– Easy credit offered by UK banks is endangering “everyone else in the economy”
– UK banks are “dicing with the spiral of complacency” again
– Bank of England official believes household debt is good in moderation
– Household debt now equals 135% of household income
– Now costs half of average income to raise a child
– Real incomes not keeping up with real inflation
– 41% of those in debt are in full-time work
– £1.537 trillion owed by the end of May 2017
Why UK household debt will cause the next crisis
“Household debt is good in moderation,” Alex Brazier, executive director of financial stability at the Bank of England (BoE), told financial risk specialists earlier this week. But, it “can be dangerous in excess.”
The problem with ‘in moderation’ is that no-one knows what a moderate measure of something is until they have had too much of it. Sub prime borrowers in the U.S. and property buyers in Ireland and the UK did not know they would contribute to a global debt crisis. Central bankers in Germany in the early 1920s and more recently in Zimbabwe never thought they were doing something that would be as detrimental as it ultimately was.
The same may go for levels of debt in western countries today and indeed the QE schemes and modern monetary experiments of western central banks. And, a moderate measure of something can be too much or too little from one person (or economy) to the next.
For example, four glasses of wine for me are too much, for my Glaswegian cousin it is merely an aperitif.
We only discover what is too much when ‘oh just one more’ happens time and time again. Another example, two credit cards are too much for me to manage, for my mother (a demon in money-management) it is fine.
What about when it is two credit cards and a car loan and a mortgage? Is that too much debt for one household? Who knows, it depends on the household.
Brazier believes that we are now on the brink of household debt being in excess and therefore dangerous.
Why? Because we are seeing a 10% YoY increase in car loans, credit card balances and personal loans. This is due to a “spiral of complacency” from lenders who are offering cheap, easily available credit to households which have only seen their incomes rise by 1.5% over the same time period.
This is something we have talked about previously. Brazier’s comments made headlines and rightly so.
Personal debt in the UK is almost certainly already in excess and may well be the catalyst to the next financial crisis. As Brazier himself acknowledged, household debt can be dangerous ‘to borrowers, lenders and, most importantly from our perspective, everyone else in the economy.’
Yet again, something that was supposed to be in moderation has tipped the scales of balance towards obesity thanks to a nation that has gorged itself on cheap credit, all fed to them by the feeder banks and lenders.
The Spiral of Complacency
There are three main areas of concern for the Bank of England:
