Government plans rely on another private debt splurge
SirMickTravis
Posts: 2,607 Forum Member
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Lost in the small print of the government's autumn statement is an expectation that household debt levels will rise back to about 180% GDP in the next five years. That's even higher than thy were in 2007 before the crash.........
This is partly about mortgages - higher house prices means more lending for mortgages but the government is also relying on an increase in unsecured lending - i.e credit cards. This will get us nowhere since the debts will have to be repaid and they aren't going on anything useful - not investment but simply increasing asset prices. This won't achieve anything. What's more, when the government can itself borrow money at rock bottom interest rates it insists the burden of risk be shouldered by individuals. This is profoundlyimmoral and probably won't work. The government was relying on a similar debt splurge in 2010 and it never materialised. I suspect his won't work either since the Bank of England is going to pull the rug from under Help To Sell, sorry Buy.
This is partly about mortgages - higher house prices means more lending for mortgages but the government is also relying on an increase in unsecured lending - i.e credit cards. This will get us nowhere since the debts will have to be repaid and they aren't going on anything useful - not investment but simply increasing asset prices. This won't achieve anything. What's more, when the government can itself borrow money at rock bottom interest rates it insists the burden of risk be shouldered by individuals. This is profoundlyimmoral and probably won't work. The government was relying on a similar debt splurge in 2010 and it never materialised. I suspect his won't work either since the Bank of England is going to pull the rug from under Help To Sell, sorry Buy.
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"Low-wage economy", surely an oxymoron as applied to the UK economy which needs people to have spending power not dependent on debt.
I think what confused some people is the amazing self-confidence shown by those in government, a wrong conclusion was drawn that such confident people must know what they are doing.
The trouble is, there isn't a political party out there with the will to tackle the root cause as they all prefer window dressing over actual solutions.
Nail. Head.
This post should be a sticky post at the top every single thread about the economy and every single page of that thread on here.
No economic system will work until this gets sorted out, once this is sorted out, then we (as in everybody everywhere) can have an actual meaningful debate about which economic system we use, which might actually lead somewhere.
Excellent point (and good for my education cheers - after your post i'm now fully read up on fractional reserving).
On a more simplistic level i was rather disappointed that yet again our recovery is to be based around huge levels of personal debt and our government both requiring & stimulating large house price inflation. Because its not like these are the first two factors required to create a boom & bust economy or anything! .....whilst the banks make obscene profits. Again. >:(
It used to be that the Conservatives had more of an understanding that way, but this lot have caught up with Labour in general cluelessness.
The public have yet to realise this though and still have a trust in the Conservatives that isn't justified.
Indeed. It has been since the first ancient brit decided to take his chariot to the seaside for a holiday, or the stone age chap made himself a nice stone human figure., or Londoners decided to go and watch something by that chap Shakespeare.
The other problem at the moment is that many of the people running busineses are hopeless at it , and produce rubbish services, or hunting people with more money then sense.The focus is on a quick buck, reducing service and costs, and the odd, often stupid, great new idea. I am currently wading through the incompetence of BT and Dairy Crest , going to half full West End theatres, and finding many of the places I would go to buy things closed - because some property developer has his eyes on bigger profits from residential development, or some top end of market shop that will have a lot fewer richer customers.
It may carry on fine - but one day it will blow up big time.
I think it set in when people started taking bets on whether the ancient brit would make it to the beach. Or how quickly he'd make it. And then wouldn't he like a new, faster chariot on easy payment terms.. Ancient socio-economic textbooks tried to warn us of the dangers of usury, but did we listen?
Austerity is a great political soundbite - but it's a lousy policy.
According to the figures, income tax receipts were £66 billion lower than forecast, national insurance contributions were down £25.5 billion while social security spending is £25 billion higher than originally planned.
So the net difference between Osborne's beliefs and reality is over £100 bn.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11271845/George-Osborne-has-missed-his-chance-to-end-the-British-disease.html
Or try being too clever. Neat example of what goes wrong explained here-
http://www.zerohedge.com/news/2014-12-06/citi-faces-270-million-loss-panic-over-chinese-port-commodity-fraud
Dunning exclaimed "it appears that substantial quantities may be missing from the warehouses or may be the subject of multiple pledges," and the bank says it is owed at least $270 million. Other 'banks' have been less forthcoming about their potential losses, but the government probe has so far uncovered almost $10 billion in fraudulent trade, including irregularities at Qingdao, according to the country’s currency regulator.
