UK Household Debt has Reached Unsustainable Levels


G. Wilpert: Welcome to the Real News Network. I’m Gregory Wilpert joining you from Quito,
Ecuador. UK households are spending more than their
income at an unprecedented rate. Record-busting levels of privately held debt
are also accompanied with stagnant or even falling real wages in the UK. The situation is so bad that members of Parliament
have started calling for a public inquiry into 200 billion pounds worth of privately
held debt in the UK. Perhaps even more disturbing is the argument
of our next guest who says that the only thing keeping the UK out of recession is the growing
and unsustainable levels of privately held debt. Joining us today to discuss the growing private
debt crisis in the UK is Ed Smythe. Ed is economist and researcher at the financial
research organization Positive Money. He worked for nine years in asset management
and as an equity analysts and macro economist. He recently wrote an article for Open Democracy
called “The UK is Hooked on Rising Asset Prices: What Happens When the Bubble Bursts.” Thank you for joining us at the Real News,
Ed. E. Smythe: Thank you for having me. G. Wilpert: So in your article you say that
the British economy is being kept afloat by unsustainable levels of privately held debt. What is the basis of this observation of yours? E. Smythe: So essentially and in fairness
it’s not just debt, it’s also capital gains. So the way to think about this is we can look
at the sectoral flow of funds in terms of how the UK economy is growing. At the moment we can see that the UK household
sector is running an unprecedented deficit, more than it was before the last financial
crisis. And in fact, more than it’s ever done in the
100 years of records that we have. Now the question is, how are they funding
that? And in part, that’s coming through debt, but
we argue that it’s also coming through massive capital gains over the last three decades
or so as interest rates have come down. So it’s the combination of both the debt and
capital gains that are funneling and funding that deficit. G. Wilpert: Some such as David Graber recently
also argued, and I think I mentioned in your article, compare the current private debt
level to the private debt levels that led to the 2008 global financial crash. So are we in this territory now, and is it
likely that the current private debt levels will repeat what happened back in 2008? E. Smythe: Yes, so I think it’s interesting. We had Mark Carney on record recently in a
speech that he made last week talking about the fact that household debt levels are actually
down relative to where they were, relative to incomes, before the last crisis. But actually that’s focusing on a bigger metric
which includes mortgages. If you just look at consumer and student loan
debt, that’s actually rising at the fastest rate ever. So it’s rising at about 31 billion pounds
per annum whereas before the crisis it was rising at about 25 billion. It’s also risen to the highest ever level
at about 315 billion. So there’s a clear red flag that to the extent
that private debt was the cause of the last crisis, it’s absolutely waving it today to
suggest that this could be a factor in causing the next financial crisis. G. Wilpert: I mean, back in 2008, one of the
detonating factors was that investors were partly misled about the nature of the debt
that they were taking on when they were buying the mortgages and so on. In other words, they were given AAA ratings
in the United States when actually they were very questionable loans that had been given
out. And when people couldn’t pay them off, then
the investors were caught unawares of the type of loans that they had. Is there any chance that something like that
would happen? Is there any misleading going on … Or what
would trigger, in other words, a possible crisis this time around? Raising of interest rates, what would be so
to speak the detonating factor if something were to happen? E. Smythe: Yeah, so strictly speaking, when
we talk about consumer and student loan debt, that doesn’t include mortgages. So it doesn’t necessarily relate to what you
talked about in terms of the mortgage coverage and that that occurred prior to the last crisis. But in answer to the question is there a risk
that many of these consumer and student loan debts have created on the backs of people
who might simply not have the ability to repay? Absolutely. We are seeing signs. Particularly in the PCP pending market for
autos that the availability of credit is at an alarmingly high level. There’s essentially a complacency in the market
which typically happens after many years of recovery where lenders reduce those checks
that should be in place. And therefore, once you’ve done that, you
create the condition by which even a small trigger might start to bring down the whole
sort of cascade, if you see what I mean. G. Wilpert: Uh-huh. And so what kind of proposals have you been
suggesting to push the UK away from debt-based, consumer-driven economy? E. Smythe: Well, in reference to the first
argument that I made, it’s not just consumer and student loan debt, and also the mortgage
