Wednesday, September 02, 2009
Debt stocks and lending flows
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

All day yesterday, and this morning, the BBC reported that we had seen the first fall in household debt since 1993, when the current series began. Many of Wednesday's newspapers said the same. Yet that is plainly not the case. The Bank of England's figures, here (column VTXC) show we have had six monthly falls in outstanding debt owed by individuals in the past 12 months.

Why the confusion? It is understandable. What we did have was the first fall in the flow of net lending on record. It dropped by £635m. Logically, you might expect the flow to equate to the change in the stock. But that is not the case, for reasons the Bank sets out deep in the details of its release.

"Changes in a series between one period and the next (referred to as ‘flows’) do not always equate to the difference between successive amounts outstanding," it says. "The starting point for calculating changes is the difference between these amounts outstanding but these are then ‘break-adjusted’ to form the flows. The reason for ‘break-adjustments’ is to remove the effects of factors that would otherwise distort the flow. Such adjustments bring the statistics into line with ‘transactions’ as defined by international standards for economic statistics (particularly the European System of Accounts, ESA 95)."

Debt can fall, it seems, even when the flow of net lending is rising.