among the middle-income consumers keeping the economy on song. But, although he lives in Surrey's commuter belt and holds down a respectable £30,000-a-year job, he is "in a state of financial despair".
Despite appearances, this 39-year-old professional is servicing £24,000 in unsecured debt, on two credit cards and a personal loan. "I'm literally counting pennies before buying a pint of milk," he says. "My situation is so dire I'm deeply depressed and find it hard to see a way out." A "huge chunk" of his income goes on debt repayments. "I've already had to sell my house. But, with my finances still a mess, I can barely afford the basics."
Drew is among millions in difficulty. Since the start of 2005 the number of county court judgments served on those with unsecured loans has risen by a quarter. That's one reason why August saw an extremely rare credit card net repayment. For only the second time in 11 years, the public's monthly card repayments exceeded new borrowing. In other words, maxed-out households called a halt. And with high-street spending flat and retailers bracing themselves for the slowest Christmas in a generation, this retrenchment is seriously affecting the wider economy.
For his part, Drew accepts his responsibilities. "My situation is largely my fault," he says. But he insists that "the lenders made it far, far too easy" to run up debts. "I was plodding along nicely until invited to take those credit cards," he says. "That was the slippery slope. The company kept raising the credit limit. Pretty soon, the monthly payments exceeded my salary."
Now trying to salvage his finances, Drew uses the Consumer Credit Counselling Service. The UK's biggest debt charity, the CCCS advises tens of thousands of people, working out payment schedules and helping with creditors. Malcolm Hurlston, who founded the service ten years ago, lifts the lid on the truly alarming world of "extreme" debt. "Among those seeking our help, the average unsecured debt is almost £29,000," he says. "So Sam's debt is below average. And calls to our helpline are up more than 50 per cent this year."
Hundreds of CCCS clients have unsecured loans - above and beyond mortgages - exceeding £100,000. Hurlston cites "dozens and dozens" with ten credit cards or more. Several clients have more than 40. "The number of desperate cases is growing fast," he says. "People get in much greater difficulty than they used to, and roughly half of those in severe debt become clinically depressed."
Earlier this year Richard Cullen, a self-employed mechanic from Wiltshire, committed suicide. He had debts of £130,000 on 22 different cards. Cullen used one card to pay off another, so he appeared solvent when in fact he was bust. "Suicides are mercifully rare," says Hurlston. "But, whatever the lenders say, customers can't always look after themselves."
The CCCS points also to "a huge increase" in callers below the age of 25, particularly women. "With student loans and easy access to credit, many youngsters are desensitised to borrowing," Hurlston says. "They seem resigned to servicing massive loans for the rest of their lives."
The Department of Trade and Industry says the new Consumer Credit Bill - the first in 30 years - will help reverse the rising debt tide, particularly among the vulnerable. Ministers argue that the legislation, currently going through parliament, will improve transparency on credit charges and, crucially, data-sharing between lenders. But Mick McAteer of the Consumers' Association has "grave concerns". Like many debt campaigners, he says ministers don't want to rein in credit because it sustains the politically important feel-good factor. "This bill means the industry can continue with predatory and aggressive sales of deliberately confusing products. Measures on credit limits and data-sharing remain very weak - this is a government that puts the needs of the financial services industry before those of consumers."
However the legislation turns out, a more immediate question is whether the wider economic effect of over-borrowing - now only too apparent - is likely to last. After all, even this summer's self-imposed credit cutback may not be what it seems. While there was a net reduction in card debt, August also saw a surge in new personal loans and mortgage approvals. The number of home loans rose 8 per cent, the first increase in almost a year.
In essence, consumers used the August rate cut to refinance their borrowing. In a bid to reduce interest charges, loans were shifted from credit cards to houses.
This is the nub of our problem. Middle-income Britain is locked into a cycle in which periods of excessive spending are followed by remortgaging and other debt consolidation. Then, as people are egged on by lenders, retailers and endless born-to-shop celebrity starlets, their borrowing binge begins anew.
"Unsecured" loans are endlessly rolled over into housing, so adding to "secured" mortgage debt. That's one reason rampant unsecured borrowing, which was once limited to the twilight world of door-to-door loan sharks, is now part of polite society.
Millions of households have sunk into debt on the expectation that property prices will keep rising. But prices have fallen for 14 months in a row. The danger is that, as our economy slows and unemployment rises, mortgage defaults will go up. House prices could then fall more rapidly, possibly sparking an early-1990s style crash. Even if that doesn't happen we have serious problems. Thanks to our habit of adding unsecured loans to mortgages, the latest figures show that total household debt servicing, including secured debt, is now above 20 per cent of our incomes. In other words, on average we're spending more than a fifth of our incomes on loan payments. That is as big a burden as in the crisis years at the start of the 1990s, even though interest rates today are much lower.
In many ways our debt burden today is more worrying. If interest rates rose sharply - and high oil prices mean they could - debt repayments would soon reach dangerous new highs. Even if that doesn't happen, today's debts will last far longer: in the early 1990s high inflation eroded outstanding loans, but that doesn't happen in today's relatively low-inflation world.
That's the main reason Middle England's debt burden is likely to drain household incomes, acting as a drag-anchor on our economy for many years to come. As that realisation sinks in, British consumers - up to their necks in debt - are opting to consume much less. By doing so, they are seriously undermining the single most important factor driving the growth of the British economy. And that affects us all, indebted or not.
"I look at people on the high street," says Sam Drew, "and wonder how many others are in too deep. There are millions out there like me. We've become so used to living beyond our means we're now in a debt pandemic."
Liam Halligan is economics correspondent at Channel 4 News
http://www.newstatesman.com/200510240005
http://www.newstatesman.com/200510240005
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X-No-Archive: yes

