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  October 8, 2017

UK Household Debt has Reached Unsustainable Levels

Consumer and student debt in the UK have reached unprecedented levels and are a warning that austerity could lead to a new financial crisis, explains Edward Smythe of Positive Money
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Edward Smythe is an economist here at Positive Money. Edward previously worked for a decade in the financial sector, including 5 years as a macroeconomist in a boutique hedge-fund. He studied economics at Cambridge Uni.


G. Wilpert: Welcome to the Real News Network. I'm Gregory Wilpert joining you from Quito, Ecuador. UK households are spending more than their income at an unprecedented rate. Record-busting levels of privately held debt are also accompanied with stagnant or even falling real wages in the UK. The situation is so bad that members of Parliament have started calling for a public inquiry into 200 billion pounds worth of privately held debt in the UK. Perhaps even more disturbing is the argument of our next guest who says that the only thing keeping the UK out of recession is the growing and unsustainable levels of privately held debt.

Joining us today to discuss the growing private debt crisis in the UK is Ed Smythe. Ed is economist and researcher at the financial research organization Positive Money. He worked for nine years in asset management and as an equity analysts and macro economist. He recently wrote an article for Open Democracy called "The UK is Hooked on Rising Asset Prices: What Happens When the Bubble Bursts." Thank you for joining us at the Real News, Ed.

E. Smythe: Thank you for having me.

G. Wilpert: So in your article you say that the British economy is being kept afloat by unsustainable levels of privately held debt. What is the basis of this observation of yours?

E. Smythe: So essentially and in fairness it's not just debt, it's also capital gains. So the way to think about this is we can look at the sectoral flow of funds in terms of how the UK economy is growing. At the moment we can see that the UK household sector is running an unprecedented deficit, more than it was before the last financial crisis. And in fact, more than it's ever done in the 100 years of records that we have.

Now the question is, how are they funding that? And in part, that's coming through debt, but we argue that it's also coming through massive capital gains over the last three decades or so as interest rates have come down. So it's the combination of both the debt and capital gains that are funneling and funding that deficit.

G. Wilpert: Some such as David Graber recently also argued, and I think I mentioned in your article, compare the current private debt level to the private debt levels that led to the 2008 global financial crash. So are we in this territory now, and is it likely that the current private debt levels will repeat what happened back in 2008?

E. Smythe: Yes, so I think it's interesting. We had Mark Carney on record recently in a speech that he made last week talking about the fact that household debt levels are actually down relative to where they were, relative to incomes, before the last crisis. But actually that's focusing on a bigger metric which includes mortgages. If you just look at consumer and student loan debt, that's actually rising at the fastest rate ever. So it's rising at about 31 billion pounds per annum whereas before the crisis it was rising at about 25 billion. It's also risen to the highest ever level at about 315 billion. So there's a clear red flag that to the extent that private debt was the cause of the last crisis, it's absolutely waving it today to suggest that this could be a factor in causing the next financial crisis.

G. Wilpert: I mean, back in 2008, one of the detonating factors was that investors were partly misled about the nature of the debt that they were taking on when they were buying the mortgages and so on. In other words, they were given AAA ratings in the United States when actually they were very questionable loans that had been given out. And when people couldn't pay them off, then the investors were caught unawares of the type of loans that they had. Is there any chance that something like that would happen? Is there any misleading going on ... Or what would trigger, in other words, a possible crisis this time around? Raising of interest rates, what would be so to speak the detonating factor if something were to happen?

E. Smythe: Yeah, so strictly speaking, when we talk about consumer and student loan debt, that doesn't include mortgages. So it doesn't necessarily relate to what you talked about in terms of the mortgage coverage and that that occurred prior to the last crisis. But in answer to the question is there a risk that many of these consumer and student loan debts have created on the backs of people who might simply not have the ability to repay? Absolutely. We are seeing signs. Particularly in the PCP pending market for autos that the availability of credit is at an alarmingly high level. There's essentially a complacency in the market which typically happens after many years of recovery where lenders reduce those checks that should be in place. And therefore, once you've done that, you create the condition by which even a small trigger might start to bring down the whole sort of cascade, if you see what I mean.

G. Wilpert: Uh-huh. And so what kind of proposals have you been suggesting to push the UK away from debt-based, consumer-driven economy?

E. Smythe: Well, in reference to the first argument that I made, it's not just consumer and student loan debt, and also the mortgage debt market. It's the fact that actually we've also been reliant on a massive, massive expansion of net wealth. And in fact, the UK's net wealth disposable income ratio is now the highest for any developed economy ever, worse than Japan in 1989. So what we're saying and what Positive Money is advocating is a fundamental shift in monetary policy and the mechanism by which money is being used to sustain economic growth. We want to shift from the policy whereby at the moment we need very low interest rates to boost the price of assets or to enable increased amounts of debt to generate a certain amount of household spending, the deficit which is currently driving the economy, and instead shift to much more sustainable mechanism whereby money is created by the central bank using zero interest perpetual bonds, an incredibly constrained amount, which allows governments to then spend that directly into the economy to get the sustainable increase in demand that we need.

And in doing so, you could actually turn down some of these other dials of ultra-low interest rates in QE. You could have a reduction for example in asset prices, a reduction in the expansion of ever greater demand of credit. And instead, you've got a sustainable demand function. So it's the policy of overt monetary financing, or QE for people is what we'd call it. And it seems to be the only mechanism by which we can move from the current status quo to something much better.

G. Wilpert: You recently spoke also at the conservative party conference. What was the gist of your presentation and how was it received there?

E. Smythe: The presentation was cool after the crash, and I suppose our argument was actually when we look at many sort of metrics, it's very difficult to suggest that the crash ever ended. So we've just experienced the worst decade of real wages since the 1860s and perhaps a long time more. We've got record low productivity levels, record low investments, record low interest rates, record high asset prices. So what we're saying is, look, the situation as it stands is simply not a normalized scenario. Therefore we have to be thinking about slightly more radical options, both in terms of the way we hold the central bank accountable, but also think about these other tools of overt monetary financing because it's the only mechanism this government can achieve its policy objective of achieving an economy that works for everyone, and particularly for the younger generation.

G. Wilpert: The proposal to me sounds a bit like you're suggesting the government should essentially spend more and essentially steer away from the austerity policies of the past ten years or so. Is that correct? Is that a fair summary?

E. Smythe: It absolutely is, but it's with a sort of modified agenda behind it as well because I suppose we are currently working within a paradigm whereby governments, when they spend, are necessarily imposing a sort of intergenerational tax on the next generation to pay that debt back off with interest. What we need, particularly given the intergenerational transfers that we've seen to date, we need a system whereby we can fundamentally deliver demand into the economy on the things we need, like infrastructure, education, and healthcare, but without saddling the next generation with huge interest costs on this debt.

What we need is a policy whereby governments feel that they can spend a little bit more on those things without increasing the potential for interest costs down the line. And that's why overt monetary financing is the only solution to deliver that step changing government spending and shift us back onto a sound fiscal footing.

G. Wilpert: And how do you think that the Labor Party is on this issue which also just recently wrapped up their party conference?

E. Smythe: Yeah, so we are having interesting conversations with members of both parties. We think, you would imagine, that the Labor Party should be more receptive to these arguments. At the moment they are focused to a large extent on a national investment bank which delivers some small benefits. But we would argue it's not big enough thinking.

If you think about for example the problem on the next 50 years, and I think it's important that people do, the OBR predicts that the government deficit will increase to a primary deficit of 9% in 2065 just as dependency ratios, etc., really kick in. And so what we're saying is we need a fundamental solution that will stand the test of time. It can't be gimmicks. It can't be small tweaks around the edges. We need to be reframing the whole debate about monetary policy and how much governments can spend. And sort of confronting directly some of the misplaced arguments that have often been used to counter this type of proposal.

G. Wilpert: Okay well we'll probably come back to you again once we see a little bit clearer as to which way the UK is heading in this issue. But thanks so much Ed for having joined us for today.

E. Smythe: Thank you very much for having me. I enjoyed it.

G. Wilpert: I was speaking to Ed Smythe, economist and researcher at the financial research organization Positive Money. Thank you for watching the Real News Network.


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