#4 The next borrowing binge

No wise person criticises cats for trying to catch mice. It’s what they do. It’s part of the job description for being a cat.

Likewise, we should expect politicians to try to win elections. But this does not mean that we should watch their electoral manoeuvrings without comment, particularly where those activities are gravely damaging to the general public.

With government clearly planning a property-based borrowing binge ahead of the election, here are a couple of figures that might give you pause for thought:

      Over the last ten years, the annual disposable income of the average British wage-earner has increased by £2,080.

       Over the same period, average household debt has increased by £28,300.

Now I know that the average worker and the average household are not quite the same thing, but they are close enough for this to be a valid comparison. Some households are workless, and some are retired, but it’s difficult to rack up debt without an income, so the comparison is close enough.

Since 2002, then, average household debt has increased by £13.60 for each £1 increase in average disposable incomes.

And now George Osborne wants people to borrow more?

Yes, he does. The “Funding for Lending” scheme is intended – I quote government here – to “create incentives for banks to increase their lending to UK households”. ”Help to Buy”, meanwhile, will guarantee up to 20% of the cost of buying properties up to a maximum price of £600,000. (Just for the record, average property prices are £168,000 in Britain as a whole and £287,000 in Greater London, so this isn’t aimed at first-time buyers).

Let me explain my figures here. Between 2002 and 2012, average wages increased by £6,480 (36%), from £17,910 to £24,390. Of this nominal increase, however, £4,400 (68%) was eaten up by the 62% increase in the cost of essentials (as measured by the TM UK Essentials Price Index), leaving disposable incomes just £2,080 (19%) improved.

Second, average mortgage and credit debt per household increased by £28,300 – from £31,510 to £59,810 – over the same period.

Let’s remember how often the Conservatives and the Liberal Democrats have accused Ed Balls of trying to borrow Britain’s way out of a debt crisis. It’s a valid criticism. But now, instead of the state loading up on debt, as Labour would have liked, households are going to do the borrowing instead. Either way, then, the panacea to a debt-burdened economy is more borrowing.

The logic, of course, is that rising house prices will make consumers more relaxed about loading up on credit, giving the economy a Brown-style ‘borrowed growth’ spurt in time for the election. Two questions surely have to be asked – will it work? And should it?

Well, pumping up a credit bubble ahead of an election has worked before. This time, however, we ought to take note of what is happening in bond markets, which could wrest control of interest rate policy out of central bankers’ hands long before the 2016 “guidance” date for the continuation of cheap money.

As for whether it should work, I’ll leave that to you. But my sympathies will be with first-time buyers when – and, I emphasise, when, not if – rates rise from their historic lows. Anyone sucked into taking on debt over the coming couple of years is likely to learn, the hard way, that anyone supping with the official line on monetary policy should do so with a very long spoon. As savers, of course, have already learned to their cost.

6 thoughts on “#4 The next borrowing binge

    • Tim

      In reality, we can never discuss these things in a vacuum. I think it was St Augustine who said “make me virtuous, Lord – but not yet”……

  1. Hi Tim

    Very depressing but sadly inevitable.

    They can only generate so called growth through debt expansion – the idea we could rebalance and grow through industry and exports is 20 years to late. Globalisation was a one way ticket to poverty for the UK and much of the West – however we had lots of fun on the ride down.

    It works until it doesn’t – I thought it would have stopped working in 2008 – but in fact the crisis came too late and was too big for them to allow it to run its proper course. We couldn’t exit the game so we doubled up instead.

    I am not convinced it will end with bankrupting rate rises – that would trigger a chain of defaults starting with property and ending with UK sovereign default. A nightmare scenario for us but also the rest of the developed world (& maybe developing world) – because if we go then they might go too. I don’t think the house of cards can withstand a sovereign default on the unprecedented scale of the UK.

    Rather I think, the combination of QE and conspiring central bankers will prop up Gilts and other government bonds much longer than we can imagine. The free-market lives with the tooth fairy. So I think they can artificially depress rates in exchange for inflation and they believe that will be a desired outcome,

    Anyway we are in such a mess, I think its hard to imagine any kind of recovery without first defaulting – either a hard default or soft default via inflation. The question is just how long can this phoney economy last ? Would be interested in any views.

    • Dave

      Yes – but how long can this go on? Let’s say that sovereign bond yields continue to rise. Central bankers cannot let this translate into policy rates (suicidal), but neither can they borrow (even to refinance expiring debt) through the market. So they use QE, which becomes monetisation of debt (it already is, in my view, but that’s another issue).

      Now, what effect does this, in turn, have on the bond markets (or the forex markets, for that matter)?

      This where Abenomics will end, in my opinion, and the UK is treading the same path, especially if it triggers a pre-election borrowing binge.

      If you look at my point about wages and the cost of essentials, you’ll see that we’re already getting poorer, and no amount of financial engineering, QE and so on can disguise the fact.

      My ‘surplus energy economics’ view is that we’re trying to prop up growth in the ‘financial economy’ whilst the ‘real economy’ isn’t growing, and debt is being used to bridge the gap. When ‘honest’ debt – raised on the markets – can no longer do this, QE is used instead.

      This has been kept going for a surprisingly long time. The snag, though, is that the end result is debasement of the currency. All fiat currencies depend on the credibility of the issuer. And one cannot – to paraphrase Abe Lincoln – “fool all of the markets, all of the time”.

      I’m trying not to put too much importance on rising bond yields, but this has long been an obvious result of what has been happening…..

    • I would be interested in who exactly is buying Gilts at moment in temporary absence of QE – any ideas Tim ?

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