Comments: Debt won't bring down our house of cards

Hi David

This may be a really stupid question but when you say "That really would be the end of the cheap money era" do you mean for the whole world as well as the Japanese?

Thanks

Johnny C

Posted by JohnnyC at June 25, 2006 11:45 AM

Debt won't bring the house down, unless we get some interest rate hikes in the next five years, or tens years, or even longer.

Posted by Werewolves at June 25, 2006 04:57 PM

Debt won't bring the house down, unless we get some interest rate hikes in the next five years, or tens years, or even longer.

Posted by Werewolves at June 25, 2006 04:58 PM

In response to Johnny - I meant Japan, the last shoe to drop, the cheap money era is already over in the US, is on its way out in Europe and it is a long time since we had a 3.5% base rate in the UK.

In response to Werewolves, I've no doubt interest rates will rise (and fall) over the next 5-10 years. The serious sensitivity analyses suggest the household sector could take a lot of pain on rates, though not the small minority in real debt difficulty.

Posted by David Smith at June 25, 2006 06:26 PM

Trouble is according to the leading lenders' current bad debt insurance, (Barclays Bank's bad debt provision has soared 20% to GBP706m in the first half of this year alone!), there are an awful lot more people in real debt difficulty than is given by the official "doorstop challenge" surveys upon which those debt sensitivity surveys are based.

As these institutions have scrambled to leverage maximum customer share from low rates resulting from currency carry trade in Japanese yen, so they have (aggregately) exposed themselves dangerously (I mean their customers of course) to interest rate rises.

I'm quite sure that when rates go up and bad debt provision grows by 20% again and personal bakruptcies go up by another 40% on the previous year as it did this year, many economists may say that the issue of debt took them by complete surprise!

In this way, I think of economics as dismal not only in Thomas Carlyle's reckoning, but as a discipline which sadly, completely lacks scientific rigour at all ("ceteris paribus" still seems a very hollow term). For example, ask a scientist about an experiment under certain conditions and they'll give a pretty accurate answer about the result. Ask an economist the same thing and you'll get an opinion, based on another opinion and a reliance on the audiences' collective short memory if they're wrong.

Not having a dig at you David (or at any other economist), just a general observation.

Posted by Terry at July 1, 2006 12:59 AM

Dear David,
RE:Debt won't bring down our house of cards ?!

You might well be right on the above assumption, on its own it probably won't bring down the house of cards.

But consider this, all parents in brittain are problably house owners or aspiring ones. In the course of their parental night time story they may have come across "Pinochio", upon reading it there is an evil man promising the best of times to innocent childeren, who are then turned into donkeys to work in the salt mines....... I could not have found a clearer way to explain the current UK economic (Miracle)!!! I leave you and others to substitute the characters with those of Her Majesty government and opposition.

Best wishes,......
and don't drink the lemonade!!!
Arik Schickendantz

Posted by Arik Schickendantz at July 6, 2006 11:27 AM

Hi David,
I am in agreement with Terry that surveys on debt are not scientific and in any event rely on respondants being truthful in their response.
The simple fact of the matter is that the banks have massively over extended credit to many people. It will only take sustained interest rate hikes and an economic downturn for the situation to reach melting point. Interestingly Barclaycard cash rates (a mainstream lender) on some of their cards are now as high as 37.9%. That is not sustainable for the sort of people who will carry high balances on their cards. My take is that they are profiteering now to pay for hard times ahead.
On a slightly different note it is absolutely crazy that banks allow credit cards to be used for gambling transactions. Quite simply apart from the poor economic sense it is immoral and the practise should be stopped by legislation if necessary. Again they take the greedy line and now treat gambling transactions as cash advances in order to eek more money out of those who already have problems. Check out www.stopgamblinguk@org.uk
Regards
Anthony

Posted by Anthony Franklin at December 15, 2006 01:13 PM