Credit card debt is not, of course, the whole of the personal debt market. But the following chart, from the FT, provides a remarkable insight into the growth of the personal debt problem:
The 2009 crisis and its impact on households is apparent. But things are now much worse. And this debt is subject to penal rates of interest.
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Don’t blame me! I’m paying mine all off.
Richard, I know you are often challenged by those who still focus on previous economic thinking regarding our banking system but this interview with Prof Richard Werner offers a very refreshing and revealing approach to the subject.
The comparison he makes between the banking structures of the UK and Germany are of course very relevant.
https://www.youtube.com/watch?v=EC0G7pY4wRE
The single biggest reason for the growth in personal debt is very low interest rates. Yet as I understand it, Richard, you are totally against interest rate rises. What then is the solution?
Credit controls
The market needs regulating to prevent abuse
That and recreate the social fund for those with limited means who need to borrow for essential items
I imagine that many of those in powet might respond to this problem punitively by putting up interest rates. The knock-on effects could be catastrophic. Debt reoveries, baliffs, seizure of homes and property. None of this really clearing any debt. What if the credit card companies/morgage lenders parcelled up all their bad debt with nice pink ribbons and sold it on to banks who might not know what they were getting……………………
I agree
“Credit controls
The market needs regulating to prevent abuse
That and recreate the social fund for those with limited means who need to borrow for essential items”
Given that that is unlikely to happen under this Government, looking at the upward trajectory of that graph (although bearing in mind that the lower bound on the Y axis starts at £50bn, not £0bn) it cannot continue to climb forever, what, in your view, Richard, will be the likely outcome?
And when?
A crash
Soon
As I now think the BoE think likely
“A crash. Soon. As I now think the BoE think likely”
The Keynesian era followed a crash(and war, yes).
I can’t see a timely end to neo-liberalism in the absence of a crash. I won’t get into some Marxian rant about the necessary destruction of capital values but it may not be the crash(or avoiding it)that is critical but the long-term response.
The longer the boom (or credit bubble in this case), the bigger the bust – No?. And if a crash is inevitable, as it may be, it should happen sooner to minimise damage and it should happen on the Tories watch (to be fair).
Just a thought – I won’t insist on it but it should be considered.
Familys buying food and paying for everday household goods with credit cards is not because of low interest rates it is because of wage stagnation and the squeeze on household finances.
Mike King,
“The single biggest reason for the growth in personal debt is very low interest rates.”
Single? Biggest?
It doesn’t help when you preface your question with a massive conjecture. Credit card rates are generally / overall much higher that mortgage rates, most other interest rates and they have more fees as well.
I think that the responses from Nicholas and A.Pessimist have got it right here.
@Mike King
“very low interest rates” – on credit cards?!?!
I’d imagine the plethora of “Interest free” deals available on credit cards these days is also partially to blame for these ever-increasing figures.
Something I’ve actually taken advantage of myself and I’m a little over a year into a 27 month (!) interest free period. Paying off some purchases a small amount each month and the balance will be zero before any interest is charged.
However, I’m not claiming these ‘interest free’ offers aren’t harmful overall as I’m lucky enough to be able to use this facility as an interest-free loan and won’t have any issues paying it off. I do wonder how many people who are struggling financially are building up a balance on such cards with little prospect of paying it all off before the interest commences.
If you look at the money saving advice sites, the other big thing in credit cards is 0% deals on balance transfers. Halifax, for example, are doing 0% interest on balance transfers for up to 29 months – if you get accepted for a card, you could transfer a substantial balance across from one another card then not have to pay anything but small payments for almost two and a half years! The longest deal listed on MSE is 41 months 0% on balances with an initial fee to be charged.
I can’t help but wonder what will occur when the wheels fall off this ‘interest free’ card market as it surely can’t continue in the longer term? All this credit will surely have to unroll at some point down the road.
This could bite everyone, banks included
The Social Fund remains a good idea. I used to help claimants access it when they had a special need, eg being rehabilitated and taking up a new tenancy.
We badly need it again
I guess you mean mortgage rates, car purchase loans schemes, etc.
I wonder what the proportions of various categories of loans are, anyone have a link?
Hi Richard,
How much influence does PPI repayments had on these figures do you think?
These seem to be significant from august/2011 (244 million repaid that month).
Over 4 billion a year was paid out 2012-2015.
It has been tapering off for about a year now. E.g. The latest figures April 2017 are 200 million lower than April 2016. (FSA website)
Just asking as I seen a mention of this in the guardian today and a commenter dissed it as insignificant.
Ps I bought your book now just need to find some time to read it!
I think PPI is one of the great unmentioned issues
It may well have driven car sales and some consumer spending
Now its declining and people want to replace what they got buck shee with debt
It always was the Tory Party’s policy to rely upon a large increase in private sector debt to drive the economy. Making money from debt issuance always comes before the economic health of the nation with Tories:-
http://bilbo.economicoutlook.net/blog/?p=36348
http://bilbo.economicoutlook.net/blog/?p=14325
Short term it looks like lunacy but if you’re playing the right sort of long game it’s a win-win situation. Debt is a form of control, it enables rent extraction and facilitates the movement of property/wealth from the poor/public to the rich/private. Is there a long term metric that shows debt servicing costs, adding public and private together? In the same way we see %ages for how much of the average disposable income goes on various goods.
We already know that the poorest have no choice but to spend all they receive. But how much of that is servicing debts?
What is more chilling is that society has got used to debt. Probably because it creates the illusion of wealth, of being able to keep up.
As has been discussed here before, we need an injection of real cash into the economy – higher wages, more generous benefits and more big investment projects. A better network of charging points for the electric cars that are coming our way would be a start.
HS2 is not my cup of tea. Improving the current network capacity would have been better. Why for example do stretches of track that have had sections removed up to privatisation not had these reinstated? To create a capacity problem which ‘can only be solved’ by HS2?
And in terms of recent broken electrification pledges – was this because of lobbying by the rolling stock leasing companies perhaps in order for them to squeeze as much return as possible out of the smelly, noisy and uncomfortable diesel trains we currently have to put up with?
True PSR and if they were thinking/planning logically then they would be moving the centre of government to the North as it would be cheaper and faster than refurbishment. Any planning bod would describe the overuse of London and the South East, and underuse of elsewhere, as idiocy.
I struggled to find anything better than this chart (apologies – it’s from the DM) showing the proportions of categories of loan;
http://i.dailymail.co.uk/i/pix/2016/11/07/15/3A267D5600000578-3913560-image-a-14_1478532751114.jpg
Presumably “secured loans” is mortgages and dwarfs anything else – but the awful thing is that after the 2008 crash we are back into business as usual with an inexorable piling on of credit despite income growth and (until recently) inflation having been flatlining. Do the people in charge (is there anyone?) believe it can just go on for ever?
AP you should read Steve Keens stuff, or watch his presentations, on private debt bubbles.