> ... For only the second time in 11 years, >the public's monthly card repayments exceeded new borrowing. In other >words, maxed-out households called a halt.
Perhaps we'll see a return to saving up? Saving -- there's a word one doesn't see often these days.
--
James Follett. Novelist. (G1LXP) http://www.jamesfollett.dswilliams.co.uk


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If someone provided decent rates then it would be far more attractive.
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X-No-Archive: yes


True.
Then again. We often get complaints that the government don't encourage savings and should make savings tax free.
Mmm ISAs anyone? You can save £250 per month in a tax free cash account. If you can afford any more- do you really need an insentive to save?
I heard on the radio someone say "It's not worth saving because the government taxes your savings." What a brainless cretin! You're still better off that if you hadn't saved.
There's no shame in being thick these days it seems.
--
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On Thu, 20 Oct 2005 16:17:26 +0000 (UTC), "Biscit"

It's not worth saving because the interest rates are so low!
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As long as they match inflationI have no problems with it.
But see my other reply in this thread.
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AlanG wrote:

Savings rates should be substantially above inflation, or what's the point of saving anyway?
Right now though, saving rates are a few percent *below* the real rate of inflation, and then you get taxed on the interest! We're paying tax for the priviledge of seeing our savings eroded by Gordon Brown's fake boom... he wants us to borrow up to the hilt to buy crap to give the appearance of a thriving economy in the UK.
The funny thing is, people justify a tax on savings interest because it's 'unearnt income', and yet if you borrow 200k to buy a house, sit in it for five years while it triples in price, then sell it and pocket 400k for doing _NOTHING_, that's tax-free.
The entire economic system is designed to screw over savers... then politicos complain that the British people don't save.
Mark
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the wonderful person snipped-for-privacy@my-deja.com said

Not if you save in the right places. Inflation is ~2.5%-3%, Ing (for instance) are paying 4.75%, First Direct 5%. Now, for those arithmetically challenged, let me advise you that 5%>2.5%. Even after 20% tax, 5% is STILL more than the rate of inflation.
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GSV Three Minds in a Can
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On Thu, 20 Oct 2005 18:35:30 +0100, GSV Three Minds in a Can
typed:

it isn't...you are confusing rpi with inflation.. as the gov't intends you do... real inflation in the uk last i looked is ~6%
regards...

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Not by any of the methods that =I= use to define it. What methodology gives you an answer higher than Earning inflation?
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GSV Three Minds in a Can
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said

Isn't this all missing the point...? Surely, you have to take into account (a) whether you want the thing now or later (if later, then save now; if now, then borrow) and (b) whether the thing will cost more or less (in money or real terms) if you buy it in the future. "Inflation" rate is all very well, but it's only an average of a basket - and no-one saves for a basket...
--
Martin

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GSV Three Minds in a Can wrote:

Like hell it is. Real-world inflation is more like 7% right now.

Right. And after 40% tax, that 5% is 3%... which is less than half the real rate of inflation: saving ain't worth shit if you actually have any decent amount of money to save.

Houses alone have inflated 15-20% per year in the the last few years... I take it you don't spend any money on housing either?
Mark
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snipped-for-privacy@my-deja.com wrote:

But the money you spend on housing -- in the form of your rent or your mortgage payments -- isn't subject to this inflation, is it? They don't go up each month as the value of the property rises.
And, of course, if you really want to, you can save your money in property bonds (though they primarily concentrate on commercial property, since that's a lot easier for a fund to manage commercial properties than residential ones).
Steve
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On Thu, 20 Oct 2005 18:35:30 +0100, GSV Three Minds in a Can
mysteriously appeared thru the usenet mist to inform us thus...

