Current Economic Course

[boom_and_bust]

Hi,

Very good, it's very good to make visible predictions. I would say as well, perhaps - like the market physcology section of the forum - an analysis and trends section could be an option for these types of postings as well?

In your spread sheets, perhaps you could provide a spread of outcomes like best case and worse case scenarios, these are figures that change quarterly and the world is a dynamic place, a good opportunity to further compare at future dates differening, detailed predictions on the site (there are already a number of chartists here who may care to rise to the challenge!) against each quarterly announcements of things like GDP, RPI, HPI, etc., Remind ourselves of where we have come and where we are going (possibly).

Another thing of course is to make a decent analysis of shocks and unexpected events - good or bad - when they arrive and avoid bear-or-bull knee jerks that we sometimes can become accused of (every decade a major shock to the domestic or international economy can be expected, it always happens - winter of discontent, big bang, Black Wednesday, ERM, Iraq, DotCom, etc., etc., I guess that is the whole point of insurance!). We do have a good collection of monthly, quartley and annual figures posted here on each announcement, it might be nice to have a more technically orientated, pinned area to keep an organised history of it together. Particularly quarterly, three months of postings here is a collosal volume to check back over.

Another area of analysis that I think will become incresingly important is the pensions situation. It is bad now and will get much, much worse in the future given the current governments bias towards house-price, demand-management macro-economics. This will have to be addressed at some point and is very much linked to housing and personal consumption. It is the biggest potential, domestic shock for future generations on the current course sailed by the Treasury.

Boomer

Edited April 26, 2006 by boom_and_bust

[?...!]

Just checked again and the graphs are fuzzy. Doh!

Cr@ppy Jpegs, I'll put Bitmaps on tomorrow to make this a lot clearer (and maybe post the .xls) you do need them.

I didn't take much notice of the snipes, this thread seems to have sorted the wheat from the chaff. I was a bit puzzled by some of the responses...

Odd really?

If I were to take this analysis further I would weight quarterly data based on its age.

i.e. take the last 5 years and weight each quarter on its age 20 for the most recent 1 for the oldest.

It would be an interesting tool (especially on US data with 15 straight hikes) but I am too busy to produce that, and I know what it would say anyway.

You can't be perfectly accurate unless you take a quarterly census.

The point of the original post is that it proves the trends we are on, right now, today, need to change.

Not to boost the economy, not to make housing affordable, but to discourage the UK population from taking on more debt than they can physically repay.

Also, there is a strict time frame for this. The BoE are against the clock. They have more time than many here would admit but every month they delay is a month wasted, infact is another month of mounting debts.

The system has a breaking point and it is now clearly visible on the horizon.

The growth of debt needs to slow (from 10.3% to around 2-4%), and there is only one tool for this.

.

[IMupNorth]

If I was you I would run this past an economics professor - I think he may just want to correct/explain a few things to you in terms of your argument.

You are right that growth of debt at 10.3% won't continue for ever though. At some point it self corrects and slows down, in fact this process has already slowly begun I think you will find. It will find its own natural level of whats affordable based on any specific IR level.

Total amount of debt is very closely linked to IRs - the lower IRs the more debt there will be. If IRs go up, growth in debt will slow, stop and then debt will utlimately have to go down if IRs keep going up. The total amount of debt will reduce due to bad debts being written off - if there is a 1930's style recession, there will be a lot of debt written off, and I mean ALOT !

[FollowTheBear]

...and meantime, a lot of jobs are lost.

[Flat Bear]

If I was you I would run this past an economics professor - I think he may just want to correct/explain a few things to you in terms of your argument.

You are right that growth of debt at 10.3% won't continue for ever though. At some point it self corrects and slows down, in fact this process has already slowly begun I think you will find. It will find its own natural level of whats affordable based on any specific IR level.

Total amount of debt is very closely linked to IRs - the lower IRs the more debt there will be. If IRs go up, growth in debt will slow, stop and then debt will utlimately have to go down if IRs keep going up. The total amount of debt will reduce due to bad debts being written off - if there is a 1930's style recession, there will be a lot of debt written off, and I mean ALOT !

I agree, things can get a lot worse quicker than anyone imagined and drops in property prices are going to be much bigger than anyone really believed possible.

