COMMENT
Debt Is A Danger To Us All!

Just before the General Election in 1997, British borrowers owed a total of £497 billion, made up of £417 billion of mortgages and £80 billion of unsecured debt, such as loans, credit cards and overdrafts.

If we fast-forward eight years to April 2005, we discover that our debt burden has risen tremendously. Currently, it stands at £1,088 billion (more than a trillion pounds), consisting of £901 billion of mortgages and £187 billion of consumer credit.

So, in eight years, we've managed to accrue another £591 billion of debt, which means that this government has overseen the biggest increase in debt in British history. Of course, the property boom that started in 1997 has enormously increased our asset wealth, and our houses are worth around £4 trillion. But the fact remains that our non-mortgage debt has soared by £107 billion under Labour.

Indeed, our debt has been growing very fast for many years. In fact, it's far outstripped inflation (rising prices) and wage increases, both of which have had annual growth rates in the low single digits. Our total debt, however, has been growing at over 10% a year, with non-mortgage debt rising at more than 11% a year.

Of course, this debt is merely the symptom of a greater underlying problem, namely, that we have forgotten how to live below our means. One piece of research suggested that we are spending £110 for every £100 that we earn, which, without a doubt, is a recipe for financial ruin.

Indeed, one financial historian has warned that the UK (and US) economies have been 'badly corrupted' by spiralling debt. Edward Chancellor, who correctly predicted the collapse of the technology bubble in 2000, argues that our credit bubble is unsustainable and has seriously undermined our economy. Having analysed many previous financial bubbles (including the events leading up to the 1929 Wall Street Crash and the Great Depression of the Thirties, and recent debt bubbles in Japan and Korea), Chancellor warns that a 'credit crunch' has the potential to do serious damage to the UK.

Homeowners should sit up and pay attention, because Chancellor warns that the UK housing market is looking particularly vulnerable. He warns that many households are dependent on "rising asset prices and refinancing of their liabilities to remain solvent". In other words, millions of people have been borrowing against the rising value of their homes to subsidise their lifestyles, a process known as mortgage equity withdrawal. By using sacrificing bricks and mortar to support their lifestyles, these people are, in effect, gambling with their homes.

Chancellor argues that the Bank of England's view is flawed, and that our debt-fuelled housing boom is neither benign nor sustainable. He warns that 'increasingly vulnerable' UK consumers will suffer when the almost-inevitable 'credit crunch' arrives. I'm of the same opinion, and I've been saying the same thing for the last two years. As economist Herbert Stein once remarked, "If something can't go on forever, it will stop", hence, I believe that our lust for credit is not sustainable.

I'll leave you with the conclusion of Chancellor's report:

"The growth of credit has created an illusory prosperity while producing profound imbalances in the British and American economies...When credit ceases to grow, the weakened state of these economies will become apparent."

"It will also become clear that the credit boom, by inflating asset prices and boosting profits, has lead to inappropriate balance sheets (both for the private sector and in general). At some stage, balance sheets will have to be adjusted to face a new reality. The process of adjustment is likely to be painful. It may well end in either an extraordinary deflation...or an extraordinary inflation."

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