“A debt bubble, yes. But a consumption binge…?”
IT’S A COMMON-PLACE of political, investment and bar-room debate that the Anglo-Saxon economies enjoyed a debt-fuelled consumer boom over the last decade or so.
In fact, it’s a given…the one sure thing any analysis builds on, whether it’s begging for votes, fund-management fees or a shared cab-ride home. The US and UK piled more debt on household balance-sheets than any other nations in history, forgetting to add a balancing item beyond the apparent value of the roof over their heads.
Thing is, the data don’t support it. Worse yet, they don’t deny it either. Anglo-Saxony took on a record volume of household debt, simply to keep household spending growing on trend. Something ugly but hidden – economic dark matter – forced consumers deep into hock just to keep pace during the early 21st century.
The UK, for instance, added 30 pence of new private debt for every £1 of output at the very top of the bubble.
Not merely 30p for every extra pound. (New debt to growth averaged 4:1 from 2000 to mid-2008). No, private debt-growth peaked at equivalent to 30% of GDP full-stop, accelerating by more than one-sixth each year from the turn of the decade.
Yet household consumption failed to leap higher in tandem, remaining “on trend” from the previous four decades and growing in lock-step with total activity. The extra credit and debt must have gone on funding something else entirely.
Across the Atlantic, the same story, albeit with different data.
Personal consumption, as a proportion of GDP, broke sharply higher in the last years of last century. It stayed there too, equivalent to 70% of the annual economy, despite flagging in terms of year-on-year growth – and despite increasing in lock-step with GDP across the 10 years to end-2007.
Clearly something’s wrong with the maths, but where it’s broken the data won’t say. It didn’t add up five years ago either, back when then-Bank of England policy-maker Stephen Nickel spotted the puzzle…only to dismiss it. Nickel noted the huge leap in UK house prices in terms of income multiples (from the near-record four times salary then, they had another three multiples to go before peaking), but he guessed that “debt accumulation” by one family buying a home typically meant “financial asset accumulation” for the seller, using the proceeds to buy shares or bonds. Thus all was for the best in the best of all debt-driven worlds. Net-net, we were borrowing ourselves richer.
Fixing the worst slump since the Thirties thus comes down, or so everyone assumes, to either reversing a course that never took place…and forcing a reduction in consumption that enables households to reduce debt…or reviving a fresh (meaning first) surge in consumer spending with sub-zero interest rates and tax-funded cash incentives.
The likely outcome, we guess here at BullionVault, is both or neither. More urgent for investors and savers, let alone policy pooh-bahs, is identifying quite what the historic burden of debt that households now carry actually financed.
Adrian Ash
for Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com