debt market. It’s the fact that actually we’ve also been
reliant on a massive, massive expansion of net wealth. And in fact, the UK’s net wealth disposable
income ratio is now the highest for any developed economy ever, worse than Japan in 1989. So what we’re saying and what Positive Money
is advocating is a fundamental shift in monetary policy and the mechanism by which money is
being used to sustain economic growth. We want to shift from the policy whereby at
the moment we need very low interest rates to boost the price of assets or to enable
increased amounts of debt to generate a certain amount of household spending, the deficit
which is currently driving the economy, and instead shift to much more sustainable mechanism
whereby money is created by the central bank using zero interest perpetual bonds, an incredibly
constrained amount, which allows governments to then spend that directly into the economy
to get the sustainable increase in demand that we need. And in doing so, you could actually turn down
some of these other dials of ultra-low interest rates in QE. You could have a reduction for example in
asset prices, a reduction in the expansion of ever greater demand of credit. And instead, you’ve got a sustainable demand
function. So it’s the policy of overt monetary financing,
or QE for people is what we’d call it. And it seems to be the only mechanism by which
we can move from the current status quo to something much better. G. Wilpert: You recently spoke also at the
conservative party conference. What was the gist of your presentation and
how was it received there? E. Smythe: The presentation was cool after
the crash, and I suppose our argument was actually when we look at many sort of metrics,
it’s very difficult to suggest that the crash ever ended. So we’ve just experienced the worst decade
of real wages since the 1860s and perhaps a long time more. We’ve got record low productivity levels,
record low investments, record low interest rates, record high asset prices. So what we’re saying is, look, the situation
as it stands is simply not a normalized scenario. Therefore we have to be thinking about slightly
more radical options, both in terms of the way we hold the central bank accountable,
but also think about these other tools of overt monetary financing because it’s the
only mechanism this government can achieve its policy objective of achieving an economy
that works for everyone, and particularly for the younger generation. G. Wilpert: The proposal to me sounds a bit
like you’re suggesting the government should essentially spend more and essentially steer
away from the austerity policies of the past ten years or so. Is that correct? Is that a fair summary? E. Smythe: It absolutely is, but it’s with
a sort of modified agenda behind it as well because I suppose we are currently working
within a paradigm whereby governments, when they spend, are necessarily imposing a sort
of intergenerational tax on the next generation to pay that debt back off with interest. What we need, particularly given the intergenerational
transfers that we’ve seen to date, we need a system whereby we can fundamentally deliver
demand into the economy on the things we need, like infrastructure, education, and healthcare,
but without saddling the next generation with huge interest costs on this debt. What we need is a policy whereby governments
feel that they can spend a little bit more on those things without increasing the potential
for interest costs down the line. And that’s why overt monetary financing is
the only solution to deliver that step changing government spending and shift us back onto
a sound fiscal footing. G. Wilpert: And how do you think that the
Labor Party is on this issue which also just recently wrapped up their party conference? E. Smythe: Yeah, so we are having interesting
conversations with members of both parties. We think, you would imagine, that the Labor
Party should be more receptive to these arguments. At the moment they are focused to a large
extent on a national investment bank which delivers some small benefits. But we would argue it’s not big enough thinking. If you think about for example the problem
on the next 50 years, and I think it’s important that people do, the OBR predicts that the
government deficit will increase to a primary deficit of 9% in 2065 just as dependency ratios,
etc., really kick in. And so what we’re saying is we need a fundamental
solution that will stand the test of time. It can’t be gimmicks. It can’t be small tweaks around the edges. We need to be reframing the whole debate about
monetary policy and how much governments can spend. And sort of confronting directly some of the
misplaced arguments that have often been used to counter this type of proposal. G. Wilpert: Okay well we’ll probably come
back to you again once we see a little bit clearer as to which way the UK is heading
in this issue. But thanks so much Ed for having joined us
for today. E. Smythe: Thank you very much for having
me. I enjoyed it. G. Wilpert: I was speaking to Ed Smythe, economist
and researcher at the financial research organization Positive Money. Thank you for watching the Real News Network.

