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British Consumers Borrowed £1.25 Billion Pounds New Money In November

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Is credit the only thing keeping businesses going, keeping people spending? What would happen to the economy if the credit stopped? What percentage of the borrowing have they purposely factored in and expect to go into default, quite a fair bit I would expect.....keeps the plates spinning.

http://www.dailymail.co.uk/news/article-2895286/Warning-UK-consumers-running-highest-levels-debt-credit-crunch-borrowing-levels-hit-1-25BILLION-November.html

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Is credit the only thing keeping businesses going, keeping people spending? What would happen to the economy if the credit stopped? What percentage of the borrowing have they purposely factored in and expect to go into default, quite a fair bit I would expect.....keeps the plates spinning.

http://www.dailymail.co.uk/news/article-2895286/Warning-UK-consumers-running-highest-levels-debt-credit-crunch-borrowing-levels-hit-1-25BILLION-November.html

I think it must be, and ever more so.

So much that I can't imagine what would happen if the credit stopped as my imagination seems to fantastical.

Imagine if people can't have the shiny things that keep them quiet, let alone basics like food.

Those that have would be afraid of the sudden have nots.

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Money is created by (1) governments creating money, or (2) banks lending money they don't have and relying on that money being re-deposted somewhere in the banking system to make the cash accounts balance,

So credit is very important for economic growth.

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Unsecured borrowing has been growing, but modestly following a big decline as the credit crunch unfolded. However, banks have swapped personal loan books for credit card debts, and the credit card debts will be at much higher rates of interest so trebles all round.

Not saying that was their initial intention, but it cannot have gone unnoticed that having wound personal loan books down by about half as the credit crunch unfolded, rather than write similar levels of new personal loans they could just facilitate informal credit facilities at much higher rates. CC balances have regularly been hitting new highs as I recall from the BBA numbers.

Interesting to consider the above behaviour in light of energy firm's obligations to put people on the cheapest tariff available.

I'd expect the rise of PCP car finance from manufacturers has taken a bite out of personal loan demand these days (indeed the banks could have partly fuelled PCP's rise to prominence with the scarcity of personal loans)

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Money is created by (1) governments creating money, or (2) banks lending money they don't have and relying on that money being re-deposted somewhere in the banking system to make the cash accounts balance,

So credit is very important for economic growth.

That all makes sense..... So the money is borrowed and spent in the shop, the shop pays the money back into their bank account to balance....the bank takes the fee/interest from the borrower for services rendered...... Who says anything about repaying the original debt back?

Is that how economic growth is created?

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That all makes sense..... So the money is borrowed and spent in the shop, the shop pays the money back into their bank account to balance....the bank takes the fee/interest from the borrower for services rendered...... Who says anything about repaying the original debt back?

Is that how economic growth is created?

Surely, at some point the piper has to be paid, or individual debts have to be written off - isn't that what war does ?

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Colleague of mine (50 ish, married, no kids) was unable to buy presents for Christmas this year as she lost her purse which contained her credit card. I asked if she had no way of getting money and she said she still had her debit card but literally had no money in her account, she'd need the credit card for presents.

I was amazed she was living like that given she earns reasonable money, lives in a very cheap area and is really organised at work.

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Surely, at some point the piper has to be paid, or individual debts have to be written off - isn't that what war does ?

Maybe but if the minimum payments ie the interest continues to be paid it could over time cover the principle debt.....0.5% base rate, as already said credit cards charge far more than that......so it is not a sale when sale goods are purchased with a credit card and makes all Christmas purchases far more costly than they could have been.

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Yes kiddies, most new money is created by the banks. They lend to you at 4% (secured) up to 8% or more (unsecured) and in the unfortunate event of the money not being re-credited to another account in the same bank pretty much the same day they borrow it back at the LIBOR rate (2% or less) to make the cash accounts work.

Some of the money they create they use to fund payday lenders with an APR up to 1200%. At that rate defaulters are a trivial annoyance.

Worst case scenario they go to the Bank of England, lender of last restort and owner of the money printing machine, and say - we have all these assets (the loans to you) lend to us on the strength of them, then the BoE lends to them at 0.5%.

There is a slight downside that everything you buy, from cars to houses, is more expensive because of the invented money in the system. (Thought experiment: two people enter a car show room. One has £5,000 he has saved up over years, the other has £10,000 he borrowed that morning. Who gets the car?)

