Mervyn King misleads on household debt
In October, Bank of England Governor Mervyn King warned that we could be suffering our “worst financial crisis ever”, more serious even than the Depression of the 1930s. Two months later, just as it is confirmed that the UK has dipped back into recession, he’s more cheerful, telling us not to despair: “There is no reason to despair… All crises come to an end”.
One thing in particular struck us about the speech he gave yesterday evening. He said: “The increase in households’ borrowing came to an abrupt halt in the 2008/9 recession.”
While that may have been true at the time, it gives the very misleading impression that UK households have stopped borrowing. This could not be further from the truth. A look at the Bank of England’s own figures shows that British households are as indebted as ever and that the only reason headline totals have fallen is because the banks have written off so much bad debt.
Take total consumer debt for instance. This stood at at £1,461 billion in November 2008 and £1,452 billion in November 2011. It seems to have declined slightly and yet the banks had written off £26.7 billion. So the total excluding bank write-offs has actually risen by £18.4 billion.
Credit card debt is particularly strong still, no doubt helped by the plethora of zero-interest transfer offers. It has risen over the period from £53.3 billion to £56.5 billion. But an extraordinary £13 billion has been written off over the same period. Exclude write-offs and credit card debt has actually risen £16.1 billion. So much for David Cameron’s belief, expressed in his party conference speech, that people are paying off credit card debt.
Secured lending has also risen over the period, from £1,226 billion to £1,245 billion before write-offs of £2.3 billion.
As the Bank of England itself said recently:
“There is little sign that, at the aggregate level, households are making an active effort to pay down debt more quickly than in the past.”
It is hard to know why Sir Mervyn King should give the impression that household borrowing has fallen when the Bank of England’s own figures show growth of 2.3% in the past 12 months in unsecured lending, including credit card debt.
“Debt levels were unsustainable,” said Sir Mervyn King in yesterday’s speech. They still are. And they are still growing.
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There’s little imperative to clear down debt when people are being told that abnormal, near zero base-rates are to persist for the foreseeable future.
Hints of rises in base rates might bring about more of a sense of urgency.
Is it just me? I can’t seem to remember hearing much from Sir Mervyn the King of Smug as debt mushroomed. He didn’t seem to notice that.
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No point trying to wax lyrical, they’re all a bunch of crooks.
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Assuming that debt levels are actually still rising. Doesn’t that show that money is too tight that those borrowers a taking out more to keep afloat? adding more fuel to the fire of debt. If the Government wants debt levels to come down we must use standard economics of money and increase interest rates, to give the borrowers the incentive to pay down their debts. As Simon was saying a few months ago that these unusual low interest rates are entrenching on growth.
What I find really annoying that the Bank of England is convinced that the UK has demand problem but they are going about it totally the wrong way as they are talking about printing even more money, which won’t solve our demand problem but would solve a supply problem if we have one. There is enough money in the economy; our problem is that there is a real lack of confident, perhaps increasing interest rates to more normal levels would bring confident and would boost the income of pensioners (and savers) who have a small pot of savings to spend their money. Plus encourage borrowers to pay down their debts if that is what the government want to do. If they want to deflate the debt away they will get hit in the face, as market the will demand more interest when they get too fed up with the government fleecing them.
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