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Rush To Pay Off Debts Threatens Uk's Recovery

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http://www.independent.co.uk/news/business...ry-1780290.html

Having enjoyed the biggest borrowing binge in their history, British consumers are now starting to pay off their near £1.5 trillion of debt at the fastest rate in at least 15 years, according to the Bank of England.

The data adds to fears that the fragile recovery in the economy, still not officially confirmed, could be damaged by a return to thrift by households. Figures from the manufacturing sector also suggested a setback in the pace of industrial revival.

The Bank of England reported yesterday that total personal debt has fallen for the first time since records began in 1993. Personal borrowing – personal loans, credit cards and mortgages – fell by a net £635m in July, leaving the total owed by individuals at £1.457 trillion, roughly equivalent to one year's GDP. Consumer credit fell by £200m. Despite record low interest rates, fears of redundancy and uncertainty about the future seem to have fed a new aversion to debt.

Brian Murphy, head of lending at the Mortgage Advice Bureau, warned: "The hatches have been well and truly battened down. Consumers, it is clear, are retrenching like never before."

Anecdotal evidence suggests that consumers are using the reduction in their monthly mortgage bill to pay off their debt more quickly, rather than spending the windfall, as the Bank and the Government would wish.

Although new mortgage approvals rose again, to just over 51,000, the total value of mortgage lending fell back, as repayments exceeded new lending, suggesting protracted weakness in the housing market and that stabilisation in house prices may be linked to a shortage of supply rather than more fundamental strength of demand.

The Royal Institution of Chartered Surveyors' chief economist, Simon Rubinsohn, added: "The fundamental issue remains the withdrawal of many lenders from the mortgage market over the past year and the reluctance of new participants to play a meaningful role in delivering finance to potential homebuyers."

The Bank also reported a jump in bad debts, blunting claims that the banks are being unreasonable in their lending policies. Write-offs of corporate debt rose by £365m, or 40 per cent, in the second quarter compared with the first three months of the year: write-offs on household unsecured debt rose by £250m.

Such write-offs will further damage bank balance sheets and their ability to lend sufficiently freely to secure the recovery. Bank lending to firms fell by £14.8bn in July, partly a reflection of companies turning to bond and equity markets to raise funds.

The reduction in demand for funds threatens to stymie the Bank's attempts to get the economy moving by boosting the money supply by some £200bn. The Bank's favoured measure of monetary growth, which strips out lending between banks, showed a 0.6 per cent rise in July, with growth of 3.9 per cent over the year, an improvement over last month's figures but not rapid enough yet to guarantee strong GDP growth.

Experience in the UK and US in the 1930s and more recently in Japan suggests that once a deflationary psychology takes hold, it can be extremely difficult to counter.

There was also slightly discouraging news from the manufacturing sector, where the Markit/Chartered Institute for Purchasing and Supply's monthly survey of confidence and new orders fell back a little.

Rob Dobson, a senior economist at Markit, commented: "The recovery is likely to continue, but may become more muted later in the year once the initial rebound and monetary and fiscal stimuli have run their course."

Headline of the day for me.

People are idiots we want a short term recovery, that can't be achieved if people pay off the debt.

It seems the govt plan to get people spending has backfired. Even govt spending can't make up this shortfall and just think what will happen when taxes increase, I wonder if people are paying down debts whilst they can still afford too before the tax man cometh for more cash?

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Oh my! People are doing the right thing and ignoring this stupid government's incentives to borrow yet more.

I found this interesting too:

Any sensible individual will take advantage of reduced interest payments to reduce the overall size of their debt. The current monetary system is unsustainable and will sooner or later collapse under the weight of the debt which it is constantly creating. The total debt currently stand at about 10 times the turnover of the whole planet - and that cannot ever be repaid.

I recommend this (http://www.transitionnc.org/node/50/126#comment-126 ) as a painless but hard-hitting educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system, which creates some £100 of debt out of every £1 deposited at a bank.

The whispers for monetary reform are slowly turning into calls... this is the 2nd article linked to here in the last week, with comments about monetary reform. I think they were different news papers too. Promising... very promising!

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I love the government's approach to the current problems, "if only everybody would get the credit card out and start spending again, then we could close our eyes, tap our heels together three times and we'd be back in Kansas". Seems that people have realised that the cost of a debt isn't just the cost of finance, one day you have to pay back the principal too. In the end you pay more for the same thing, so why not just wait a bit and pay cash? Good luck anybody who works in the finance sector, you're going to need it!

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I love the government's approach to the current problems, "if only everybody would get the credit card out and start spending again, then we could close our eyes, tap our heels together three times and we'd be back in Kansas". Seems that people have realised that the cost of a debt isn't just the cost of finance, one day you have to pay back the principal too. In the end you pay more for the same thing, so why not just wait a bit and pay cash? Good luck anybody who works in the finance sector, you're going to need it!

Clearly the politicians are screwed the entire system has worked because the proles have been willing to take on more and more debt to become wealthy.

It appears that the proles have suddenly discovered the debt wealth they have isn't real and was in fact an illusion. The people don't want to be fooled again.

