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


C

Crowley

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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J

JF

X-No-Archive: yes
In message <[email protected]>,
Crowley said:
The debt pandemic
New Statesman
Liam Halligan
Monday 24th October 2005
... 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.
 
M

M Holmes

In uk.finance Crowley said:
The debt pandemic
New Statesman
Liam Halligan
Monday 24th October 2005
[...]

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.
So sales are up 1% year over year where they were rising at quadruple
that last year. However a 1% increase is still an increase, as in even
more sales. Why then would this be a problem for the retail industry?

FoFP
 
S

Sam Smith

Perhaps we'll see a return to saving up? Saving -- there's a word one
doesn't see often these days.
If someone provided decent rates then it would be far more attractive.
 
B

Biscit

X-No-Archive: yes

Perhaps we'll see a return to saving up? Saving -- there's a word one
doesn't see often these days.
{SIGH}

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.













--
 
S

Sam Smith

So sales are up 1% year over year where they were rising at quadruple
that last year. However a 1% increase is still an increase, as in even
more sales. Why then would this be a problem for the retail industry?
You've answered your own question. If it's down on last year then that's not
a good thing for the retail industry. People are not spending like they once
did but it is a natural effect of the high level of debt. The economy will
have to go through a very slow period for a substantial length of time
before this can be corrected.
 
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M

Maria

X-No-Archive: yes



{SIGH}

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.
It's not worth saving because the interest rates are so low!
 
G

GSV Three Minds in a Can

Bitstring <[email protected]>, from the wonderful person M
Holmes said:
So sales are up 1% year over year where they were rising at quadruple
that last year. However a 1% increase is still an increase, as in even
more sales. Why then would this be a problem for the retail industry?
Well if that's 1% by value, and you back out inflation at 2.5%, then
it's a decrease in real terms. If you back out 4% salary increases and
8% rates increases it looks even worse ..
 
M

Maria

You've answered your own question. If it's down on last year then that's not
a good thing for the retail industry. People are not spending like they once
did but it is a natural effect of the high level of debt. The economy will
have to go through a very slow period for a substantial length of time
before this can be corrected.
One of the reasons it's bad for retail is because in general, retail
prices are falling and so you have to sell a lot more stuff to make
equivalent profits.
 
T

tim \(moved to sweden\)

Sam Smith said:
You've answered your own question.
no he hasn't
If it's down on last year then that's not a good thing for the retail
industry.
The growth is less than last year but spending has still increased.

You can't continually expect year on year growth to
increase by more than the previous year, that's completely
unrealistic. Positive growth is positive growth, end of
story.
People are not spending like they once did
Yes they are, it went up by 1%
but it is a natural effect of the high level of debt. The economy will
have to go through a very slow period for a substantial length of time
before this can be corrected.
that's true.

tim
 
A

AlanG

X-No-Archive: yes



{SIGH}

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.
For someone on low income that is true. You *can* be taxed on savings
while not earning. A thousand pound demand for council tax can make a
big hole in a £4000 building society account.
There's no shame in being thick these days it seems.
There is no shame in being of low intelligence. Nature made you that
way so it isn't your fault.
 
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A

AlanG

It's not worth saving because the interest rates are so low!
As long as they match inflationI have no problems with it.

But see my other reply in this thread.
 
M

mmaker

AlanG said:
As long as they match inflationI have no problems with it.
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
 
G

GSV Three Minds in a Can

from said:
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,
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.
 
A

abelard

X-No-Archive: yes



{SIGH}

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.
your comment are not necessarily realistic....
the situation is much more complex than you imagine....

read this as a first step to understanding why...
http://www.abelard.org/inflation.htm
the article quoted is not convincing by any means

--
web site at www.abelard.org - news and comment service, logic,
energy, education, politics, etc 1,531,404 document calls in year past
--------------------------------------------------------------------------------
all that is necessary for [] walk quietly and carry
the triumph of evil is that [] a big stick.
good people do nothing [] trust actions not words
only when it's funny -- roger rabbit
--------------------------------------------------------------------------------
 
A

abelard

It's not worth saving because the interest rates are so low!

net interest rates must compensate for inflation....
net interest rates must give a better return than other potential
investments in order to be worth a damn...
see other post at this place and time

regards..

--
web site at www.abelard.org - news and comment service, logic,
energy, education, politics, etc 1,531,404 document calls in year past
--------------------------------------------------------------------------------
all that is necessary for [] walk quietly and carry
the triumph of evil is that [] a big stick.
good people do nothing [] trust actions not words
only when it's funny -- roger rabbit
--------------------------------------------------------------------------------
 
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A

abelard

Not if you save in the right places. Inflation is ~2.5%-3%
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...
, 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.
--
web site at www.abelard.org - news and comment service, logic,
energy, education, politics, etc 1,531,404 document calls in year past
--------------------------------------------------------------------------------
all that is necessary for [] walk quietly and carry
the triumph of evil is that [] a big stick.
good people do nothing [] trust actions not words
only when it's funny -- roger rabbit
--------------------------------------------------------------------------------
 
M

Martin

GSV Three Minds in a Can 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.
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...
 
G

GSV Three Minds in a Can

from the said:
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%
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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G

Geoffrey Mortimer

JF said:
X-No-Archive: yes
In message <[email protected]>,



Perhaps we'll see a return to saving up? Saving -- there's a word one
doesn't see often these days.
Try doing it and see where it gets you. Recently my bank offered me an
investment fund-linked ISA savings plan based on monthly contributions. The
financial advisor gave me a personal illustration. This showed that, taking
into account charges and commision (huge), and assuming the current level of
inflation, also assuming a growth rate of 7% (IMO very ambitious for a low
risk plan), after 5 years the increase in real value of the money saved
would be almost exactly equal to zero.

All the benefits of these tax-free savings are being gobbled up by the
investment funds, who charge, in this case, 5% of all money saved, up front,
then take 1% of the value of the fund every year. This turns the 7% into and
equivalent 3.8%, which, when money is paid into the fund on a monthly basis,
and the contribution therefore diminishes in value over time, is barely
sufficient to track inflation.

-Geoff
 

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