[?...!]

If I was you I would run this past an economics professor - I think he may just want to correct/explain a few things to you in terms of your argument.

You are right that growth of debt at 10.3% won't continue for ever though. At some point it self corrects and slows down, in fact this process has already slowly begun I think you will find. It will find its own natural level of whats affordable based on any specific IR level.

Total amount of debt is very closely linked to IRs - the lower IRs the more debt there will be. If IRs go up, growth in debt will slow, stop and then debt will utlimately have to go down if IRs keep going up. The total amount of debt will reduce due to bad debts being written off - if there is a 1930's style recession, there will be a lot of debt written off, and I mean ALOT !

I agree with everythiing you say there.

The post is not intended to be a window into the future, indeed it is not how I believe things will pan out.

What the post does do, is prove that the trend we are currently on is not a magic antidote to boom boom/bust.

It proves we are still on a cycle, we are still riding ups and downs, perpetua-growth is a fallacy... e.t.c. e.t.c.

The next step is to try and ascertain where we are in this cycle (we know we're at the top), or more importantly were you are as an individual, on the cycle, and does that correspond to an advantageous position?

I have ignored everything that could cause an economic hic-up as I have taken a bullish approach. I have assumed sustained low IR as I have taken a bullish approach. I have assumed the continuation of easy credit as I have taken a bullish approach. I have ignored bad debts being written off as I have taken a bullish approch.

I am well aware of the mechanisms I have ignored. I have assumed harmonious perpetuation of how things are currently.

Anything I didn't have time to calculate, I estimated on the bullish side, after all, I was taking a bullish approach.

And guess what?...

It all goes tits up, 22 years from now the monetary cost of the debt would be irreparably massive and the creditors would own UK GDP by default.

But I am aware it can never come to that. All that needs to happen is for the cost of servicing personal debt to grow at a nominal value (actual sum) that encroaches on the nominal (actual sum) growth of GDP.

The ratio for "debt cost growth":"GDP growth" is currently 6billion:30billion.

So every Billion quid GDP grows by, it cost us the people an aditional 160 million in servicing personal debt.

The big issue, in fact the sole issue, is that GDP is growing at 2.4% and debt is growing at 10.3%.

The 6bil:30bil ratio is closing, and the shift of this ratio is gaining speed.

22 years from now the ratio would be 50billion:50Billion, beyond this GDP growth is impossible.

Compare debt servicing growth to GDP growth...

year = Debt:GDP

2005 = 6.00:30.00

2006 = 6.60:30.72... Debt grows by 0.60billion < GDP by 0.72billion

2007 = 7.26:31.45... Debt grows by 0.66billion < GDP by 0.73billion

2008 = 8.01:32.21... Debt grows by 0.75billion < GDP by 0.76billion .....Somewhere Between these two dates (2008/2009) the

2009 = 8.84:32.98... Debt grows by 0.83billion > GDP by 0.77billion .....encroachment begins. NB: This is a bullish model.

2010 = 9.75:33.77... Debt grows by 0.91billion > GDP by 0.79billion

So all that needs to happen, is for interest rates to increase to a value that does not permit 10% YOY growth of personal debt.

This is inevitable at some point between now... and the encroachment.

...

Edited April 27, 2006 by ?...!

[New Bear]

Much appreciated analysis - and making consistently bullish assumptions to see where they end up is a smart thing to do.

[WaitingWaitingWaiting]

Thanks for the great post ?...!. I've been reading this forum for several months now, and it's fascinating economics lessons like this that keep me coming back (and today I've even signed up to post!).

There's something I don't understand about your post though (not suprising - I know very little about economics) maybe you, or someone else, could answer it for me:

But according to this graph which uses real data. Debt will soon begin to encroach on growth, if this ever happens we will struggle to compete.

I think the encroachment of debt on GDP looks about five years away. The only way to avert this is to reign in personal debt growth, the most efficient way to do that is to slowly ease rates upwards.

So are you saying that people will be spending so much on interest that they won't have money to spend on other things, and so the economy won't grow? But the interest they're paying isn't dissappearing, it's going to lenders. Presumably the lenders then spend or invest the money, so doesn't it go back into the economy anyway?

