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Who killed the
UK recovery? UK households of course...
DELEVERAGING,
like Hamlet's nothing, is only good or bad when you come to think about it.
And what view you choose speaks to your moral view of the world too, and so
to your economic theory as well, whether or not you know it. Because for
every "liquidationist" saying the debt
must be paid down, and savings must be built up before a new cycle can begin,
there is another economist urging government and central banks to take on releveraging themselves, so the
net effect is nil. Otherwise we're doomed to a permanent depression.
UK households care little for such chatter, however. By September 2008, their
net debt – their total savings minus their borrowings – were
equal to 20% of the UK's annual economy. People owed the banks £300bn
more than the banks owed to them.
How things change! Banks won't lend, and people won't borrow even at 0%
interest rates. Net result?
Over the last four years, UK households have cut
their debt and grown their savings faster than any time on record. They have delevered by more than 15 whole percentage points' worth
of GDP – a "cost" to the economy of £235bn in current
spending. Or if you prefer, a long-needed boost to household assets after two
decades of spending beyond our means.
Of course, the savers and the debtors aren't all the same people. Poor
pensioners still trying to pay off their mortgage are very different in
spending and financial behaviour from young City
workers struggling to spend last year's bonus. Yet across the UK as a whole,
people's response to the financial crisis – or rather, their role in
creating the economic fallout – has been the same: to cut spending as
never before.
The retained money has either gone to paying down household debt (some
£104bn on the Bank of England's figures) or
building household savings (which have risen by £133bn). Anyone
wondering why the UK economy has failed to recover as rapidly as after
previous post-war recessions has a good part of their answer. The question
now is how much further this deleveraging could run.
Fifty-odd years ago, net banks savings amongst UK households totaled some 26%
of GDP on average. That cushion (or "dead money" depending how you
see it) got chewed up by the 1970s' inflation, itself tied up with the surge
in consumer debt which credit cards and the mass commercialization of
hire-purchase wrought.
By the end of the 1980s, we'd tipped from net savers to net debtors. But it
wasn't until 15 years ago that the second-leg of Britain's household leveraging
got started. That swoon took 10 years to reach the record net debt of 2008.
It's been unwound in less than half the time, despite the Bank of England
urging people to borrow with zero interest rates, and urging others not to
save with quantitative easing.
Can the UK bear another 15% of GDP in household deleveraging? That would only
take us back to 1983's level of net savings. But it would likely gut the UK
banking sector, let alone the shopping malls.
Again, whether that's good or bad is your personal choice. Policy-makers
– right or wrong – have so far been powerless to prevent it.
Doesn't mean they won't try again. And again.
Adrian Ash
BullionVault
Gold price chart, no delay | Buy gold online at live prices
Adrian Ash is head
of research at BullionVault – the secure, low-cost gold and silver market for
private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2012
Please Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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