COMMENT
We Are All Americans Now!

I knew that things were looking bad for the UK when The New York Times (NYT) started writing cautionary articles about our levels of personal debt! The first NYT article on this subject to come to my attention was written in September 2003. Since then, the NYT has chronicled the UK's headlong descent into debt in a series of articles.

When US newspapers start warning Brits about our soaring levels of personal debt, I think it's time to sit up and take notice. After all, the US is practically the spiritual home of debt: the credit card was invented there and there are now over 1.2 billion cards in use across the Big Pond. That's a lot of plastic! In comparison, there are around 72 million cards in the UK, so there are roughly seventeen times as many credit cards in issue in the US as there are in the UK. Wow!

US consumers have much to be fearful of, because they failed to inherit their parent's thrifty habits. Each year, two out of five American households (40%) spend more than they earn, and three out of five credit cards (60%) are not paid off monthly. Things aren't much better this side of the "special relationship", either.

Oscar Wilde once declared that Britain and America were two nations "divided by a common language" (actually, he didn't quite say that, but I'll let this popular misquote stand). These days, our common language is debt. As a matter of fact, on certain measures, UK consumers are now more indebted than our American cousins.

Of course, all financial figures are massively larger across the Atlantic, partly because the US population is five times larger than ours. Nevertheless, as a nation, we now owe 150% of our annual post-tax income, compared to about 140% for US consumers. There's no getting away from the fact that, on this measure at least, Brits are now the world's biggest borrowers. D'oh!

Today, the Bank of England warned that our non-mortgage debt (which stood at £187 billion at the end of April) is threatening Britain's financial stability. Although our economy appears to be thriving, in fact, much of this growth has been fuelled by consumer debt. Soaring house prices have made us feel wealthier, and we've responded by spending our housing equity. Since the second half of 1998, we've borrowed, coincidentally, another £187 billion against our homes, which we then splurged on high living!

As the housing-market bubble begins to deflate, some consumers have responded by reining back their spending, which has led to a string of profit warnings from retailers. Many borrowers have thrown in the towel by becoming bankrupt or insolvent. Personal insolvencies rose by almost a third (31%) between 2003 and 2004, and around a thousand people a week are predicted to tread this hard path during 2005. Some of this meteoric rise can be attributed to the fact that the bankruptcy laws were relaxed last year, but these figures still shock me.

And things are going to get worse. Soaring government borrowing (May's figure of £8.7 billion was an all-time record for that month) will lead to higher taxes, plus fuel costs and other household expenses will rise sharply over the coming year. Some of us are already feeling the pinch: banks are reporting higher card arrears and bad debts, which could lead to a credit crunch. The sensible answer is to prepare for the financial hurricane by cutting your expenses, living below your means and throwing any spare cash at your debts.

Finally, in ancient Greece, if you didn't have the money to meet a debt, you personally would become the property of your creditor. In other words, you became a slave to your debt. More than two thousand years later, tens of millions of us are in exactly the same position, because we spend so much time working for lenders!

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