[?...!]

There's something I don't understand about your post though (not suprising - I know very little about economics) maybe you, or someone else, could answer it for me:

So are you saying that people will be spending so much on interest that they won't have money to spend on other things, and so the economy won't grow? But the interest they're paying isn't dissappearing, it's going to lenders. Presumably the lenders then spend or invest the money, so doesn't it go back into the economy anyway?

That's a smart question.

Remeber this data applies to the UK and the UK alone. If the cost of our borrowing begins to encroach on our GDP growth, it begins to strangle the economy exactly in the way you describe. The lenders invest their money where it would see best returns, that would not be in a heavily endebted economy, much more likely the money goes elsewhere i.e. overseas.

Even if they did reinvest it all in the UK there is only so much investment the UK can absorb before hyper inflation is triggered. That would spell disaster for the lenders since they hold the credit.

The lenders are trying to track GDP growth through the cost of servicing debt (which is their profits).

At the minute they are expanding that cost at an alarming pace, too quickly to sustain.

There is a point in the not to distant future where GDP growth and the cost of servicing personal debt (see graph) become parallel, which if you understand what that actually means is a very worrying point.

That is the point beyond which the lenders are encroaching on GDP.

In laymans terms their share of GDP growth grows faster than GDP growth.

They currently take almost exactly 20% (6Billion from 30Billion)

Oh yea, and I have now updated the graphs...

.

Edited April 27, 2006 by ?...!

[brainclamp]

If we continue down that road (massive HPI), we reach a point where we can no longer service the growing debt.

The fall down factor in our economy is that personal debt is growing at over 10% annually. Borrowers need to be discouraged, but we can continue on this course without imploding for a few more years (although we are building bigger problems down the road).

It all comes to a head inside the lifetime of a mortgage anyway, so mortgages should be avoided like the plague.

I have to pluck a value out of the air because it all happens in the future! ITS A FORECAST!

It's a more bullish value than the current value, it assumes cheaper repayments!

Which facts do you want me to verify?

Could you please travel forward 30 years in time and tell me what value I should use? Then I can update it thanks.

The fundemental argument behind your graphs is that private sector debt cannot continue to be accumulated at this pace, while GDP rises by a few percent a year, as private sector debt servicing costs will take a higher and higher slice of GDP (peoples incomes).

Now thats a good arguement with merit. But there are two problems with it.

The main one is that under massive immigration, the price of this asset (therefore the debt to buy it) can only go higher in supply demand terms as a slice of output/GDP, even if GDP stagnates elsewhere.

The second one is that I believe the bank will be holding the debt servicing costs (the interest rate) at a low level with a this new nonsense CPI inflation measure which flatters GDP upwards, erodes the debt from savers and workers real incomes, as borrowing (printing money) continues, and rents/cashflows to support the debt that the asset prices are based on, will to rise under continued massive immigration.

As evidence of this you can see the 14% rise in utillity bills, council taxes, tv licenses, petrol and other costs which have no weigh in the inflation measure, contracts sharply with price of milk dropping 5% causing inflation to drop to 1.8%!!!

In many ways you are working for the BTL elite every day you goto work and sweat, as the additonal money supply printed by the bank enters the economy, your dropping real wages for your labour causes thier debt to erode, your real standards of living most notibly seen in HPI and bills collapses under real inflation, and mass immigration means static wages. Rents continue to rise under riseing demand for housing.

So a scenario with £1/4m houses, expanding GDP, lower debt servicing costs, and a rising overall debt mountain as rents rise while wages as part of GDP fall back further or remain staic looks pretty bang on to me.

The skipton bs also projects the debt mountain in thier 'debt in a decade' report as rising from 1.1 Trillion to 1.6 Trillion by 2015. It is now 2006 - and debt had moved from 1 T in 2005, to 1.2T now. The prefict the accumulation of much more debt and our current course and rate of accumulation more or les the same.

http://www.thisismoney.co.uk/credit-and-lo...2&in_page_id=62

Many building societies have been pointing this out http://www.bbg.co.uk/bbg/mc/releases/mc_co...ase/?id=3832899

In 10 years, it is not too far fetched to see the debt mountain as 2T continuing at todays rate, while GDP has moved from 1.2T today to 2T also, with most of the income from GDP seen in houseprice rises captured by the crony state and landlord elite, as we move to a mass renting society, tenants squeezed between rent to thier landlords and taxes under thier ID cards. (read my sig) as low interest rates continue, (-ve real interest rates), and the real costs of debt are born by the renting and taxed population of workers.

