UK debt crisis is imminent. What happens to the economy ?

On Sun, 05 Jun 2005 17:16:12 +0100, James Hammerton mysteriously appeared thru the usenet mist to inform us thus...

He was referring to *if* the banks go belly up. I was referring to

Ooh it was in another post...

With all you socialists

There already is in effect a variable pension based on savings but not equity in your home (yet).

The state pension is well below the poverty line. Benefits to make it up to a liveable level (109.45 a week plus rates and rent) are means tested. In fact so means tested it is a massive deterrent to savings for people on low incomes. This is one of the problems being grappled with by Adair Turner's pensions commission.

Labour loves means testing because it make people feel dependent on it. But the effect is more and more payouts by the state because saving is not worth it. And people in poverty because claiming is so complicated.

We wait with baited breath to see what fudge will result claimed to do two things at once - keep means testing for political reasons while encouraging people to save to reduce the burden on taxpayers.

Turner's current line seems to be that a basic pension people can live on would be too expensive.

"Alan" wrote

I think the figure is net debt, so if you owe 300 buy pay in 300 that would count as 0 in the figure.

That was not made clear in your response.

N>>>>>>and why not....they make a judgement call....

To which you replied:

To which you replied:

I then replied with the above URL.

James

I don't know about Britain, but the Fed over in the USA tracks the ratio of debt servicing to income and it seems to have been pretty constant for over

A quick calculation of say 30 million workers on an average of 20,000 taxed at 30% and a debt service of 6% on 1 trillion outstanding debt gives us about 14% I believe?

The answer lies in the generationally low interest rates. People are taking on more debt because debt is very cheap to service. When interest rates go up, cost of debt goes up, overall debt goes down but the ration of debt cost to income doesn't seem to change much.

Roland

A huge part of the UK economy is now financed by consumer debt largely from MEWing on equity in houses and use of credit cards. With a debt crisis imminent what are the prospects for the economy ?...........

The Independent

Consumers teeter on the edge of borrowing precipice

As banks warn that defaults are rising, the advice agencies are gearing up for action. David Prosser reports

Published : 04 June 2005

HBOS this week became the third bank in 10 days to warn that the number of consumers defaulting on debt repayments has risen sharply this year. The Halifax Bank of Scotland group says that its bad-debt provisions will increase markedly this year. It is now tightening its lending requirements to try to get on top of the problem.

HBOS's warning follows similar alerts from both Barclays and HSBC last week, amid increasing concern that Britons may finally be running into trouble in repaying the 1trn of consumer debt now outstanding.

The Bank of England's latest consumer-credit figures, also published this week, show that borrowers are continuing to spend more on credit cards and personal loans. And, while last month's rise was the smallest for four years, some debt experts believe that many borrowers may have passed the point where showing some restraint will get them out of trouble.

The three banks' warnings are the latest signs this year that a debt crisis is imminent. In April, for example, the Government announced that 37,900 people went bankrupt over the year to the end of March, a

The defaults come as people struggle with higher mortgage bills than a year ago - there were five increases in the Bank of England base rate over the 18 months to last August. A reduction in the number of interest-free deals on offer from credit-card lenders has also prevented people moving debt around so easily, which may previously have masked the extent of their borrowing.

For now, lenders are not panicking. Barclaycard's Ian Barber says: "You will always see ups and downs in bad debt figures during the economic cycle, but we believe that the current levels are manageable in the absence of significant interest-rate rises or a sharp increase in unemployment."

However, the increases in bad debt at banks such as Barclays and HSBC are larger than those analysts would expect to see when the economy is not in recession. HSBC economist John Butler warns: "Consumers are now very sensitive to the slightest shock. What is worrying is that this has happened when unemployment is still very low." One problem may be that many people are actually worse off than economic indicators suggest - high-profile job losses at companies such as Rover, for example, have yet to feed through into the official figures.

But debt advisers are concerned about the type of people in difficulty. John Fairhurst of the charity Payplan says: "Debt problems are no longer just the result of a change in circumstances, such as a relationship break-up or losing a job. We're seeing more people who've just been spending a little too much each month over an extended period and who find that this is now catching up with them."