The whole system works fine provided you never stop borrowing. Expiring loans must be replaced with new loans.

In times gone by if you deposited £100 at a bank they would lend out £90 and keep £10 as a reserve against people wanting to withdraw. Now if you deposit £100 they lend out £900 and just borrow the cash back on the LIBOR. Money almost never leaves the banking system. It will always be available to borrow back. Plus for a mega bank it will probably just get re-credited to an account in the same bank anyway.

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Maybe but if the minimum payments ie the interest continues to be paid it could over time cover the principle debt.....0.5% base rate, as already said credit cards charge far more than that......so it is not a sale when sale goods are purchased with a credit card and makes all Christmas purchases far more costly than they could have been.

Surely, at some point, wages won't afford the interest. Genuine question.

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Is credit the only thing keeping businesses going, keeping people spending? What would happen to the economy if the credit stopped? What percentage of the borrowing have they purposely factored in and expect to go into default, quite a fair bit I would expect.....keeps the plates spinning.

http://www.dailymail.co.uk/news/article-2895286/Warning-UK-consumers-running-highest-levels-debt-credit-crunch-borrowing-levels-hit-1-25BILLION-November.html

An increase in personal credit at this juncture indicates a small lift in confidence that the so called recovery is here to stay. Unfortunately this will be proved wrong as markets are gradually heading towards a precipice. The balance of payments is showing the largest deficit since records began in 1955 ! This shows borrowing in the economy, whether govt or corporate or privat, as a whole, is woefully out of control.

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Its been strange Christmas shopping wise. Boxing day sales really busy but after that shops have been quiet and I not noticed any really good offers in my little time in shops

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Injin was right!.....also the shops are charged a fee when a customer buys with a credit card and the vat is collected for money that has not yet been earned or may never be earned.

Paying back this years debt makes it harder to save for next Christmas.....if you can get out of the debt sprial you could save yourself a fortune both in what you spend and what you avoid buying.

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Pensions, wages etc the system is not sustainable.

The system relies on house price inflation and the individuals ability to pay.

Pensions and wages are reducing in real terms

Edited by frederico

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Money is created by (1) governments creating money, or (2) banks lending money they don't have and relying on that money being re-deposted somewhere in the banking system to make the cash accounts balance,

So credit is very important for economic growth.

Yes kiddies, most new money is created by the banks. They lend to you at 4% (secured) up to 8% or more (unsecured) and in the unfortunate event of the money not being re-credited to another account in the same bank pretty much the same day they borrow it back at the LIBOR rate (2% or less) to make the cash accounts work.

Some of the money they create they use to fund payday lenders with an APR up to 1200%. At that rate defaulters are a trivial annoyance.

Worst case scenario they go to the Bank of England, lender of last restort and owner of the money printing machine, and say - we have all these assets (the loans to you) lend to us on the strength of them, then the BoE lends to them at 0.5%.

There is a slight downside that everything you buy, from cars to houses, is more expensive because of the invented money in the system. (Thought experiment: two people enter a car show room. One has £5,000 he has saved up over years, the other has £10,000 he borrowed that morning. Who gets the car?)

The whole system works fine provided you never stop borrowing. Expiring loans must be replaced with new loans.

In times gone by if you deposited £100 at a bank they would lend out £90 and keep £10 as a reserve against people wanting to withdraw. Now if you deposit £100 they lend out £900 and just borrow the cash back on the LIBOR. Money almost never leaves the banking system. It will always be available to borrow back. Plus for a mega bank it will probably just get re-credited to an account in the same bank anyway.

Good posts, thanks.

Posts like these are the main reason why I trawl these pages.

Just two more slivers of information that might lead to an intuitive idea of WTF is going on.

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Surely, at some point, wages won't afford the interest. Genuine question.

Isn't that the heart of the 2008 sub-prime crisis in the US? Wages can't support the standard of living voters expect, so the government and private banks have a shared vested interest in extending mortgage credit to marginal borrowers. However, in order for successive cohorts of borrowers to enjoy the cash-machine effect of so called cash-out refinancing (mortgage equity withdrawal in UK parlance) house prices need to keep rising. Rising prices means larger and larger loans, which means ever more financial innovation in order to enable the financial institution to make massive loans with interest charges that meagre incomes can cover, (I think that a negative-amortisation ARM was the weapon of choice, where the interest payments did not cover the interest accrued during an introductory period of the mortgage). At that point, you are at the answer to your question. Banks were writing loans where the customer couldn't afford the interest out of their income.

