Monday, 7 January 2019

The Post-Crisis Debt Cycle

In today’s post, we will look at something which we have covered a number of times here in Financial Regulation Matters, and that is the personal debt arena which continues to increase. After official figures were released recently, we can continue to chart this dangerous phenomena. However, we will examine this issue in relation to a number of connected issues, like consumer spending, to examine what is, in effect, a massively systemic cycle.

It was reported recently that, in November alone, more than £400 million was added to the total personal debt owed in the UK alone, which now stands at £72.5 billion. In the UK, the average household debt now stands at £15,385 and this figure is in relation to a number of sources of credit including credit cards, banks, and the auto-sector. In the US, the total household debt stood at just over $13 trillion as of August last year, whilst Chinese debt is continuing to rise. Although we are talking about personal debt in this post, it is also interesting to note that global debt is on the rise as well, with that figure now standing at incomprehensible $184 trillion. Going back to the UK, this latest figure ‘stands 24 per cent higher than it did on the eve of the financial crash, while consumers are paying off their cards at a higher average level of interest than in 2008’. Before we look at the associated economic issues in the larger sense, the business media have bene quick to focus on the individual impact, and for good reason. Associated charities have mentioned how people with low incomes or living in poverty are turning to credit cards because of their heavy marketing and easy availability, whilst the Money Advice Service has stated that whilst 8.3 million people are over-indebted in the UK, 22% of adults in the UK have less than £100 in savings. The fear is that this precarious position is precisely the opposite of what is required if the system is to experience another shock, even if it is not on the scale of the financial crisis. Individually, such people are susceptible to a number of personal shocks, like job losses or unexpected bills, which would then lead to a number of financial difficulties on top. The General Secretary of the Trades Union Congress (TUC) said recently that ‘household debt is at crisis level. Years of austerity and wage stagnation has pushed millions of families deep into the red. The government is skating on thin ice by relying on household debt to drive growth. A strong economy needs people spending wages, not credit cards and loans’. This raises an important point about the linkages between debt and economic growth, as a number of recent stories show us.

We looked at the issue of growth on the British high street on a number of occasions last year, and only last week it was reported that the British retailer Next had recorded an increase in revenue over the Christmas period, against its own expectations. Whilst the company is rightly anxious over making any financial predictions with the year that the UK has in front it, the news has been well received by Next, its investors, and the High Street moreover. However, in other news, ‘a “perfect storm” of factors’ has resulted in new cars sales in the UK falling to their lowest since 2013, which has caused relative shockwaves. A provisional figure of 2.36 million ‘units’ sold in 2018 represents a 7% drop on 2017. The Society of Motor Manufacturers and Traders said there is a confidence problem in the UK, based upon aspects such as Brexit and a shortage of some vehicles due to a new emissions testing scheme, although analysts are suggesting that a much bigger ‘storm’ lays ahead. We will, no doubt, cover this issue in more detail as the year progresses, but what of the connection between rising personal debt and these larger economic issues?

The reality is that economic growth is now, fundamentally, tied to consumer borrowing. Gone are the days when the spending of wages constitutes growth because, quite simply, there would be very little growth to speak of. As we live in a world where consecutive and consistent growth is the staple of the modern economy, and where any shocks (such as that caused by Apple’s relatively poor performance recently) are front-page news, relying on something which has taken the biggest blow since the Crisis is not an option. The effect of this is that personal credit is not only easily available, but systemically encouraged to continue to feed economic growth forecasts. That economic growth is something separate to the real world is the reason why this current era is being referred to as a ‘personal debt bubble’ because, quite frankly, something has to give. Yet, the political arena is now consumed with the notion of the ‘here and now’, and focusing on making any change that would affect the economic ‘here and now’ is not only not considered, but actively discouraged. The result, therefore, will be the same as always. The growth in personal debt is a massive indicator that lessons from the financial crisis were not learned. Perhaps lessons were learned with respect to RMBS, derivatives, CDOs and CDSs (although this is highly debatable), but the lessons that needed to be learned about short-termism and cyclical behaviour clearly have not been learned. We can expect to see more news about the debt levels rising, people living in a consistently precarious position, and associated markets suffering as a result. Small ‘wins’ like that experienced by Next are not to be considered the norm, as it is more likely the experiences of the auto industry in the UK will become the standard moving forward. Each jurisdiction is different and therefore will have different indicators, but the message is the same – cyclical thinking is here to stay.

Keywords – Finance, Debt, Borrowing, UK, Global Debt, Politics, Business, @finregmatters

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