So it is perfectly possible for debt to rise higher and higher, while debt servicing costs are raised through rents climbing as a percentage of peoples income, and taxes rise in a world of population registers and being fined £2,500 for not updating you details on the government database.

In a world of ever expanding debt being accumulated, the burden of servicing that debt falling on the population in rents and taxes for a crony state and landlord class, ID cards and a population register are historically essentail on the path we are heading down.

Edited April 27, 2006 by brainclamp

[DabHand]

I presume a few people here watched that Moneylenders video.

This is all surely part of the plan of credit expansion and contraction the world bankers use to take control of more and more tangible assets.

It also means that creditors are more than aware of how unsustainable the current trends are for the lendee and themselves. They will know not to milk the cow til it implodes..but keep it alive for the next time round.

Therefore can we not expect a savage contraction of liquidity in the next few years? Problem is, l am wondering if this cycle has been left to go on for longer as one last hurrah. i.e. globalisation has probably lessened the absolute control of the credit cycle by the old guard "moneylenders" and they themselves face uncertainty over the future. Hence they are going to implode a few cows as they exit.

[?...!]

The fundemental argument behind your graphs is that private sector debt cannot continue to be accumulated at this pace, while GDP rises by a few percent a year, as private sector debt servicing costs will take a higher and higher slice of GDP (peoples incomes).

Now thats a good arguement with merit. But there are two problems with it.

Your arguements are good, but I'm not sure how they disagree with what I have said...?

Are you saying the current clime is sustainable under mass immigration as BTL landlords can continue to borrow large sums on the assumption of continued population growth, and therefore accelerating returns?

The money to service UK personal debt can only come from UK GDP. -(Ref 1)

Asset inflationary prices on static unproductive assets do not contribute to GDP. They may offer a landlord a certain leverage to increase rates but the same landlord cannot charge more than his tennants can earn.

What his tennants can earn is recorded by GDP and GDP growth. now check back to Ref 1

If the immigrants you speak of bring large sums of foreign cash with them, then in theory, the system could be sustained for a while, but they would have to keep bringing ever larger sums. Most bring next to nothing, right?

But the thing is, current immigration levels are incorporated in the data I have used.

Last years GDP includes GDP from last years immigrants.

Edited April 27, 2006 by ?...!

[dogbox]

Nice to see such effort in explaining the unsustainable nature of debt accumulation.

Ah but a lot of this debt is going into both personal and business investment (foreign endeavours).

All my recent debt accumulation has gone into property abroad and 1 commercial UK property.

Economists as usual trail the cutting edge of change, and fail to spot whats going on at the coal face.

Even amongst my small circle of freinds and aquaintances investing abroad is becomming an epidemic.

ALSO net income flows from abroad are running at a wopping 23% of GDP. This in large part results from investment abroad including the transference of manufacturing abroad which now yileds hansome rewards thanks to low cost base.

Anyone interested in economics dismissing these factors is a fool. Looking at past data and trends is only 1/2 the story.

Edited April 27, 2006 by dogbox

[?...!]

Ah but a lot of this debt is going into both personal and business investment (foreign endeavours).

All my recent debt accumulation has gone into property abroad and 1 commercial UK property.

Economists as usual trail the cutting edge of change, and fail to spot whats going on at the coal face.

Even amongst my small circle of freinds and aquaintances investing abroad is becomming an epidemic.

ALSO net income flows from abroad are running at a wopping 23% of GDP. This in large part results from investment abroad including the transference of manufacturing abroad which now yileds hansome rewards thanks to low cost base.

Anyone interested in economics dismissing these factors is a fool. Looking at past data and trends is only 1/2 the story.

Wouldn't everything you have pointed out be included in current GDP and current personal debt?

Are you and your friends borrowing against UK assets?

