FOOL'S EYE VIEW
The Best Of Times, The Worst Of Times

By David Kuo (TMFDragon)
January 31, 2002

Carburton Street, London -- It's now time to start thinking about putting that away that cheque book and pen, rein in the spending and start paying off some of those debts we have accumulated over the past few years. The latest figures from the Bank of England show that last month British consumers borrowed at the fastest rate for nine years.

The Bank of England's data showed that lending to individuals grew by £7.3b in December and we have been borrowing not only to finance our house purchases but also to pay for that new car and other consumer goodies. New consumer credit, that is personal loans to individuals, rose £2.2b and credit card lending rose £577m for the month.

While all this is good news for the supporters of monetary policy and reinforced their views of the powers of interest rates, it also shows just how easy it is for consumers to slip into debt. Monetarists, that is followers of monetary policy, believe that interest rates and the level of monetary supply can have a profound effect on economic activity. And in order to avert a recession and boost the economy interest rates should be reduced to allow money supply to grow.

The figures from the Bank of England showed just how effective this policy could be. Retailers have benefited from the increased level of spending on the high street and the sparkling Christmas trading updates from these operators are a testament of this.

House builders, banks and building societies have also profited because monthly mortgage payments are considerably more affordable when nominal interest rates are low. The Bank's figures indicated that the number of housing loan applications in December was 111,000 compared with the average of 108,000 in the three months to November.

But it is not just in the UK that interest rate cuts have helped to boost economic activity. In the US, the Federal Reserve, said, "signs that weakness in demand is abating and economic activity is beginning to firm." Evidence of a healthier economy prompted the Federal Open Market Committee to keep interest rates on hold last night, suggesting that the cycle of interest cuts in the US may be at end.

This might not result in an immediate rise in interest rates but the increase in consumer debt will, no doubt, cause a few eyebrows to be raised when Sir Edward and his Monetary Policy Committee (MPC) gather for their next pow wow on 7 February. It is not unreasonable to conclude that the cheap credit, which has fuelled the consumer boom, will be high on the committee's agenda.

The MPC has already expressed some concern over the misperception that has induced households to increase their level of borrowing against such fixed assets as houses. Low nominal rates of interest have boosted the affordability of mortgages but this tends to ignore that fact that the real burden of the loan will no longer be reduced by inflation as quickly as it has done in the past.

Clearly UK consumers cannot continue to increase their debt burden in the expectation that they can continue to afford the luxury of high debt levels. This is because the low level of interest rates that we currently enjoy cannot be guaranteed indefinitely.

But what should we be doing now to ensure that our existing debts are kept under control. It goes without saying that the best time to tackle a problem is before the predicament becomes a dilemma. For most people debt, under the current low interest rate climate, is manageable. Repossessions as a result of mortgage defaults are on the decline with lenders reporting a decline in repossessions to 0.07% as a proportion of total mortgages. But that situation will most likely change for the worst and we should see evidence of that when mortgage lenders start to make larger provisions for bad and doubtful debts. And when the banks get worried so should we.

Start now by reviewing what you owe and to whom you owe it. Rate you creditors in order of importance. Your mortgage lender should be at the top of your list. Reassess your current mortgage and shop around for some of the better deal. There's no point looking around for a cheaper mortgage lender when you're already in arrears. Reconsider the credit cards that you own. If you are faced with credit card bills that never seem to get any smaller then think about switching to one with a lower interest rate.

In terms of interest rates, we've probably enjoyed the best of times. With a bit of prudence we should be able to avoid the worst of times.

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