‘Money often costs too much’ is a quote attributed to Ralph Waldo Emerson.
The American poet probably meant this in a philosophical way – what do we have to give up to earn it? But you can apply the idea to borrowed money, too.
What costs, beyond the monetary, does the individual debtor bear, especially if he gets in over his head?
And what are the social costs, in terms of economic fragility, if too many people at once are in that situation?
In the early part of this decade government rhetoric was all about bringing down public debt. The state was ‘living beyond its means’ and this situation had to be remedied, we were told.
Rather than being anxious to bring down or even eliminate the budget deficit, governments might have spent their time more wisely keeping tabs on the growing piles of private debt.
The obsession with public debt led focus away from private indebtedness, which is arguably much more dangerous to a country’s economic health.
Total unsecured debt hit an all-time high of £349bn in September 2016, Office for National Statistics figures published over the weekend show.
The rise in borrowing has been caused by stagnating wages, the TUC claims. Unsecured debt as a percentage of household income has grown to 27.4 per cent – its highest level in eight years.
The Bank of England’s chief economist Andy Haldane talks a good game about not being worried by private indebtedness.
Privately, though, this matter must be on the minds of Monetary Policy Committee members when they consider when to start raising interest rates again.
They must know higher rates will hurt a lot of people, with implications for the strength of consumer spending.
And some at least must worry that a new economic shock or lagging wage growth could make it increasingly difficult for households to keep pace with their borrowing commitments, with implications for the financial system if defaults start to rise.
Governments have focused on the less dangerous threat
The mantra of the austerity years was that we shouldn’t pass the burden of high public debt levels onto future generations.
Austerity was sold as a policy that might hurt now but it’d pave the way for a better future. ‘Let’s do it for the kids’ could have been an alternate slogan.
It’s an argument Nobel laureate Joseph Stiglitz has never accepted.
“Nobody would look at a corporation and say, ‘look at this firm, look at the debt it has,’” Stiglitz says in a Business Insider video. “You want to look at liabilities only in conjunction with assets.”
If governments can borrow cheaply and invest the money in things like infrastructure and technology against decent returns, then it’s foolish not to make those investments, Stiglitz explains.
But in the age of austerity the focus was squarely on public debt.
This meant the onus for promoting recovery remained on monetary policy (rather than fiscal policy) long after the global financial crisis.
Holding interest rates down at historically low levels helped create a situation in which the current generation added to a private debt that was already dangerously high.
This is worrying for several reasons.
For one thing, history shows us it’s dangerous.
The Roaring Twenties, Japan’s 1980s boom and the years preceding the global financial crisis have a common denominator. They were all fuelled by high levels of private debt, according to this paper published by the ECB.
“In almost all instances, rampages in the pace of accumulation of private debt coupled with initially high levels of debt have led to crises. Although often eyed as ‘the’ ultimate root of crises, public debt seems, by contrast, to have played little role in igniting them.”
The other common feature these periods share, of course, is they were all followed by a gigantic economic mess.
Sustained periods of low borrowing costs are also hard to reverse.
Policymakers are all too aware that higher rates would mean more borrowers in over their heads, their debts more and more difficult to service, a recipe for financial instability.
Yet despite the obvious dangers – and notwithstanding talk of fundamental shifts in economic policies and outlook (for example, “Trumpflation” as discussed by Ben Traynor in the Daily Reckoning) – the signs are that we’re locked into a dangerous dynamic.
Rents and property prices have been rising much faster than wages, causing people to spend an ever bigger part of their disposable income on a roof over their heads. This makes them more likely to take out loans to finance anything else they might want or need.
Student debt is spiralling out of control following the government’s decision to increase fees and scrap maintenance grants. It’s much higher than anywhere else in the English-speaking world and leads to more money being loaned.
“Average debt for those finishing university is expected to be more than £40,000 and, because of the decision to end grants, highest for students from the poorest families at around £53,000,” says a House of Commons Library paper published last month.
Graduates who can’t live off The Bank of Mum and Dad often face a choice between taking on more debt to gain work experience (e.g. through unpaid or low paid internships) or working in jobs beneath their skill-set.
All the while the UK economy keeps relying on consumption, which in turn relies to a worrying extent on debt.
High private debt is a more serious concern in terms of the vulnerability it brings to the system.
And in Britain it’s now at a record high.