If so are you not just transfering some of your future earnings to the seller now through the vehicle of a loan?

Thereby transferring future UK GDP abroad for the seller to use in his/her own economy?

You are documenting the investers shunning the UK as a viable competitor for investment, just as described.

.

[dogbox]

Wouldn't everything you have pointed out be included in current GDP and current personal debt?

Are you and your friends borrowing against UK assets?

If so are you not just transfering some of your future earnings to the seller now through the vehicle of a loan?

Thereby transferring future UK GDP abroad for the seller to use in his/her own economy?

You are documenting the investers shunning the UK as a viable competitor for investment, just as described.

.

I invest abroad to build my wealth. In the end it all comes back to me.

UK plc is empire building once again. Debt is the fuel but wealth is the result.

[brainclamp]

Your arguements are good, but I'm not sure how they disagree with what I have said...?

Are you saying the current clime is sustainable under mass immigration as BTL landlords can continue to borrow large sums on the assumption of continued population growth, and therefore accelerating returns?

The money to service UK personal debt can only come from UK GDP. -(Ref 1)

Asset inflationary prices on static unproductive assets do not contribute to GDP. They may offer a landlord a certain leverage to increase rates but the same landlord cannot charge more than his tennants can earn.

What his tennants can earn is recorded by GDP and GDP growth. now check back to Ref 1

If the immigrants you speak of bring large sums of foreign cash with them, then in theory, the system could be sustained for a while, but they would have to keep bringing ever larger sums. Most bring next to nothing, right?

But the thing is, current immigration levels are incorporated in the data I have used.

Last years GDP includes GDP from last years immigrants.

Because most of the addtional debt is not for consumption, i.e. 83% of the debt moutain is secured on poperty, property which is showing positive cashflows, and likely to show more, then the accumulation of debt is not unsustainable, as ordinary people are priced out and forced to rent. These low real interest rates under mass immigration will not show inflation, and will not be raised, and real costs in raw materials rising will not be picked up with the inflation measure as we can see.

The debt can continue at a 100bn pace per year, against property, until we have even more massive houseprices, 2 Trillion of debt, and 2 Trillion in GDP by 2015. This implies houseprices about the 0.5m mark in 10 years, and real interest rates around where we are now, with rising rents to service the debt. GDP is the price of goods and services, it can grow sharply by inflation, like in the 1970s. We are in the 70s but without peoples wages catching up, thanks to mass immigration.

Edited April 27, 2006 by brainclamp

[?...!]

I invest abroad to build my wealth. In the end it all comes back to me.

UK plc is empire building once again. Debt is the fuel but wealth is the result.

True,

But by taking a UK loan and then investing abroad you are:

1). Selling sterling, importing inflation

2). Bouying competitor economies, distracting potential foreign investment away from the UK

You are not doing anything wrong. You are doing what is good for you. It is also happens to be very bad for the UK.

You are doing what I said investors/lenders would do by avoiding the UK.

The debt can continue at a 100bn pace per year, against property, until we have even more massive houseprices, 2 Trillion of debt, and 2 Trillion in GDP by 2015.

???

Did you read the original post?

I said debt can continue at 100bn per yer, I said in bold WE CAN AFFORD IT

What we cannot afford is for debt to increase at 10%, the two are very, very different.

The current nominal debt accumulation (100bn) is sustainable.

The current rate of debt accumulation (10.3%) is not sustainable.

The most efficient tool to control/encourage/discourage the rate of debt accumulation is IR

Edited April 27, 2006 by ?...!

[dogbox]

True,

But by taking a UK loan and then investing abroad you are:

1). Selling sterling, importing inflation

2). Bouying competitor economies, distracting potential froeign investment away from the UK

You are not doing anything wrong. You are doing what is good for you. It is also happens to be very bad for the UK.

You are doing what I said investors/lenders would do by avoiding the UK.

???

No I expect my capital employed to double or triple in worth over 3 - 5 years. I will then re - import these much inflated sums back into the UK.

[?...!]

No I expect my capital employed to double or triple in worth over 3 - 5 years. I will then re - import these much inflated sums back into the UK.

Then I don't know why you are arguing, I said we can continue "as is" for another 5 or 6 years on the current trends.

