SPECIALS
Is Britain in Crisis?

By Jane Mack (TMFJane)
August 1, 2001

I know, I know – it depends on what sort of crisis we're talking about, doesn't it? Well, I happen to be referring to the Consumer Debt Crisis.

If you don't think there is one, then ask yourself when our ruling parties, of whatever colour, have ever stepped in to pre-empt a crisis as opposed to implementing a hastily put together damage limitation exercise. (Oh, all right, I suppose the current lot tried to pre-empt a massive Foot and Mouth outbreak but...Ooops!)

As far as I can make out, Governments spend much of their time setting up "working parties" and "task forces" to either a) appease the masses so that we think something's being done or b) to tackle problems that they think need to be addressed as a matter of urgency. The former group are given years to investigate and to report back (Gulf War Syndrome?) whilst the latter are told to come up with some facts and recommendations Pretty Damn Quickly (MMR vaccine?).

And, of course, however long it takes a working party or task force to report back and to make recommendations, the Government of the day may or may not choose to accept and implement the findings. 

Well, think about this:

October 2000 -- a Debt Task Force is set up.
April 2001 -- the Debt Task Force reports its findings and makes recommendations.
July 2001 -- the Government accepts the recommendations and puts them up for consultation amongst the Great and the Good.
October 2001 -- the deadline to be met by the Great and the Good.

Admittedly, there's still a lot of machinery grinding away in the background, and it'll be some time before the man in the street sees these recommendations put fully into practice. But I rather think the Government considers that there may be a Consumer Debt Crisis, don't you?

In the last year or so we've witnessed the tech stock crash as well as the knock-on effect on the stock market as a whole. Certain blue chip companies are drastically cutting staff and there have also been mutterings in recent months about whether the housing market is about to go the same way, i.e. down. So what's new? That stuff happens with monotonous regularity every few years or so and, as all Fools know, the ups and downs of such mainstays of the economy tend to pan out in our favour over the long term.

But never have consumers been in the situation where so many have borrowed so much money that a greater number than ever are up to their eyeballs in debt. In fact, it's become so normal to borrow to fund our lifestyles that we're all doing it. Unfortunately, the "Buy Now, Pay Later" syndrome has taken hold of the nation sufficiently that even the current Government is perturbed!

According to the Credit Card Research Group, the prospect of an economic slowdown (whether it will happen or not) is sailing completely over our heads. Last month we spent £16.5b on our credit and debit cards – about half on each type of card. That's up nearly 20% on the same time last year and more than 5% up on the month before. And even though these figures relate to the general ebb and flow of consumer cash within the economy, it's still a pretty sizeable increase considering salaries have only risen by about 3% in the last year. What's even more alarming is that we're not even spending this money on durables such as cars, kitchens and double-glazing – we're apparently spending it on holidays, meals out and other forms of entertainment.

Of course, it's not a problem if we can afford it but, as the Debt Task Force pointed out last week, figures from the Bank of England show that the level of borrowing (excluding mortgages) increased from £87.5 billion in December 1997 to £127.4 billion by December 2000. That's up by more than 45% in just three years!

Frankly, it's a bit scary.

The trouble is, for most of us non-economists, these figures are practically meaningless – and I have to put myself into that bracket. I'm afraid that, like many people who aren't interested in or who don't really comprehend, the nitty-gritty of how the economy works, I have a rather simplistic view of such things:

If you spend more than you earn, you're going to get into trouble eventually!

To my mind, the economy works in the same way. If we all spend too much – particularly if we're borrowing in order to spend – then things can get a tad unbalanced. It's a bit like a fully laden boat at sea. If everyone rushes in a starboard direction to spend his to or her money (borrowed or not), the boat is in danger of tipping over. Equally, if everyone rushes to port in order to rein in their spending, the boat is just as likely to overturn.

Hence the reason for the Bank of England's interest rate "barriers" down the length of the deck. High interest rate barriers stop many of us from borrowing more money to spend on the starboard side – although you're always going to get the plonkers who leap over the barriers because they don't know when to stop. And low interest rate barriers encourage us to hop over to spend – although you're always going to get the handful who superglued their wallets shut back in 1974 because they prefer the port side view – or because they've forgotten how to have fun!

At any rate, it must be pretty hard for any Captain in charge of keeping a boat afloat to stop us passengers from rushing this way and that. But it must be even more difficult when he's sounded the alarm already, only to find that so many of us still aren't listening. It seems to me that so many of us are still rushing in the starboard direction that the Government is trying to fast-track a way to a solution – before we, ultimately, sink the boat. 

For the moment they're targeting the financial services industry in an attempt to force them to explain to us exactly what we're doing wrong – and, let's face it, it's about time really! But it's a bit hard to target a mass of individual passengers who are so eager to keep up with the Jones's that they can't hear the emergency tannoy announcements.

At any rate, if you're wondering where all this is going, I suppose my point is this:

• if you're 100% certain that you're going to have a job this time next year and
• if you've got enough of an emergency fund to see you through hard times and
• if you're accumulating enough in savings and investments to take care of your retirement

then, by all means, carry on spending. But if you're in debt, then for Goodness' Sake, batten down the hatches and get shot of it. Even if I'm reading too much into the Government's actions, you'll still be doing the Foolish thing.

More: Get Out Of Debt