So back in the good'ol days someone would just buy copper & aluminium from a trader, possibly with some financing from a bank. They'd then turn the resources into stuff doing the value add thing, and pay the bank back. Simples. But now we have this-
Copper ownership and hedging: Through the whole process each tonne of copper involved in CCFDs is hedged by selling futures on LME futures curve (deals typically involve a long physical position and short futures position over the life of the CCFDs, unless the owner of the copper wants to speculate on the price).
Though typically owned and hedged by Party A, the hedger can be Party A, B, C and D, depending on the ownership of the copper warrant.
And it goes wrong. And I am Jack's lack of suprise.. Our sharp money men got so excited about their convoluted financial shenanigans, they lost sight of the basics.. like whether the metal was really there.
Government spending is a component of GDP, if the government is committed to reducing its spending then it needs to ensure that this is substituted by private spending - otherwise there would be an instant recession.
Whether or not the government can borrow at rock bottom levels is irrelevant as we have been over-borrowing since the day Labour got in in 1997 - we have piled up a lot of debt which we must reduce as currently we are paying the same amount of money on servicing our debt as we do for the enitre NHS budget.
That is a ridiculous fact and we just cannot borrow more. So if you want to avoid another major recession and the job losses that would ensue, the only solution is to get households to spend.
it is not in the interest of the government to reform the way money is created. in a gold standard you cant manipulate money .. you cant secretly tax people by creating more gold. you dont print gold .. you mine it or buy it.
Oh dear. We ARE borrowing more every day. This was a private debt crisis that has morphed into a public debt problem. If we hadn't allowed the public balance sheet to expand we would have been in a depression. As for the government having to service its debts................ so do private individuals. Their debt will be a drag on the economy for decades.
It just beggars belief. In 2008 public debt was about 40% of GDP, roughly what it was in 1997. Private debt was probably 400% GDP. It was the latter that caused the crisis. Public debt has since risen to about 70% GDP. So you think that amounts to a PUBLIC debt crisis? Nothing special by international standard or throughout our history. The zealotry of people who insist debt must be in private hands (often those least able to deal with it) rather than public astonishes me. Public investment on things we know we need eg infrastructure at a time of record low borrowing costs is about as close to a free lunch as you will ever get.
And when it does we can always blame the welfare system, slash that and then restart again safe in the knowledge that it won't happen again.
When I look at these housing price growth forecasts combined with the expected negligible wage rises - it simply makes no sense.
You couldn't make such stupidity up!:D
Private debt has not caused any crisis, certainly not since 2007. It might have been unsustainable, but it never caused any crisis. If you have any evidence to the contrary, I'd like to see it.
The recession was caused by credit drying up. When people couldn't finance their desired purchases then sales went down.
It is bad economically for our economy to rely on credit to keep growth.
Exactly, private debt didn't cause the crisis, it was the fact that it was unsustainable that caused the crisis i.e. households couldn't load up on debt indefinitely.
If there had been widescale bankruptices and home repocessions then you could say that private debt caused the crisis.
https://www.youtube.com/watch?v=auHJlWwwTKk
An economy is only as good as the energy it can harness to sustain itself and in rare instances, grow.
I agree with Marty about the OBR. Big questions need to be asked about its 'independence' and credibility.
It's not quite as simple as a collpase in demand and too much private debt. Givent that pretty much every western economy went into recession simultaneously, are you going to conclude that every western country had enormous private debts and that this caused the global recession?
What really caused the 2009 onwards worldwide recession was twofold: collapse in consumer and business confidence and the drying up of credit markets. The reason credit froze worldwide was because banks suddenly became reluctant to lend to each other because no one knew which banks were holding toxic assets and which banks could be the next Lehman/Northern Rock.
I wouldn't say that private debts are a bad thing, we have built an economic system which relies on it. This is sustainable as long as good middle class jobs do not disappear. If people can repay their debts then there's no problem. Inflation takes care of a lot of it.
I'm not saying that private debt is a bad thing in itself. The problem is that it has grown far too large. This was first seen in Japan which has become a stagnant economy and now it has happened here.
Thats capitalism for you which has always relied on debt to function.