I think in the UK we had a similar process, but it wasn't quite so in your face. People were financing self-certified interest only at very high loan-to-value and then refinancing every 12-24 months against a rising house price, using the cash-machine effect to finesse the fact that their wages wouldn't cover the interest. They were using other credit instruments (personal loans, second charge mortgages, credit cards) to help carry the load.

Piece in The Telegraph last week chimed with the research on BTL arrears sponsored by Lloyds that I posted a link to last summer; plenty of BTL is barely breaking even and plenty of it is not breaking even. That means that even at these incredibly low interest rates given the level of earnings (and housing benefit) the income of households which can be assigned to covering mortgage interest is inadequate to pay the interest and thus in a non-trivial number of cases the landlord has to chip in to help pay the interest.

This is quite eye-catching. Firstly, through the availability of BTL the banks have constructed a position where renters' incomes can be assigned to pay interest on mortgages way in excess of the interest that the renters would have been willing or able to pay if they were owner-occupiers financed with repayment mortgage. Secondly, even after the Bank of England policy (low bank rate, BTL included in FLS) does so much to keep BTL rates low, the result is just that more people jump into BTL at even higher prices.

From a greater remove this is why so much BTL involvement in UK housing can still be regarded as Ponzi finance from Minsky's debt-income perspective, in fact, ever since the direction of travel of the Mortgage Market Review shut owner-occupiers out of self-certified interest only lending, the Ponzi financed house purchases have been restricted to BTLers. Everything will be fine for BTLers provided that interest rates never rise, we never have another recession and no political party ever sees any mileage in openly pursuing the renting vote, (plenty of evidence that renters are achieving class-consciousness ;) )

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Good posts, thanks.

Posts like these are the main reason why I trawl these pages.

Just two more slivers of information that might lead to an intuitive idea of WTF is going on.

except its not your deposits that define the lending limits...its the capital position of the bank.

Banks only actually need money when it comes time to pay the bills or depositors want out.

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Isn't that the heart of the 2008 sub-prime crisis in the US? Wages can't support the standard of living voters expect, so the government and private banks have a shared vested interest in extending mortgage credit to marginal borrowers. However, in order for successive cohorts of borrowers to enjoy the cash-machine effect of so called cash-out refinancing (mortgage equity withdrawal in UK parlance) house prices need to keep rising. Rising prices means larger and larger loans, which means ever more financial innovation in order to enable the financial institution to make massive loans with interest charges that meagre incomes can cover, (I think that a negative-amortisation ARM was the weapon of choice, where the interest payments did not cover the interest accrued during an introductory period of the mortgage). At that point, you are at the answer to your question. Banks were writing loans where the customer couldn't afford the interest out of their income.

I think in the UK we had a similar process, but it wasn't quite so in your face. People were financing self-certified interest only at very high loan-to-value and then refinancing every 12-24 months against a rising house price, using the cash-machine effect to finesse the fact that their wages wouldn't cover the interest. They were using other credit instruments (personal loans, second charge mortgages, credit cards) to help carry the load.

Piece in The Telegraph last week chimed with the research on BTL arrears sponsored by Lloyds that I posted a link to last summer; plenty of BTL is barely breaking even and plenty of it is not breaking even. That means that even at these incredibly low interest rates given the level of earnings (and housing benefit) the income of households which can be assigned to covering mortgage interest is inadequate to pay the interest and thus in a non-trivial number of cases the landlord has to chip in to help pay the interest.

This is quite eye-catching. Firstly, through the availability of BTL the banks have constructed a position where renters' incomes can be assigned to pay interest on mortgages way in excess of the interest that the renters would have been willing or able to pay if they were owner-occupiers financed with repayment mortgage. Secondly, even after the Bank of England policy (low bank rate, BTL included in FLS) does so much to keep BTL rates low, the result is just that more people jump into BTL at even higher prices.

From a greater remove this is why so much BTL involvement in UK housing can still be regarded as Ponzi finance from Minsky's debt-income perspective, in fact, ever since the direction of travel of the Mortgage Market Review shut owner-occupiers out of self-certified interest only lending, the Ponzi financed house purchases have been restricted to BTLers. Everything will be fine for BTLers provided that interest rates never rise, we never have another recession and no political party ever sees any mileage in openly pursuing the renting vote, (plenty of evidence that renters are achieving class-consciousness ;) )

That is exactly my view.

