Everybody and their dog certainly seem to be worrying about consumer debt – and the parallel, low, savings rate. The regulators are clearly concerned about increasing levels of unsecured consumer debt – and have asked lenders to tighten up. Latest figures from June showed that unsecured loans debt grew to more than £200 billion for the first time since 2008. Mortgage debt is another concern (especially around buy to let mortgages) as are car loans – a particular focus of much media attention. Leading financial charities are also muscling in on this generalised sense of gloom. The Money Charity, for instance, has been digging into these numbers and discovered that the average household owes £7,413 in unsecured debt, £530 more than a year ago. Debt is growing at the same rate it was back in the mid 2000s, expanding at around 7% for the last three years. The first two charts to the side map out this growing mountain of debt – and examine the parallels with the Great Financial Crisis. The one big difference, it argues, is that interest rates are low. A decade ago, Britons paid back £86bn and today that is just over £50bn. If rates had not changed at all since then, we would be paying 81% more than we pay today according to the Money Charity – that’s £94bn, £1,810 for every adult in the UK or 7% of average earnings.
According to permabear Albert Edwards, a strategist at French bank SocGen, these numbers on debt reflect a much bigger, more systemically important story – the remarkable decline in the savings rate (SR). He observes in a recent note that the US authorities have been revising downwards their numbers for saving, but the UK is in an even worse position, with recent data showing a slump in Q1 to only 1.9% (see chart below). According to Edwards “the UK has also only sustained moderate GDP growth via a total collapse in the Savings Rate to unprecedented historical lows, but also relative to the levels of the credit crazy US. The BoE recently warned of spiral of complacency about mounting consumer debt. But, of course, there is no acknowledgement of its own pernicious role in this unfolding disaster. “
Edwards observes that most large declines in the savings rate are “typically followed by large recession inducing rises”.
So, what are we to make of all of this debt angst? There are I suppose three reactions. The first is to worry and suggest that once interest rates start to rise we’re all screwed. Imagine what they debt servicing costs would be if interest rates were at 5%. One suspects that we’d have a deep depression that would make the 1930s look like a walk in the park.
The next reaction is complacency. This consists of a riposte to the “imagine interest rates at 5%” argument which says, “it won’t happen”. Put simply we live in a world where interest rates won’t increase beyond 2.5% for the foreseeable future. There’s too much debt about and we can’t survive ‘normalised rates’. I think this argument is largely correct but it misses an important human dimension. People worry about debt and it’s their anxieties about debt which can sour an economy. Consumers heavily weighed down by debt, even at low-interest rates, will tend to be more cautious, caging those animal spirits that faster economic growth requires.
The last reaction is to say that we still need to do something about these debt anxieties even if interest rates remain low. In essence, we need a multi pronged attack which accepts that we have a new world order built on debt. How on earth do people expect millions of consumers to be able to buy a £30k car or £300k house WITHOUT debt? It simply won’t happen for all except the very rich. In essence debt, properly structured is an empowering instrument of redistribution of actual goods and assets. Someone else’s capital allows a consumer to participate in the modern economy. But this new world requires strong legislative parameters. Interest rates need to be capped. We also need to consider debt jubilees in deep recessions so that borrowers can walk away from onerous debts. As I’ve mentioned before we also need to develop new financial models such as asset lite rental models or asset ‘sharing’ where investors participate in the upside of a key asset such as a house ( or even a degree). Last but by no means least we also need to think about smarter state level redistribution policies. The Child Trust Fund was the basis of a great idea but it needs to be more ambitious and radical – and not just restricted to kids. Rather than using redistribution via the state to fund the feckless welfare families of the Daily Mail’s fevered imagination, why not consider using the state to pump prime new forms of debt investing, to improve productive potential and help families.
Massive debt levels aren’t going away and they’ll probably get worse rather than better. Encouraging savings are a valid policy idea but they are hopelessly outgunned by high house prices and spiralling costs for many consumer essentials. Better to think through how we deal with this debt addled world and make it a little less anxious and more hopeful rather than light a spark by pushing interest rates back up to traditional levels and creating a new Great Debt depression.