Vol.6 No.31, 16 August 2006

Debt Crisis in Britian

Margaret Legum

This article was published in the Business Report on Monday, 14 August, 2006.

Looming catastrophe is not a pretty sight. Doubly so, two looming catastrophes; while multiple such can drive you mad. Perhaps it is understandable that so many of us try to look the other way, easily reassured when political leaders fail apparently even to notice, let alone to act. Such was the situation in the early years of the last century, when ignoring looming crises led to a world war, the Great Depression and then another world war.

The current global looming crisis in debt is one such. You can't fail to notice that Heathrow Airport is under terrorist threat; or that Israel and Hezbollah's flaming collision course is dragging the rest of us into horrors that will resound down the ages. Or that the climate is changing so fast we face continuous droughts and/or floods. But we can, and do, ignore a crisis that now affects millions of people, and has the potential to drag down the financial system.

The chronic problem of household debt in South Africa was raised in the media earlier this year. Now it is the turn of Britain, where personal indebtedness is said to be 'spiraling out of control'. There was a 66% rise in insolvencies in the second quarter of the year - about 9,000 a month. The official total of personal indebtedness is over 1 trillion. But financial consultant James Falla thinks this is the tip of the iceberg: 'Our own research indicates 1.1 million adults in Britain are in some danger of becoming insolvent.'

The most obvious and humanly painful result is, of course, re-possessions of homes, which have nearly doubled during the first half of the year, compared to last year. At an institutional level, the UK banks have much increased their provision for bad debt. Barclays estimates that at over 1bn during the first half of 2006 - over a third up from last year. Lloyds TSB, HBOS and Alliance and Leicester announced bad debt increases up to 70%.

What is the context for all this? First, note that we are in relatively good times. Business confidence in Britain, like South Africa, has 'hit an 18-year high', according to The Scotsman. It is a curious fact that business leaders expect prosperity when insolvency is growing. We will return to it.

Second, debt levels rise with unemployment - recently risen to 1.64 million in Britain. Obviously that increases the need for debt.

Third, there is a global increase in migrant workers looking for work: that leads to reduced wages and therefore incomes. Millions of economic migrants from eastern Europe find their way to western Europe and Britain, because their own countries' open market policies resulted in industrial destruction. Similarly, the American job market is flooded with immigrant workers prepared to work for very little to escape enforced deportation. South Africa's version is political and economic refugees from non-working economies in Africa. Wages are depressed when competition for jobs is high and desperate.

Fourth, the increasingly suspect emphasis on the control of inflation via interest rates means central banks raise rates when inflation rises by more than 2%. That chokes off employment-creating growth, benefiting only people who have money to lend. The recent interest-rate rise in the UK will accelerate insolvencies - for the purpose of reducing inflation from a mere 2.5%.

Fifth, property prices rise relentlessly, as the financial sector hedges its bets on the stock market by moving into property. It has little to do with the demand for houses for families, but it increases indebtedness while property investors benefit. In the UK the annual rise is 'only' 8% - less than it has been - but a burden for income-limited families.

Finally, householders' expenses rise as privatized utilities raise prices well above inflation to keep their shareholders happy. The latest outcry in Britain follows the second large increase in gas prices in a year; while the dividend to shareholders has also increased. Similar 'scandals' have affected privatized water companies.

The truth is that this is all part of a pattern arising from the freedom of the financial sector to move its money about. You cannot blame the private utilities for raising shareholders' rewards: if they didn't, those shareholders would desert. If shareholders can move globally you have set up a system in which they can demand top wack, employee incomes will stagnate, and consumers will suffer. Hence business confidence: as long as the system keeps profits high, all's well with that world.

Meanwhile debt mountains will grow. Add the chronic rise in the price of oil - out of the control of governments - and you have a very dangerous situation.

Surprisingly, the most sensible comment on Britain's debt crisis was made by the Tory policy director, Oliver Letwin: 'An economy built on borrowed money is built on borrowed time'. He thinks he is having a crack at his Labour rivals. But he knows not what he says. A debt-based economy is built into the current banking system. Does he think, with New Economics, that money creation should be a function of government rather than the commercial banks? Goodness me.

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