41 comments on “UK Household Debt has Reached Unsustainable Levels”

  1. Originalman 89 says:

    Same thing here in the us. Oh and let's just wait and see if this failure in chief gets these tax cuts passed, its going to go from bad to worse fast in america.

  2. Devendra Sharma says:

    Wow really private debt is the cause so in a way you are saying yes the wealthy caused this you can't say this is because of your average joe.

  3. Matthew Malpeli says:

    We need a debt jubilee.

  4. Geordi La Forge says:

    Great interview, thanks.

  5. magiteker says:

    Sounds like it's time for UBI

  6. Thimble says:

    When people go and buy things they only seem to care about how much something costs per month.People don’t seem to care about how much interest they pay, or how long the loan is for. I experienced this the other day when I went with a friend who bought a car.i was astonished when I asked the salesperson she didn’t want to give me the information either.

    Things are coming to a head here. Maybe a massive correction is what we need. People want things they can not really afford. They need to be taught a lesson.

  7. AMANDA BARNES says:

    Stop printing money cut taxis and get rid of the too big to fail banks we will never sort this problem out until usury is abolished.

  8. Klub Svetnikov says:

    Yes, it is a lot of sense there. But – the main economy and society problems will not be solved by sounder monetary policy alone. There is a paradigm flaw in the value distribution algorhitms within a neoliberal order, and there is a class conflict – 1% v.s. 99%. This questions are addressed in a much more comprehensive way by Michael Hudson, for instance.

  9. bigdaz7272 says:

    Nationalise The Bank of England and make it auditable and accountable to the people, give it the sole power in the UK to create money or issue credit and take away this privelage from all the private Banks operating within the UK.
    Now the government can borrow money all the money it needs from the Bank of England interest free and the ledger is open and accountable to the people who lend the government their power while they serve their term in public office.
    All the debt owed to the private Banks or lenders could either be written off if the people vote it or it could be restructured to be paid off on our own terms in small manageable payments over the next 200 years.

  10. G Stew says:

    Thanks "real news" for finally reporting on real news! <golf clap> This is a major problem in the states where…well let's see…? WE HAVE ENTIRE STATES FILING FOR BANKRUPTCY! (They will say that states can't declare for bankruptcy but just look at Illinois and try and describe it) peoples pensions they've worked their entire lives for are Going, going… GONE! HOUSEHOLD DEBT IS AT ALL TIME HIGHS AND JUST RECENTLY, SO IS PROPERTY VALUE.

    Please do the people a favor and cover this issue with more appropriate resources. The economic reports like job reports full employment, inflation, and a handful of other metrics are cooked to look like things are healthy while the middle class has been eviscerated.

    Oh and they aren't attending NFL games because they are offended about a couple players taking a knee during the anthem, has nothing to do w the fact that they have no expendable income. I'd wager the farm that if the income inequality gap wasn't so historically skewed that they wouldn't be taking a knee in the first place.

    Please try and wake people up! Stop chasing the shiny object and do the math. If anything is REAL NEWS, the failing economy that most of the population inaccurately equate to stock market valuations has the potential to completely destroy people.

    I mean seriously? Can we pretend that continually printing more money to throw at the problem worked? Because I can assure you just like every other thousand or so times in history that they tried that method it will end in the same result. I could go on but I'll leave it at that. Thank you for the reporting worth listening to. After all, if we had such a healthy economy why can't they raise interest rates?

    I truly believe that all of the other issues you typically cover are peripheral issues tied to this dying economy that is being falsely represented in the MSM and will never get solved in an economy built for the .1% and run by the .1% of the population. And we need to put Criminal bankers and the politicians they are in bed with where they belong. Prison! Not just paying a "fine" which works out more like a premium for there personal enrichment, but more importantly their crimes against humanity.

  11. The General STRIKE says:

    Cannot get blood from a stone. Fiat currency has no real value.

  12. The General STRIKE says:

    I don't believe that switching to cooperatives in decentralizing hierarchies drain on society with it's corrupt oligarchy controlled puppets is an outside Fringe idea at all and it should have been done a long time ago and frankly this economist and every other Economist total ignorance to the real issue is just disgusting no the government should control everything so that we could remain in a state of well if you know interest rates are low and the general population is in debt then what the government makes money hierarchy makes money and if if the government's in debt then we make money while the government's in debt and so are we and nobody's making any money except for everything is going to the top so f*** off Economist boy you're full of s***

  13. Atypical Texan says:

    Oh the contradictions of capitalism

  14. TheRealNoodles says:

    If we don't wake up, the next war isn't about the americans vs north koreans. It will be about the rich and the poor.

