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Vox populi, vox erratum

It's not a central banker's job to spread fear and panic. So it's no surprise to find the Bank of England trying to laugh off the UK consumer debt crisis...

Central bankers are paid to pretend that everything's just fine...most especially when it isn't. So it's no surprise to find the Bank of England's latest report on UK consumer debt wearing a big, broad smile.

Trouble is, the Old Lady's smile is stuck...and her eyes are rolling in her head. Maybe someone's laced her pink gin with valium again.

Back in September, the Bank of England hired a research company, NMG, to ask 2,000 people about their debts. How much did they owe? Was it a burden? What would they do if they couldn't afford to cover their repayments anymore...?

A quick look at the official data would have told the Bank what's really happening at the sharp end. Average borrowing via credit cards, finance deals, overdrafts and unsecured bank loans has risen to £4,514 per adult. Total secured lending on UK homes reached £1055.9bn at the end of October – an increase of 11.3% in the last 12 months, and only a little below the total annual output of the entire UK economy.

Can the nation really support this level of household debt? Not according to the data. Court cases for mortgage repossession have doubled since autumn 2003. The number of people declaring themselves bankrupt has more than doubled in the last two years alone. But the Bank of England has become a big fan of vox populi. Trust the people to tell you what you need to know. Then round out their responses to get the answers that you want.

Every 3 months, for instance, the Bank of England asks 2,000 people how well they feel the Old Lady is doing her job, using interest rates to control inflation. And every 3 months the plebs oblige by saying that, be honest...they don't really understand how it all works. But the Bank seems to be doing a grand job nevertheless!

Last time round, in August, 53% of people surveyed were either "very" or "fairly satisfied" with the policy wonks on Threadneedle Street. Imagine a political party getting that kind of vote! Only 11% of people said they weren't happy with the Bank of England's work in fighting inflation. The remaining 25% had no idea what the pollster wanted them to say.

Likewise with consumer debt. All that counts is what people say, not what they do. And what people say about their debts is this...

  • Around 6% of households have problems paying their debts most or every month;
  • One in every 25 families renting their home owes more money than they earn – pre-tax - in a whole year;
  • Some 7.7% of mortgagors are having problems meeting their monthly payments;
  • The proportion of people who know someone who's gone bankrupt has risen from 21% to 24% in the last 12 months;
  • Seven per cent of households would seriously consider bankruptcy if their debts became too much; 5% might possibly consider it.

Sound a little fearful to you? Not to worry. The Bank of England says that the people reporting the greatest problems in servicing their debts earn low incomes. So any impact they might have on national consumption – say, by slipping under and going bankrupt – would be muted.

But the trouble is, however, that these heavily indebted households haven't only been spending their incomes. They've become heavily indebted because they've been spending more than their income. So if or when they go under, not only will their income stop funding new TVs and iPods; so will the extra money that they would have borrowed if only the banks would keep them solvent.

No matter again, says the Old Lady. Since 1995 the proportion of debtors saying that their unsecured debts are a burden has stayed relatively constant. Yet there has been a surge in personal bankruptcies. Therefore, smiles the Bank of England sweetly, the rising defaults must simply mirror problems at the furthest extremes of Britain consumer debt economy.

But what if the surge in bankruptcies simply proves how fragile household balance sheets have become? Starting from a position that used to be more secure than people thought, a rising tide of consumers are slipping under. Enough debt to give you sleepless nights rarely led to bankruptcy 10 years ago. Now it's tipping record numbers of consumers into insolvency.

How might this have happened? Firstly, the sheer weight of debt is greater. Total unsecured lending has quadrupled since 1995. Citizens Advice dealt with 1.4 million debt problems in the past year, according to, up 11% on the previous 12 months and twice the figure from 8 years ago. But secondly, it's a simple fact that insolvency is now an easier option than it was. The Bank of England, however, seems to have missed the switch.

"Could the stigma of bankruptcy be reduced as it becomes more common?" muses the Old Lady in her report on 'The State of British Household Finances'. She's got the question upside down in fact. For on April Fool's Day 2004, the UK government reduced the stigma of bankruptcy in law. It cut the time before a bankrupt could be discharged from their debts down from 3 years to 12 months.

The number of people declaring themselves bankrupt leapt 43% during the next 3 months. By the summer of this year, it ran two-and-half-times greater than its pre-2004 peak. The stigma was reduced; bankruptcy then became more common."

"Bankruptcy was seen as a last resort by most respondents," says the Bank of England in the conclusions to its survey. "Most expected to resolve their debt problems by cutting spending.

Nothing to worry about then. Have another valium...and keep smiling.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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