At some point I think a tipping point has to be reached that will be preceded by a lot of cheap secondhand goods and labour, and an increase in crime.

That all seems very doomsday.

At the moment the workers are kept peddling quietly by the carrot of a 50" curved-screen LED TV (house, holiday, skidoo etc) available on ever longer or cheaper credit - at some point the credit will be unaffordable to both sides. Surely ?

Edited by LiveinHope

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...

At the moment the workers are kept peddling quietly by the carrot of a 50" curved-screen LED TV (house, holiday, skidoo etc) available on ever longer or cheaper credit - at some point the credit will be unaffordable to both sides. Surely ?

I think that things can go on like this for a long time, provided interest rates stay low.

I read and enjoyed Stephen D. King's "When the money runs out" and can buy his suggestion that rather than anything particularly apocalyptic what you see is either an end of rising living standards or a gradual erosion of living standards. Other posters have made the point that King also makes; our external creditors will seek to exchange our promises of a share of our future incomes for real assets (e.g. London property).

I'm making my way through Andrew Gamble's "Britain in decline", written long before the financial revolution that has brought so many new problems, it does remind us that the UK has been facing difficulties generating sustainable improvement in living standards for decades.

I guess I'm inclined to think it's going to be more "Same sh!t, different day" than "This time it's different".

The credit boom up to 2008 was the aberration. I still think that the overall master plan is to live with these debts and pay them off. What is going to be interesting is the extent to which the greater debt load makes the economy even more fragile than it was pre-boom and the extent to which the elevated debt-GDP levels that we reached are going to reduce the ability of the economy to 'generate' and 'sustain' further credit booms.

As the main asset on which lending is secured is property we are going to be replacing credit booms where UK households speculate on the price of their own houses with credit booms which are either backed by growth in unsecured lending or where a far smaller number of UK BTLers and foreign speculators speculate on investment property. Pre-2008 boom MEW meant that some of the boom froth was ploughed into goods and services in the UK economy. I don't think that this will happen to the same extent any longer. Hence, it'll be a while till we see a decent credit boom again. But, to borrow a trope from Michael Burry, this is a false prophecy - George Osborne has already demonstrated by experiment that steps which in the past might have fuelled an almighty credit boom can barely stoke a handful of sparks from the embers.

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I think that things can go on like this for a long time, provided interest rates stay low.

I read and enjoyed Stephen D. King's "When the money runs out" and can buy his suggestion that rather than anything particularly apocalyptic what you see is either an end of rising living standards or a gradual erosion of living standards. Other posters have made the point that King also makes; our external creditors will seek to exchange our promises of a share of our future incomes for real assets (e.g. London property).

I'm making my way through Andrew Gamble's "Britain in decline", written long before the financial revolution that has brought so many new problems, it does remind us that the UK has been facing difficulties generating sustainable improvement in living standards for decades.

I guess I'm inclined to think it's going to be more "Same sh!t, different day" than "This time it's different".

The credit boom up to 2008 was the aberration. I still think that the overall master plan is to live with these debts and pay them off. What is going to be interesting is the extent to which the greater debt load makes the economy even more fragile than it was pre-boom and the extent to which the elevated debt-GDP levels that we reached are going to reduce the ability of the economy to 'generate' and 'sustain' further credit booms.

As the main asset on which lending is secured is property we are going to be replacing credit booms where UK households speculate on the price of their own houses with credit booms which are either backed by growth in unsecured lending or where a far smaller number of UK BTLers and foreign speculators speculate on investment property. Pre-2008 boom MEW meant that some of the boom froth was ploughed into goods and services in the UK economy. I don't think that this will happen to the same extent any longer. Hence, it'll be a while till we see a decent credit boom again. But, to borrow a trope from Michael Burry, this is a false prophecy - George Osborne has already demonstrated by experiment that steps which in the past might have fuelled an almighty credit boom can barely stoke a handful of sparks from the embers.

None of them are a good outlook.

The UK in debt servitude

or Apocalypse now

With either, you have to live for yourself if you want to avoid the downsides.

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I think that things can go on like this for a long time, provided interest rates stay low.

I read and enjoyed Stephen D. King's "When the money runs out" and can buy his suggestion that rather than anything particularly apocalyptic what you see is either an end of rising living standards or a gradual erosion of living standards. Other posters have made the point that King also makes; our external creditors will seek to exchange our promises of a share of our future incomes for real assets (e.g. London property).