  15. tapolna says:

    Is there a connection between increasing "consumer and student debt in the UK" and "British democracy in terminal decline"?
    https://www.theguardian.com/uk/2012/jul/06/british-democracy-decline-report
    I think so.

  16. Tom Usher says:

    Government revenue doesn't come from collecting taxes. That's the first thing to understand in this. The second thing to understand is that governments with their own currencies do not need to borrow even a dime in order to create and spend money directly into the economy. In the US, the Federal Reserve is simply an middleman (or middle person if you'd rather). The US Congress can create money without the Fed and spend it directly. That's without borrowing and without any attendant interest. The third thing is that the whole thing should be directly democratically controlled by the grassroots rather than by elected "representatives" who are bought and paid for by huge corporate interests to delegate the whole thing to the public-private Federal Reserve, which is really of, by, and for the elite banksters (who caused the Great Recession). Lastly, inflation is the boogeyman trotted out by the neoliberal and libertarian types, who deliberately avoid the fact that we can match the increase in money supply to bring more resources on line at the same time (even via the increase in money). There would not be too much money chasing too few goods and services that way: no inflation problems.

    I've been pushing all of this for years and years, long before Positive Money started. I only say that to state how hard it has been to get this a fair hearing. It's very gratifying that it's finally starting to catch on!

    Make Bernie Sanders admit it all. He's avoiding saying that he knows how "Medicare for All" can be funded without increasing the deficit.

    Get Dennis Kucinich on. He was way out in front on this monetary-and-banking reform issue but never got a fair hearing on it either. Also, Ellen Brown of the Public Banking Institute has a pretty solid grasp of the multiple issues.

  17. Michelle Tulumello says:

    I didn't understand a word of what he said about that QE for people. I have a master's degree too. Granted it's in art, but is there any way that could be broken down so that normal people could understand it? Because people can't advocate for a policy if it's not laid out in a language that they can wrap their heads around.

  18. RMZ 450 says:

    Listening to pukes like this is what got humanity into this mess. Central banks and governments need to be out of the equation. It's a 5000 year old game of 3 card monty.

  19. DS YAMO says:

    The reason lending is out of control is because banks are allowed to pay each other in promissory notes created during any loan, they dont use their actual reserves. So the more a bank lends, the more promissory notes it can create. It is this promisory system and the low percentage required in reserves to create them that caused the past banking collapse. For a stable system the banks require a limit of at least 50% of its reserves, that way they can be absorbed by others and not make the whole banking system collapse.
    I predict credit will become such a necessity in the economy that the credit score wont even matter because as promissory notes "come out", real currency goes in (+ interest), further draining the global monetary supply. The world banking system has been design as a parasitical engine, money that goes in doesnt come out because the promissory note limit is always higher than the currency it holds, which is limited by its own real amount. I heard that in some models banks only need a 10% reserve which means for every 1$, they can create 9$ in promissory notes, this means that when a bank collapses it becomes a massive drag on any bank that hold their notes.
    Banking is the only business that is not required to spend money to make money, it only needs the power(legal power) to make a promissory note to give to another bank. The whole currency system has devolved into a massive delusion of fair commerce where the more banks a nation has, the more money that nation has. A political/legal system completely incoherent to the production measuring purpose it was meant to have.

  20. Nate L says:

    The price of anything never goes up,the value of our currency is just going down. With the invisible tax on the people called inflation. They have the nerve to tell us it is economic stimulation.

  21. Uatu says:

    There is no such thing as capital gain, that's another example of the economics profession failure to understand their own subject. Capital depreciates to scrap. And land is not capital.

  22. Accelerationist says:

    The collapse can't come soon enough. Capitalism must lose all of its remaining legitimacy.

  23. Hogman Go says:

    This is what happens when you leave the EU. Brits voted for this clusterfuck. 😂

  24. Multikalwin says:

    So basically, cut out the private central banks? That's not going to happen without a violent revolution.

    Advocates with the ability to make that happen mysteriously commit suicide.