You are referring to official inflation. abelard will tell you this is not the same as true inflation (higher) and also, inflation differs from one person to another. Those worst hit by inflation include those on fixed incomes and those who live from hand to mouth.
You only have to look at gas/elec/water/council tax increases to see true inflation for these people is much higher than published data.
--
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On Fri, 21 Oct 2005 11:50:28 +0100, hummingbird

So what is true inflation?

Certainly, for me inflation has been negative for some time - most of my expenses, flights, food, clothes have all significantly come down in price.

No, because ignoring the other areas where prices are falling does not give a true picture.
Jim.
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On Fri, 21 Oct 2005 10:57:36 GMT, snipped-for-privacy@jibbering.com (Jim Ley) mysteriously appeared thru the usenet mist to inform us thus...

Read lardy's site: http://www.abelard.org/inflation.htm He explains the difference between govt RPI and true inflation. Govt RPI is a huge contrick.

That's what happens for lucky people who spend more of their income on such items, including consumer electronics etc. But it's not the case for those who spend a large proportion of income on 'essentials'.
I also question what the actual inflation is on many food items. I can think of many items which have gone up by far more than published inflation over time - eg potatoes from 6p-10p/pound to 50p+/kilo in five years.
[ My local club/bar has just increased the price of bottled mineral water by *50%* to £1.50 for 330ml. It was increased by ~20% only one year ago at the same time the brand was changed from Vittel to some shoddy unknown cheaper brand packed in inferior plastic bottles.     Mineral water now costs 4 1/2 times more than petrol! ]
I also question your claim on flight prices. ISTM airlines are imposing surcharges nowadays due to high oil prices.

You miss my point about the pattern of spending for different people. A retired single person on state pension who lives in their own home doesn't spend much money on "expenses, flights, food, clothes" as you do. They have to pay the essential household bills which have gone up by far more than published inflation for some years. By contrast, you are offsetting these increases with your spending on goods which have gone down in price. Oldies don't have that luxury.
--
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On Fri, 21 Oct 2005 13:00:29 +0100, hummingbird

Well it's not accurate certainly, but as you admit no two people buy the same things.

Er, food and clothes are essentials, they've been falling a lot, if you're not rich enough to afford the council tax in your expensive house, move somewhere smaller.

Where do you pay over 50p a kilo for spuds? You should try using cheaper shops...

That's likely your club, perhaps drink tap water... Certainly bottled water from the supermarket has not changed in this manner.

My first flight to Italy 10 years ago efficiently bought at the time for the minimum price, was more expensive than the 8 flights combined I've taken since, flights have plummeted in the last 10 years, and have not significantly increased in the last couple.

No I don't, you cannot claim that the _true_ inflation rate is a particular value (you claimed 7%) because that may well be true for some people, however for some other people it's negative, as you now say it completely depends on what they spend it on.

No, but they have their own home, which they choose to keep and are therefore having to pay more council tax, if they didn't choose to do so, selling that large asset and moving somewhere smaller would certainly do more to improve their cash situation than moaning about RPI.

And young people don't have the large housing assets either, that's why we smooth out the spending throughout our lives, you should expect an old person to be spending more than they're earning - reducing assets.
Jim.
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Jim Ley wrote:

And abelard's site is impossible to read anyway.

Are you suggesting OAPs are buying bottled water in clubs? As an *essential*? I'd ask for tap water meself.

Indeed, which is precisely why 'baskets' of commodities are used, rather than one single item. RPI or any other measure can only ever be a general indicator; some essentials are staying the same price, or getting cheaper (eg food, clothing) while others are getting more expensive (gas/leccy, council tax). An argument that does have some force is that OAPs may find it harder to get to cheaper outlets for food and clothing, so are forced to pay over the odds at corner shops and such.
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On 21 Oct 2005 05:48:37 -0700, snipped-for-privacy@virgin.net mysteriously appeared thru the usenet mist to inform us thus...

No, I was pointing to prices increases which don't seem to find their way into the RPI. The club I referred to declines to serve tap water.

But my earlier point is that OAPs etc spend a much larger proportion of their income on the essentials like gas/elec/CT etc, so their inflation is higher than a person who spends their money on the latest gadgets etc.
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hummingbird wrote:

Don't they get help with fuel costs?
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