I'm making my way through Andrew Gamble's "Britain in decline", written long before the financial revolution that has brought so many new problems, it does remind us that the UK has been facing difficulties generating sustainable improvement in living standards for decades.

I guess I'm inclined to think it's going to be more "Same sh!t, different day" than "This time it's different".

The credit boom up to 2008 was the aberration. I still think that the overall master plan is to live with these debts and pay them off. What is going to be interesting is the extent to which the greater debt load makes the economy even more fragile than it was pre-boom and the extent to which the elevated debt-GDP levels that we reached are going to reduce the ability of the economy to 'generate' and 'sustain' further credit booms.

As the main asset on which lending is secured is property we are going to be replacing credit booms where UK households speculate on the price of their own houses with credit booms which are either backed by growth in unsecured lending or where a far smaller number of UK BTLers and foreign speculators speculate on investment property. Pre-2008 boom MEW meant that some of the boom froth was ploughed into goods and services in the UK economy. I don't think that this will happen to the same extent any longer. Hence, it'll be a while till we see a decent credit boom again. But, to borrow a trope from Michael Burry, this is a false prophecy - George Osborne has already demonstrated by experiment that steps which in the past might have fuelled an almighty credit boom can barely stoke a handful of sparks from the embers.

The rise in unsecured borrowings on credit cards is interesting as a means of keeping the sparks from the embers low. Obviously, it is not leveraged in the same way that secured borrowings are, which limits the amount of money from thin air that can be produced, and also because the interest rates are so much higher than other types of borrowing, the borrower reaches the debt servicing maximum much more quickly. I daresay that from some perspectives, small amounts of expensive debt are very attractive to financial institutions, but on the other hand it may increasingly hamstring their ability to advance many times that in leveraged secure borrowings.

Winning the battle and losing the war?

Guess if my musings have any basis in fact, we ought to see Govt campaign to cut rates on credit cards as a means of allowing people to borrow more and keep house prices high.

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What you never hear in the news or anywhere else the two months prior to Christmas and the January sales are warnings about taking on too much debt, spending what you can't afford, living beyond your means....no the warnings come after the damage has been done, like the gym membership and slimming classes promote getting slimmer after the damage has been done......it is if they want people to do what is not healthy for them or their finances, because people make lots of money out of the people who can't help themselves. ;)

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...

The UK in debt servitude

...

I think this is the heart of the matter.

No manufacturing and lots of entitlement spending by government means that we enter into debt contracts with overseas counter-parties for all the crap we 'need', (though QE and other financial regulation post crash means a lot of gilts are now held by either the Bank of England or UK financial institutions). Oversize financial sector, tight planning,failure to let the 2009 crash in property run its course and reluctance to tax property means we're setting up intergenerational transfers as young families seek to cram enough borrowed money down the throats of ageing boomers to tempt them out of the family homes. Finally, religious belief in rising house prices is tempting BTLers into the current market, generating 75% LTV interest-only loans with renters paying the interest.

From a certain perspective all we have done over the previous 15 years is take on colossal debts so that the prices of our houses can go up faster than earnings or GDP or anything else that they might reasonably have been expected to be couple to.

What might be interesting medium-term to long-term is when do we again see the state of affairs where our external creditors decide that we aren't good for the money?

ukgovtdebt.jpg

Source: Ed Conway's blog - Here's who the UK government owes money to

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I think this is the heart of the matter.

No manufacturing and lots of entitlement spending by government means that we enter into debt contracts with overseas counter-parties for all the crap we 'need', (though QE and other financial regulation post crash means a lot of gilts are now held by either the Bank of England or UK financial institutions). Oversize financial sector, tight planning,failure to let the 2009 crash in property run its course and reluctance to tax property means we're setting up intergenerational transfers as young families seek to cram enough borrowed money down the throats of ageing boomers to tempt them out of the family homes. Finally, religious belief in rising house prices is tempting BTLers into the current market, generating 75% LTV interest-only loans with renters paying the interest.

From a certain perspective all we have done over the previous 15 years is take on colossal debts so that the prices of our houses can go up faster than earnings or GDP or anything else that they might reasonably have been expected to be couple to.

What might be interesting medium-term to long-term is when do we again see the state of affairs where our external creditors decide that we aren't good for the money?

ukgovtdebt.jpg

Source: Ed Conway's blog - Here's who the UK government owes money to

I wonder who will offer the UK Help to Buy.

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