  25. Mhi kl says:

    So what happens when the majority of indebted people cannot make their minimum payments, needing their incomes (if they have any) to make basic ends meet?
    That would be wake up time.
    Wages too small to sustain basic needs cannot be argued. I'm just saying, 'When the time comes.'

  26. Chemeleman says:

    The Queen of England is a spoiled BRAT

  27. Chad Sweeney says:

    Debtors are held in economic slavery, whether they realise it or not

  28. Swash Bucklin says:

    So just kick out the private Federal Bank we'll print our own money at our treasury give our government what we tell it to.

  29. Kathleen Sisco says:

    Thanks FamilyofMan. I have been wondering what exactly it is they want? War? To return the Middle East to the Stone Age?
    The 2008 crash appears to have been planned to spread around the world but the snafu was there was no global catastrophe to hang it on. Now that the global weather catastrophe appears to be accommodating this plan, I expect a world economic collapse. The corporates have been buying and selling each other for the last 25 years, privatizing their assets while slashing employees so that global collapse won't touch their mines, lands, and factories. Just the public and their housing will immolate. We'll emerge as indebted slaves with no future.

  30. Craig Christophel says:

    Money doesn't actually exist… it's a construct. Simply change the construct: Global Jubilee (Forgive all public and private debt and reset all economies. Then give (for a time) a Universal income en route to the totally demonetization of the world. Paradigm shift. Check out the Venus Project. Listen to Peter Joseph and Chris Hedges and Abby Martin and Lee Camp. Wake up. The system has failed… be adults and reframe/ recreate and reform the new system. NOW.

  31. Alea iacta est says:

    Very interesting interview. Would love to hear more on this and specially how this compares to the National Investment bank idea the government is currently putting forward. I think more and more people are realising that the current financial system is somehow broken. We go from booms to bust like a pendulum in an old clock, eroding the middle class in the process, leaving ever more people poor and eventually causing political instability. We must be able to do this better?

  32. Joseph McNair says:

    So, in one of the first lines of the piece, you cover the real cause of the rising debt, wages going down, then you spend ten minutes talking about how government spending works, and how central governments need to control the central banks, and finish by saying it can't be done.
    The whole time you ignore the reason it can't be done, because the same billionaires who are shrinking our economy (by hoarding so much money and not recirculating it) and lowering wages are the same billionaires who have control of our government, and governments all over the world.
    The real news my ass.
    How about reading a book that Ron Paul didn't recommend to you.
    I would recommend Thom Hartman. He is a great author who successfully started multiple million dollar companies while writing over 20 books and hosting a longtime radio show. Although he is conservative in many ways, he supports progressive taxation and a strong social safety net as part of the American way.
    I hope the UK can figure it out as well.
    One world. No for profit central banks. Imagine.

  33. Allan Smythe says:

    U.K. Debt!? What about the level of Australian debt much much more.

  34. john cale says:

    Are TRNN outsourcing jobs to Ecuador??

  35. Laura Cortez says:

    The current capitalist system is unsustainable as it is now, if we not change in a planned way and wait more decades it will be too late to avoid the eco-collapse which it is even worst than any financial collapse.

  36. I Should Know This says:

    Our family has paid off $26k in 16 months and we're not done yet! The Five Cents Matter brand is all about our own debt free journey while encouraging others. Do not give up!

  37. Bob Best says:

    it seems to me that zero rate bonds would lead to unlimited government debt for a generation and then bust. would any politician ever raise taxes when he could simply borrow the money and pass the buck?

  38. George George says:

    has it? I live alone and my debt is only £40k …and I don't own any property either…not spectacular/nothing to brag about – but it is the true

  39. Thomas Gussin says:

    My wife and I have "TWO HOUSES" rent one out in Northamptofor £700 per month, wre have ""NO DEBTS WHAT SO EVER" DEBT ? what on earth is debt ,it just dont exist in our lives ?

  40. james Thomas says:

    hey very nice article thanks for sharing with us as a financial adviser in one of the best company in UK i have seen most of the people are facing the many problems because of lack of financial debt management I think it will help a lot and the way you are explaining is good and very clear keeps going

    https://fleetquid.co.uk/debt-help.php

  41. Tony Coz says:

    In Australia household debt is running at 120% of GDP. The bubble is starting to deflate with real estate prices falling.

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