Thursday, October 27, 2005


I read today that individuals in Britain owed more than £1,100 billion, exceeding the debts of Africa and South America put together. Put this another way, apart from the debts and deficits of the British government, the debts owed by individuals and families in Britain now exceed the debts that Sir Bob Geldof and Bono want written off.

This is leading to increases in suicide rates, repossession of homes and dramatic family crises. In London, the rate of repossession has increased 81% in one year – for the country as a whole, the increase is 66%. In the first half of this year 54,344 repossession actions were entered into the court system, 32,366 orders were made and 4,640 repossessions took place. By the end of the year, 10,000 houses will have been repossessed by mortgage lenders.

A key part of the problem is the ready access to credit cards. There are some 66 million credit cards in use in Britain - five times the European average and more than one for each British resident – man, woman and child.

Consumer debt was fuelled by low interest rates and easy access to credit and loans. Gross mortgage lending by UK banks added up to £17.8bn in September, the highest monthly total since July 2004, and almost 6% more than in August and 9.3% up on September last year. The average loan taken out for a house purchase remained unchanged over the month, at £130,500. This compares with an average of £111,300 recorded 12 months earlier. Net lending - the total advanced minus repayments and redemptions - rose by £4.9bn, compared with £4.4bn in August 2005 and September 2004. This is the biggest monthly increase so far this year and above the £4.4bn average of the previous six months.

Turning to credit cards, New borrowing on credit cards totaled £7.4bn, some 8% less than in August. However, repayments were also lower, and when seasonally adjusted the increase in net lending over the month, a figure of £108m, was above the recent average of £75m. Net lending on personal loans and overdrafts increased by £0.4bn over the month, after rising by £0.7bn in August. While credit card companies see this as a slowing down of consumer credit, any objective observer has to see this as continuing to be high rate of credit card use.

The chickens are coming home to roost. Personal bankruptcy is also on the rise in the UK is also rising – in the first quarter of 2005 it was 28% higher than in 2004 with 13,229 individuals declaring bankruptcy. For the year, it is anticipated that there will be some 75,000 individuals using this means to “sort out” their finances.

It gets worse. British firms are £130bn short of the figure they need to finance their workers' pensions, according to a new report. A study by the Association of Consulting Actuaries (ACA) published earlier this month showed that 88% of defined benefit schemes - those which offer a guaranteed payout to employees - do not have enough money to cover their liabilities. The average funding gap was 15%, suggesting that across the UK businesses need an extra £130bn to pay the pensions they have promised their workers.

The key rates = personal bankruptcy and repossession – are clear indicators of an economy in trouble. When we add growing signs of stagflation (a slowing and stagnant economy, low levels of R&D investment and growing Government debt coupled with inflation) and the pension scandal, then the British Government is in trouble.

There are other signs that Gordon Brown, Britain’s finance minister, will have to do something. The OECD reports that UK Government revenues are £10b lower than anticipated – the equivalent of $0.03p in new income taxes. Worse, Brown had estimated that GDP growth in the UK would be around 3% when it will be nearer 1.7%.

Other signs are there too. The quarterly industrial trends survey by the CBI found that factory orders for domestic and export markets fell faster than expected in the last three months. A third of the 700 firms surveyed said the volume of new orders fell in the third quarter – suggesting job losses in manufacturing alone of 25,000 or more before Xmas – 21,000 have already gone in the last three months.

So, if you are an investor who takes a long view, look at the UK right now and watch for “pickings”. If you live in the UK, get your own money arrangements in order and get out of any debt you can as fast as you can, since interest rates will continue to rise. If you are a British government Minister, worry like hell. Once the economy slips, so does power.

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