David Cameron is mistaken. British people are not reducing their debt burden...
BRITISH READERS will likely remember the kerfuffle the other month over David Cameron's speech at the Conservative Party conference. The Prime Minister had planned to say: "The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills." After a panic, it was changed to: "That is why households are paying down the credit card and store card bills."
It turns out that both statements were wrong, writes Jason Riddle of Save Our Savers.
Households are NOT paying off their plastic debt. True, headline totals have fallen. But that's only because the banks have written off bad credit card debt.
According to the Bank of England, in September total outstanding credit card debt was £57 billion. That was £2.1 billion less than a year earlier but, over the same period, the banks wrote off over £3.9 billion in bad debts.
The reality is that, over the year, borrowers put another £1.75 billion of debt onto their credit cards. Perhaps that's not surprising when it's still so easy to borrow at 0% interest on credit cards.
On a more positive note, personal loans decreased by £7.6 billion over the past year and only £3.2 billion of that was written off by the banks. It is not clear whether this is because there is less demand to borrow or because the banks are being more cautious about who they lend to. However, given the rapid growth of peer to peer lending, the latter looks more likely.
The number of houses sold over the past year has fallen 10% and the Land Registry reports that prices have declined by 3.2% year-on-year. Yet, despite this, mortgage debt is still increasing, although at a low rate of 0.6% a year.
In total, Britons owe £1.24 trillion on their mortgages and make regular mortgage repayments of over £2.5 billion a month. A decade ago, total mortgage debt was only £577 billion and about £905 million was being repaid regularly each month. Home ownership hasn't increased significantly, yet £1.5 billion more is being spent on monthly debt repayments, money that cannot be spent in the shops or invested in the economy.
As with credit cards, the common perception is that people are taking advantage of low interest rates to pay down their mortgages. But according to the Bank of England: "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."
The impression, reinforced by David Cameron, that Britons are paying down their debts, is wrong. The debt problem is not going away. The Chancellor's attempts to reduce the country's debts have been blown off course. It looks as though the public never even set out on that course.
But then, with the Bank of England and the Government implying that they never want base rate to budge from its record low of 0.5%, why would people rush to pay off debt? If they are offered zero interest to borrow on a credit card, why would they not want to take out some more?
"The only way out of a debt crisis is to deal with your debts," said Mr. Cameron. But it isn't happening, either at a personal level or at a government level. Instead of raising interest rates when they had the chance, the Bank of England gives the impression that interest rates will not rise for the foreseeable future. In cahoots with the government, they are happy to keep debt levels buoyant, even though our level of debt is the UK's greatest problem.
Boosted by QE, the price of government-issued gilts have soared, depressing UK gilt yields to record lows. But the Germans are now having problems selling their bonds; if the Germans can't sell government debt, can problems for British gilt sales be far behind? If foreign buyers desert UK gilts, the gilt bubble will burst. And it will make a deafening noise.
Interest rates won't just rise, they will surge. And if interest rates rise suddenly and sharply, insolvencies will soar.
Try as they might to blame it on the Eurozone crisis, this will be a home-made catastrophe.
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