Tuesday 23 October 2007

Debt collectors preparing to call on us all....

I spotted an excellent article in the under-rated The Business magazine. Here is the first paragraph:

"THE government’s private finance initiative (PFI) liabilities have rocketed 14.5% to £181bn ($368bn, E260bn) over the past 10 months, according to information buried in the pre-Budget report (PBR)."

That is a huge jump for an economy expanding at 3% per annum at best.

Add this to the the £1,363 billion in personal debt and the £574 billion in Government debt.

This brings it to a grand total of £2,118 billion of total debt.

This translates to £84,720 of debt per household (the best measure as it approximates net taxpayers best of all).

This is a huge amount, the interest on this alone must be something in the order of £6000 per year or £500 a month!

No surprise then that the graph above shows a rapid rise in insolvencies.

Of course some of this is long-term debt and mortgages account for half of this burden.

Nonetheless we are in a difficult position debt wise and the boom of the last few years has clearly been financed by both increased mortgage borrowing of up to £200 billion and Government spending of another £200 billion.

There is no way to finance us out of a recession now; so I bet Brown and Darling are praying somehow that we avoid one


Anonymous said...

Sub-prime is bad here in the U.S. How's it over there? ;)

Nick Drew said...

Matt - average property prices here are approx 9 times average wages, so we shall find out soon !

Mark Wadsworth said...

It's far worse than that.

Let's say, half of households have paid off their mortgages and have cash at the bank or in government bonds. So the interest they pay on government debt sort of nets off with interest they receive.

The other half, paying off mortgages (average mortgage, about £100,000) out of taxed income have got a much higher overall interest liability than your £85,000 figure would suggest.

Old BE said...

A whole swath of the country who have bought recently will be caught in negative equity. Luckily with inflation at only 5% or so we can cut rates quite quickly.

CityUnslicker said...

Mark you are right; I was being very conservative in my estimates.

The only way this will evr get paid off is with a burst of realy high inflation.

ED- Yup, negative equity will come back next year in all likelihood.

James Higham said...

Get out of all credit arrangements as soon as possible.

Anonymous said...

@Mark Wadsworth: Correct. Not only that but the people with the highest mortgage liability tend to be the ones with lowest income - young couples doing manual jobs that are about to start a family. They also tend to have very high loan debt due to having to furnish their new homes after they have taken out a 100% mortgage. So the debt is extremely heavily weighted towards those least able to accept the shocks of a weakening economy.

The analysis by CU doesn't consider corporate debt which has also risen dramatically due to the availability of ridiculously cheap debt. It started with the £100bn 3G mobile licence "bonanza". Then we had a lot of M&A activity over the last few years and more recently private equity buy-outs. All of this was inspired by almost free cash from overseas funds.

Take ALL of this debt into account and you will quickly see that the 3% p.a. GDP growth is actually rather small compared to the growth in UK PLC debt over the same period. Fundamentally we are in a recession, that has been covered up with gross inflation particularly of asset prices making us in reality worse off as ever more of our income is spent on housing. This has probably been deliberate, as Gordon Brown must surely be aware of the teachings of John Maynard Keynes who believed (mistakenly) that the idle rich could be inflated into non-existence. Brown is probably more interested in inflating the Tory voting middle classes into non-existence, but it is unlikely to be effective.

It is interesting to note that the ECB has control over both interest rates and public spending levels and has no target for maintaining growth. Thus they are left with the purely technical responsibility of ensuring that excess money supply does not result in rampant inflation. When recession happens in Europe it is considered to be a natural response to previous excess. The BoE is in no such position, and since its targets are set by the government based on a government target for inflation that is cobbled together from figures that exclude important factors for UK consumer inflation it is trying to control the economy with both hands tied behind their backs and only one lever in their control.

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