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OPINION

Not waving but drowning

Not waving but drowning
September 3, 2015
Not waving but drowning

Do you know someone like this? Can you imagine what it must be like? Just thinking about it makes me feel sick to the pit of my stomach. In fact medical records show that those with heavy debt loads tend to suffer more from ulcers, stress, anxiety attacks and a host of other issues which may lead to substance abuse and early death. This is not confined to low life either, with pop stars and sporting legends suffering from some of these problems too.

The puritan ethic says that the borrower brought it upon himself, and therefore sympathy is not warranted. Possibly and probably, but this is not a solution; lessons have to be learnt before the event, not post facto. Parading or shaming the ‘criminals’ in public is a medieval practice and really not fit for a twenty-first century society. The reason: because so very many have massive debts.

 

UK household debt to disposable income

Not just among people brought up on credit card debt, like the US since Diners card was introduced in 1961, and the UK’s Barclaycard in 1972, but also in emerging markets where for the first time in history the many have access to credit, often for the first time ever.

 

UK consumer credit

Now that the punch bowl looks as though it’s about to be pulled from the party, what to do? First and foremost, it is not in the lenders’ interest to foreclose; this merely transfers and crystallises losses onto their balance sheets. So, slash rates, extend the maturity of loans, and hope easier repayment schedules mean they are maintained. This is known in banking circles as ‘lend and pretend’ and often includes fresh cash for the very biggest debtors because they are ‘too big to fail’.

 

Average weekly earnings

Governments in Beijing, Brasilia, Rome, and Washington facing slowing economies are keeping their fingers crossed that an avid consumer will pull them through. Is this realistic? According to Russ Koesterich, global chief investment strategist at Blackrock, US debt to income ratios rose from 50 per cent in the 1950’s to 130 at their peak in 2008. He believes that every 1 per cent incremental addition to household borrowing leads to an extra 0.2 per cent in spending, with over half of the rest caused by wage increases. As neither of these are currently growing, and nor is productivity, retail sales are unlikely to take off.

 

UK government debt as percentage of GDP

Among the most indebted souls out there are the Scandinavians. For socialist leaning types with flat hierarchical structures it’s hard to square, but their central bankers are terribly worried. Swedish debt-to-disposable income is now well over 170 per cent, almost 200 in Norway and 300 in Denmark. Only The Netherlands comes close at 250 (the UK at 140, slightly ahead of Finland). Germans still have far less outstanding consumer credit than this lot, but have far more to pay off than the Italians, Spanish and Portuguese, a study by French bank Credit Agricole found. No finger wagging then.