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BankruptcyNews
Junior Member
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 Posted - 21 August 2007 : 10:05:42
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Does a trillion pounds of debt matter?
Media stories suggest the nation's debt is at worrying levels. But what's the full story, behind the statistics in the headlines?
Debt in the UK is out of control, hurtling to record levels, now well past £1 trillion.
Lenders can't chuck out cheap cash quickly or irresponsibly enough, the economy is built on shadows, bankruptcies are rising and the crunch is coming.
Debt is basically fine. In fact, we're coining it in the UK, with more wealth stretching ever further ahead of the amount we owe.
The people in trouble - who do exist - are a tiny minority accounting for a vanishingly small part of the trillion. Most debt is a sign not of penury, nor impending crash, but prodigiously increasing wealth.
Why believe one rather than another? After all, can't you prove anything with the right statistics, as the old cynicism goes?
No, you can't. What you can do, if you want to mislead (or be misled) is treat one number as if it tells the whole story. But that's not proof, nor anything like it.
So here is a quick guide to seeing a story one way, based on one number, and seeing it another, based on a richer reading of others.
The single number in the debt crisis story is the one that shows debt going up. Shouldn't that worry us?
Media neglect
Not really. The number of pounds in circulation in the British economy doubles through a combination of economic growth and inflation, every 15 years. It quadruples every 30 years. The number of pounds of almost everything multiplies madly, almost all the time. This is normal. It's what happens in the good times.
"Gone Up!" says the headline, "Hits Record!" But what, really, did we expect? Do we really think that as the number of pounds in the economy quadruples in a generation, the number of pounds of debt is going to go down? The bad, the worrying world is the one where everything starts contracting.
So the first statistical point to get out of the way is that records are all but inevitable in a growing economy. And a record amount of debt, on its own, tells us nothing, except, perhaps, that life is proceeding much as usual.
To say simply that because debts have passed £1 trillion we are at a crisis, is like concluding that since your child has grown recently she must therefore be a giant.
The next point is that debt is only one half of a calculation everybody makes all the time in working out how well off they are, but which news reporting strangely neglects. The half we're always hearing, the alarming half, is how much we owe. The other half is how much we own.
So we hear that the British owe more on their mortgages than anywhere else in Europe. But we seldom hear the obvious corollary - that the British also own more housing wealth than anywhere else in Europe.
This is straight from the Enron school of reporting. It looks at only one half of the balance sheet, and ignores the rest. Enron reported its assets and ignored its debts. Reports of debt are often the other way round. They tell us that debt is going up, shock, but don't say what is happening to wealth.
But no one would look at their own finances this way. If you did, you would compare what you owed aged 16, look at what you owe in later life, and conclude on the basis of a bigger number that you were heading for middle-aged financial calamity.
But are you really better off aged 16 than in the peak earning years of working life? The truth is almost always the opposite. Rising debts are an indication of rising ability to borrow, resulting from rising wealth.
Got-richer years
So what do we see when we take both halves of the balance sheet? Here's the picture for the UK.
This graph shows that personal wealth has been increasing over recent years steadily and substantially.
In 1987 the total personal wealth of all the households in the UK added up to about four times as much as the annual income of the whole country.
By 2005 wealth was six times as great as annual national income. Not poorer, but hugely richer, is the story of the last 20 or so years.
This wealth is held in houses, pensions, shares, bank and building society accounts, and it is held very unequally, with the rich holding most of the wealth, as well as most of the debt.
Some of the increase reflects house-price growth, some increases in share prices, but there is no denying that as the economy has grown, and incomes with it, so have savings and wealth. Debt has been rising, but wealth has been rising much more quickly, as we see from the line showing wealth minus debt.
And what of those debtors in real trouble? Their plight is genuine and miserable. We don't mean to belittle it.
And it's quite plausible that there are more of them, though it's not clear that the bankruptcy numbers are a sure guide to this, since the bankruptcy option may simply be more readily taken, given how widely advertised it now is.
But they have precious little to do with the big numbers, they do not indicate a national crisis, and they do not show that debt is bad.
Because guess who owes most? The richest - by far. Are they, or the nation, in crisis? Let's put it this way: they're not exactly weeping over their platinum credit cards.
Source: bbc.co.uk
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Does a trillion pounds of debt matter