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This is known as a fallacy of composition and is the primary characteristic of a particularly unpleasant form of economic crash known as a Balance Sheet Recession, caused by asset bubble collapses. Disciples of Richard Koo can tell you that it leads to a HPC and a very long slump.

http://www.businessweek.com/globalbiz/cont...paign_id=search

"A balance-sheet recession is both inaudible and invisible, because companies with balance-sheet problems aren't eager to share that information with the outside world. Although repairing balance sheets is the right and responsible thing to do for individual corporations, when many companies simultaneously shift their priorities from profit maximization to debt minimization, Adam Smith's Invisible Hand reverses its normal direction and shrinks both the economy and the money supply."

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This is known as a fallacy of composition and is the primary characteristic of a particularly unpleasant form of economic crash known as a Balance Sheet Recession, caused by asset bubble collapses. Disciples of Richard Koo can tell you that it leads to a HPC and a very long slump.

http://www.businessweek.com/globalbiz/cont...paign_id=search

"A balance-sheet recession is both inaudible and invisible, because companies with balance-sheet problems aren't eager to share that information with the outside world. Although repairing balance sheets is the right and responsible thing to do for individual corporations, when many companies simultaneously shift their priorities from profit maximization to debt minimization, Adam Smith's Invisible Hand reverses its normal direction and shrinks both the economy and the money supply."

So normal direction is perpetual growth?

Not sure I agree with that economic assessment.

However clearly if everyone tries to minimise debt all at the same time in an economy that's based on debt expansion to create growth we have a major problem.

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So normal direction is perpetual growth?

Not sure I agree with that economic assessment.

However clearly if everyone tries to minimise debt all at the same time in an economy that's based on debt expansion to create growth we have a major problem.

"Normal" is being used fairly unthinkingly in that article but you get the idea. And when the balance sheet problems have spread to consumers and the banks themselves, it's a far more serious situation. Banks will contract lending, which will (a) disguise the fact consumers and business are borrowing less and (B) further damage their balance sheets as the recession causes further losses - meaning they chase a problem they can never solve on their own. In the end the state has to provide not just a QE liquidity injection but a politically unpalatable permanent capital injection.

Anyway that's what Koo says.

Edited by tpbeta

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Japan here we come!

Population changes doesn't bode well for future demand.

It does for care homes, hearing aids, zimmerframe, wheelchairs, motorised wheelchairs etc....

Demand will be huge it will be a boom area.

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It does for care homes, hearing aids, zimmerframe, wheelchairs, motorised wheelchairs etc....

Demand will be huge it will be a boom area.

And how will all this be paid for?

We all know that needs and wants only translate into demand in line with ability to pay

I predict that the care market will become increasingly dominated by pressure to reduce costs with the consequence being declining standards.

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And how will all this be paid for?

We all know that needs and wants only translate into demand in line with ability to pay

I predict that the care market will become increasingly dominated by pressure to reduce costs with the consequence being declining standards.

Or robot nurses. :)

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And how will all this be paid for?

We all know that needs and wants only translate into demand in line with ability to pay

I predict that the care market will become increasingly dominated by pressure to reduce costs with the consequence being declining standards.

Future taxes, you may even be able to get these people doing work from the home to pay for it.

Or robot nurses. :)

That would certainly cut costs and proably lead to better care, plus they won't mind being bit.

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So normal direction is perpetual growth?

Not sure I agree with that economic assessment.

However clearly if everyone tries to minimise debt all at the same time in an economy that's based on debt expansion to create growth we have a major problem.

The Uk has been living beyond its means by deceiving ourselves we were rich by selling over priced houses to each other. this is payback time and debt has to contract together with the currency devaluing.

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http://www.guardian.co.uk/commentisfree/20...g-debt-recovery

The days of being able to pop down to the local garage and put a brand new convertible on the credit card may be over – but while the news of a decrease in personal debt has been widely welcomed, the fall in consumer spending could hinder economic recovery.

The Bank of England said that for the first time since 1993 consumers had paid back £635m more than they borrowed during July, pushing the total amount of money owed by individuals down to £1.457tn.

Borrowing has become such a huge part of our culture that it comes as a shock that Britons are now starting to pay off more of their debts. For the past 10 years people have been living beyond their means. Expensive cars, designer handbags and luxury holidays have become accessible through easy access to credit cards, loans and overdrafts. UK household debt has risen rapidly since 2001 when the Bank of England embarked on very aggressive interest rate cuts, and it reached £1.57tn in the first quarter of 2009. What's more, household debt rose twice as fast as disposable income between 2001 and 2008.

The fact that people are beginning to settle their debts is a double-edged sword. On the one hand it is a good thing that the financial crisis has forced people into the realisation that borrowing is not sustainable and that they now need to get their personal finances into order. Lower interest rates have made it easier for people to pay off their debts.

However, economists believe the news will cause concern for the chancellor, Alistair Darling, and thousands of businesses across Britain. If everyone pays off their debts and cuts back on spending at the same time it could lead the UK economy into an even darker downturn than the one we are currently in. According to Deutsche Bank, the UK has witnessed the largest decline in private consumption during the recession than any other G7 country. Alongside rising unemployment, falling incomes, the eventual withdrawal of tax and interest rate cuts, the rebalancing of household balance sheets could hold back economic recovery. Consumer spending, which accounts for more than 60% of total spending in the economy, will be key in determining the sustainability of any future economic recovery.

Two similar articles on the same day.

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