George Osborne Is The Debtonator!

The Liberal-Tories came to power with just one message - “Debt is bad, we have to get rid of the debt!” Now it seems, they have decided that debt is good after all! Although they claim that they have reduced the deficit by 30%, the basis of that claim is shaky, but even according to their own poodle – the Office for Budget Responsibility – they are no longer reducing the deficit. Their crazy policy of austerity has meant that the economy has slumped, tax receipts have fallen, whilst expenditure on benefits etc. has risen. Government debt continues to rise sharply. But, it is in relation to private debt that the Liberal-Tories seem to have shown their greatest addiction.

Private debt has always been the real problem. Government's can always deal with Public Debt by printing money to pay for it. That is something, of course, the Liberal-Tories have been doing in spades. The Bank of England owns about a third of all UK Government debt, and more recently has been buying about half of all new debt issued. But, individuals, unless they want to risk being locked up, cannot simply print money to cover their debts. Either they become debt slaves; their future for years to come sold into servitude to their creditors, their incomes going to pay back the debts rather than buy the consumer goods they need, or else they go bankrupt, and default on those debts.

Private Debt has been the real problem for another reason. Government Debt amounts to around 70% of GDP, but Private Debt is double that figure. A considerable amount of it is made up of mortgage debt, built up over recent years to pay for grossly over priced houses, but an increasing amount is also accounted for by credit card debt, as people struggle to make ends meet to pay their mortgages, or even their monthly food, energy and other bills. For some, who are really struggling, debts to pay day loan usurers represent an increasing amount, and for thousands of young people, they have an incredible amount of student debt even before they even begin to think about taking on further debt to cover mortgages etc.

For a government that was so concerned about the dreadful consequences of debt, you would have thought then that the Liberal-Tories first priority would have been to deal with this growing mountain of private debt. Far from it, they have instead encouraged it to grow even more.

They trebled the level of Tuition Fees, driving students into even higher levels of unsustainable debt, that with current levels of graduate unemployment, and stagnant wages, mean those going to University will likely never recover the cost, and lost wages, compared to if they had started work at 18. But, the Liberal-Tories are also actively encouraging people to take on even more unsustainable debt to buy property that is already at unsustainably high levels. What is worse, is that not only are they encouraging a growth of private debt in that way, but they are also encouraging an increase in public debt to go with it, because in order to encourage individuals to take on this additional debt, the Government is offering to underwrite it, with taxpayers money!

This can only end badly. George Osborne is the Debtonator, not because he is dealing with the debt, but because his promotion of it, is going to detonate a massive financial crisis. Far more than in the US, where, in contrast to the UK, the Government has also followed a fiscally stimulative programme, the money printing in the UK has been used, not to encourage real economic activity in the form of investment in productive capital, but has been used to simply continue to finance unproductive consumption, and speculation in stock, bond and property markets, blowing up huge bubbles in all of them.

The Liberal-Tory proposal to provide Government guarantees and backing for people to borrow money to buy property is the latest most stupid example of that. Even spokesmen in some of the banks believe that. Albert Edwards of Societe Generale has been one of the more outspoken recently. Moneyweek quotes him saying,

“What makes him most angry, he says, is that 'burdening our children with more debt (on top of their student loans) to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing' when 'lack of purchasing power should contribute to house prices declining or stagnating (relative to incomes), hence becoming affordable once again.'

Think, he says, about why houses are too expensive in the UK. The answer is 'too much debt. So what is George Osborne’s solution for first time buyers unable to afford housing? Why, arrange for a government guaranteed scheme to burden our young people with even more debt!

Why, asks Edwards, don’t we call this policy what it really is, 'namely the indentured servitude of our young people?'"

They also quote Andrew Bridgen of Fathom Consulting,

“Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who should not be offered credit. Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.”

But, the Liberal-Tories have run out of ideas and options. They have lashed themselves to the mast of austerity, and thereby removed the only sensible policy option. That is to follow the example in the US, and undertake a policy of fiscal expansion to promote growth and productive investment. That is the programme that is being also recommended to them by the IMF, OECD etc. Osborne cannot take that route, because it would mean that the whole basis upon which they were elected, the whole basis of the coalition is demonstrated to have been a sham! The public debt in 2010 never was such as to threaten the UK with becoming Greece. On the contrary, it is the policies adopted since 2010 that have made that more likely. Its not even that there has been 3 wasted years, but that those three years have actually been destructive of potential wealth!

But, perhaps the fortunate thing is that Osborne's policy of encouraging more people into property debt seems not to be getting too many takers. In its first year, it was supposed to provide “Help To Buy” to 150,000 people, but only managed 1,500 or 1% of the target. According to the Housebuilders Federation, currently 500 people a week are taking advantage, but that is still only 25,000 a year, or about 16% of the target. Given that the biggest bribes are reserved for next January, it would not be surprising for banks to wait until then before lending money, and certainly for potential buyers to wait until then for the Government to underwrite their debts, particularly as those who need it are likely to be by definition the ones who are least creditworthy.

By then the game may already be up. In the last week, not only have Japanese Bond yields risen sharply, despite massive money printing, but yields in the US, UK and Europe have started to rise sharply too. The yield on the US 10 Year has gone from around 1.6% to over 2.3%, a rise of nearly 50%. The UK 10 year gilt, has moved by a similar amount. Even the yield on the German 10 year Bund has started to rise, and peripheral Europe yields are on the rise again too.

Whatever “official” interest rates central banks fix, it is these market rates for bonds that are important, because they determine the rate at which banks, and other financial institutions have to borrow in the money markets. It is these rates that determine mortgage and other rates. The 30 year bull market for bonds is over, and interest rates are going to rise in the period ahead. That means that all those people hardly able to pay their mortgages now, will find that impossible in the weeks and months ahead.

The Government has encouraged people to bankrupt themselves by buying hugely inflated property, and has continued that policy in order to protect the banks that will go bankrupt, when the property market inevitably busts. Its not surprising then that having already extorted money out of people once to bail-out the bankrupt banks, the Government now wants to sell us the same banks we already own! When the property market explodes, as interest rates rise, the banks sitting on huge mountains of bad property debt will go bust in a massive way. The Liberal-Tories would far rather Joe Public has spent good money buying shares in those banks, than that the debt is held by rich capitalists, when those banks go bust.

Its rather like the 1980's when Thatcher encouraged people to buy their council houses. Thirty years on, all that is mentioned is how good it was that tens of thousands were enabled to own their home. Forgotten is the fact that tens of thousands of those former council tenants lost their homes altogether, when mortgage rates shot up to 15%, and they couldn't pay the mortgage, or sell their house, because it had fallen 40% in value.

History is repeating itself as farce. We can only hope that this time, when The Debtonator and his like are kicked out they won't be back!