Malcolm Hurlston of the Consumer Credit Counselling Service adds: "Broadly speaking, people adapt to changes in their circumstances more quickly than the experts predict and, in fact, real incomes have continued to rise this year. Even so, it is clear that consumer spending is slowing and that many of our clients are finding it even harder to make repayments."

The CCCS took 180,000 calls from worried borrowers last year, and is currently hiring enough new staff to be able to cope with 300,000 calls in 2006. Payplan says it is also hiring, with the number of calls it receives having increased rapidly over the past six months.

What frustrates debt advisers is that many borrowers only realise they are in trouble when a crisis point arrives. By taking action earlier, it is possible to avoid disaster. Anyone struggling to stay on top of debt should talk to one of several free advice services. They may be able to help you resolve the problem by sorting out your finances.

There may be obvious ways to reduce the cost of debt, for example, or you may be missing out on state benefits. These agencies can also speak to creditors on your behalf, in order to renegotiate what you pay each month.

CCCS, 0800 138 1111; National Debtline, 0808 808 4000; Payplan, 0800

In message , Richard Faulkner writes

Presumably we are using trillion to mean billion, which personally I find very annoying.

The 1 trillion means 1000 billion. Debt more or less equal to the annnual output of the economy. Most is mortgages. Credit card debt as I recall is quoted in the papers at around £50 billion.

The big point about debt is that to keep the same level of stimulus to the economy where debt is increasing it has to go on increasing! If people stabilise their debt this means a fall in demand.

As far as the total cost of servicing the debt is concerned this is true. But as far as day-to-day cash flow is concerned, does the cost of debt depend on interest rates? For mortgages it does, but for credit cards the minimum monthly payment is usually fixed at a percentage of the outstanding debt. This does not (normally) change with interest rates, what changes is the proportion of interest and capital which the monthly repayment covers.

In message , snipped-for-privacy@aol.com writes

But by billion you don't mean billion (10^12)

Just because the americans don't know what a billion is that is no excuse for us to get it wrong. After all we haven't changed the size of our pint.

I think that needs rewriting:

1. You owe the bank 500,000. You have a problem.
2. You owe the bank 500,000,000. The bank has a problem.
3. You owe the bank 500,000,000,000. We *all* have a problem.

FoFP

Heh. The classic "Eating the Seedcorn" scenario.

FoFP

I assumed he meant that GDP growth would have been negative if the credit spending was taken out.

Not quite, though that's a component of it.

No, but the UK could be growing its economy by "borrowng" future demand through credit-based spending. When the piper wants paid, we then get a bad recession because the future spending that was brought forward has vanished, and a period has to be spent paying down debt. If this gets bad enough then we get a debt deflation, which has always been a component of the worst recessions and depressions (the last of which was in the 1930's to give a rough idea of what "worst" can mean).

But you and I at least have danced this dance before...

FoFP

It does in the US. It used to be that a British "billion" was a million million and a British "trillion" was a million million million. It seems the US use has now supplanted all this where a US trillion is a mere British billion and a US billion a mere thousand million.

Not only that, but a continued increase of 1% means an ever ncreasing actual amount of money. Bubbles always fail in the end through the sheer math, if they're not stopped by something else first.

FoFP

Very good, now can we campaign for the return of billion to meaning

you're about 30 years out of date.

Read history here:-

If you want me to humiliate you and quote the relevant UK gov material which defines 1 billion as 10^9, please ask.

greg

but gdp growth is essentially real world.... a bit of paper floating around doesn't effect gdp growth.... except somewhat related to counting with elastic!

i see no reason to dispute that....but where does that get you....read on.

in the thirties there were attempts to get back to sound money....nobody is *that* mad anymore... if the debts can't be paid....they'll essentially get written off.....

i'm not convinced you understand my position sufficiently :-)

regards

the old form of a billion (10^12) is no longer used in any serious work... billion is now taken as 10^9 and trillion as 10^12

trillion in the old sense was 10^18 ie a million cubed....

regards...