Good luck with it, it sounds ambitious.

[munimula]

It states 2005 GDP @ £1.235 Trillion, which is healthy. Lets assume Gordon can keep it on course at 2.4%

UK GDP growth = £1.235 Trillion * 2.4% = £29.64 Billion

Next we will take data from Credit Action

Credit Action puts UK personal debt at £1.174 Trillion, which is quite large and is currently growing at 10.3%

UK debt growth = £1.174 Trillion * 10.3% = £120.92 Billion (Now bears... don't get carried away after that last bit)

The size of debt is not as important as the cost of servicing that debt (for a nation).

Lets assume a rate of 5%

Cost of servicing UK personal debt grew by £120.92 * 5% = £6.05 Billion

That £6billion additional cost is much less than the £30billion GDP growth over the same period, we CAN afford the additional costs of the debt.

I've just read this - now am I being stupid and totally missing the point or is this just an absolutely useless way of looking at things?

How is comparing these two figures showing us that we can service the debt!!????

The majority of the growth in debt will be in BTL and FTB mortgages, the majority of the growth in debt held by an absolute minority.

How on earth is the growth in debt repayment related to the growth in gdp??

[?...!]

I've just read this - now am I being stupid and totally missing the point or is this just an absolutely useless way of looking at things?

How is comparing these two figures showing us that we can service the debt!!????

The majority of the growth in debt will be in BTL and FTB mortgages, the majority of the growth in debt held by an absolute minority.

How on earth is the growth in debt repayment related to the growth in gdp??

GDP records how much value our economy produces.

Servicing debt is a penalty on that value.

[Jason]

I've been thinking about basically what was mentioned in this thread, and now have the latest figures for the average mortgage and non secured debt:

The average mortgage interest rate is 5.27%

The average credit card interest rate is 15.5%

The overall average if you use the total secured and consumer debt figures would be: £999.2bn x 5.27% + £191.5bn x 15.5% = ~ average rate of 6.91%

(Courtesy of Creditaction.org.uk - cheers!)

So the overall debt rate would be 6.91%

If you were to re-work the figures with 6.91% how many years could we last (initally worked on 5%)?

[dhpcza]

Very good thread, excellent post (the 1st one). Keep debating guys, we'll only get more informed that way.

[bpw]

How is comparing these two figures showing us that we can service the debt!!????

The majority of the growth in debt will be in BTL and FTB mortgages, the majority of the growth in debt held by an absolute minority.

You are making a very valid point and this needs more discussion. I bang on all the time about intergenerational inequity and this posting and your observation highlight the dilema of those who are under ~ 45 and without equity in homes. I would guess that a larger share of the increase in GDP will end up in the pockets of those with assets of one kind or another and that the larger share of the increase in debt will burden youngsters. Just think of it who will pay for

state pensions

guaranteed personal pensions

defined benefit company pensions

health care costs

dental bills

expanding goverment spending on unproductive worker salaries

While I learned something from the original post it clearly trivialises the complexity of national economies. Balancing increasing debt with increasing GDP doesn't tell you anything about housing affordability for the indivduals we care about and that is FTBs and the young. Remember my analogy of hogs around a trough. The biggest and fattest pigs get their snouts in first and longest. We are all living in a period when the distribution of ages is being skewed to the older end of the curve and that spells disaster for the finances of the young who are beings skewered as cash cows for an ageing and increasingly unproductive boomer generation.

[brainclamp]

After the 1850-1900 mass immigration into the UK, dispite massive productive changes, immense productivity growth, in the capital of the country and the supply of goods and food globally, there was great poverty.

In 1897 at the time of Queen Victroria's golden jubliee, because of the large expansion of the labour pool via mass immigration, the unemployment rate was 30% and parks where filled with the homeless at night.

The living hell of the east end worker, who continually saw his labour undercut, and the grim lives paying high rents and wages that barely held thier bodies together, and thier desperate existance was captured in a novel 'The people of the Abyss' by Jack London. (Also a map study done by Charles Booth).

The picture of the Uk in the future painted by insitutions like the Skipton Building society, i.e. the debt burden being paid through such bodies, is pretty much like this.