Wednesday, September 02, 2009

Reducing personal debt - we should not be surprised

The media yesterday seemed rather surprised that the UK's level of personal debt fell last month and for the first time since records began in 1993, more mortgage cash was returned by borrowers to lenders than the lenders lent out.

Think back to the early 1990s. Reducing personal debt was then, if not an obsession with people, then at least an aim. Over indebtedness was a millstone around the neck of the British economy and people were worried about their jobs and therefore their future incomes. As debt is taken out against the prospect of continuing income into the future, people were trying to avoid a burden many felt they could not sustain.

There are significant differences between the current recession and the one in the early 1990s. Then, part of the driving force of the recession was high interest rates, brought about to tackle rising inflation, some of which (though not all) had its sources in the reunification of Germany and the absorption of the Ostmark into the Deutschmark. Nowadays, the problem is the opposite in that demand for goods and services has slumped and therefore prices (other than for basics such as food and fuel) have dropped.

Nevertheless, a common thread to both recessions is indebtedness. The credit fueled booms of the late 1980s and the 2000s saw too many people take out an unsustainable level of debt. At some point that money has to be paid back. In boom years, people think they can pay it off on the back of rising house prices. With that gone, now they have to pay it off from income.

Massive personal borrowing is a cause of boom and bust (a problem Brown claimed to have fixed but simply allowed to get worse). The bust is when we pay back for the boom. And with hundreds of billions of pounds owed by UK citizens as consumer (as opposed to mortgage) debt, my guess is that people are going to be paying off more debts than they take out in new borrowing for some time to come.

1 comment:

KristinPolet said...

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