Lehman's Plus Five - Part 6

In 2008, there was a huge amount of debt that was the counterpart of the credit that had been issued. But, its wrong to say that 2008 liquidated a large part of that debt. Some of it was liquidated as people walked away from their homes, and defaulted on mortgages etc. But, much of it simply changed form. The debt built up by private banks, for example, was taken over by the state via bank bail-outs. In fact, even in those countries like Britain that have imposed policies of austerity, the actual amount of Public Debt has increased, not just because the state bailed out the banks, but because the policies of austerity undermined economic growth, so that the state had less revenue to pay down the debt.

Corporate debt for non-financial corporations alone in the US is 72% of GDP.

Michael Roberts writes,

"According the Bank for International Settlements (BIS), in its latest annual report of June 2013, the level of debt in the world economy has not fallen much despite the Great Recession. Indeed, the average non-financial debt to GDP ratio for the major developed markets is currently 312% (June 2013) compared to 280% in March 2007. While the household debt ratio has declined from 97% of GDP to 88% now, non-financial corporate debt has risen from 101% to 105% now and government debt has rocketed from 83% to 120%.

The BIS also found that of 33 advanced and emerging economies, 27 have non-financial debt to GDP levels above 130%. Two of those have ratios above 400%, four between 300-400%. Only six have ratios below 130% and only three below 100% of GDP – namely Turkey, Mexico and Indonesia. Of the 33 economies, 18 have rising debt ratios, 11 are flat and only four have falling debt ratios. Of those four, three are in IMF or Troika bailout programmes (Greece, Ireland and Hungary). Only Norway has reduced its overall non-financial debt ratio ‘voluntarily’. Only Mexico and Thailand have reduced their overall debt levels in the last 15 years. Household debt ratios have fallen in some developed markets, including the UK and the US, as well as some peripheral EMU countries. But 27 economies have experienced a rise in private debt-to-GDP ratios since the global financial crisis."

But, the real danger is not public debt. It is the growing amount of private debt. In the US, student debt is now more than $1 trillion. It is more than the amount of credit card debt.

The sub-prime crisis occurred when people who had no income or job were encouraged to take on mortgages to buy homes they could not afford. The sub-prime mortgages were then packaged up with other mortgages and sold as a package to other banks and financial institutions. Today, the same thing is happening in the US with student loans and with car loans. A 60% fall in US property prices, together with the continued provision of easy credit has fuelled another bubble in house prices, which have risen by double digits in the last year. But, all the evidence is that the main buyers are speculators. As a sign of what is likely to happen shortly with the UK housing market, however, this rebound in the US housing market came to a sudden stop in the last couple of months, as the sharp rise in US Bond Yields, fed through into higher mortgage rates.

In the UK, Osborne despite the rhetoric about reducing debt, and rebalancing the economy, has settled for the same low-wage/high debt model that Thatcher introduced in the 1980's. The Help To Buy scam has no possibility of resulting in more houses being built, it only acts to artificially stimulate demand. Every Ponzi scheme works by paying off the initial investors out of the money contributed by later mugs who are drawn into it. When there are no more bigger fools left to be drawn in, the whole scam collapses. In Britain, house prices long ago reached that stage. The only way the scam could be maintained, as was the case with sub-prime in the US, was to draw in further mugs by offering them mortgages at huge multiples of their incomes, and with no requirement for them to have put down even a minimal 20% deposit. Indeed, they could not put down such a deposit, for precisely the reason that prices had been inflated to such ridiculous levels.

2008 exposed that. House prices crashed 20%, exposing the nonsensical idea that this time there is something different about the property bubble, and that high prices have some justification as a result of a supposed shortage of housing. Since then, prices recovered, as interest rates fell, but the number of new mortgages issued has remained near 2008 levels. House prices in Zone 1 and 2 in London have bubbled up further, but in most of the country, prices have continued to fall despite the claims of the lenders. The house next door to me was put up for sale, eighteen months ago for £450,000. After 6 months, that had been reduced to £400,000. Six months ago, it was reduced to £375,000. This week its been reduced to £350,000, and its not alone.

As Will Hutton said last week appearing on BBC's “Daily Politics”, outside London, people still find there are no proper jobs. Lots of people are becoming “self-employed” out of desperation. Inflation continues to rise ever higher, spurred on by Bank of England money printing, whilst wages are being cut, or at best frozen. Tens of thousands of young people, who would be the natural first time buyers, needed for a healthy property market, are lumbered with £50,000 plus of student debt they are never likely to pay off during their lifetime. In fact, many can't even find jobs, and those that do are getting jobs only on the same kind of wages they could have been earning if they had left school at 16 anyway.

In London, that situation for millions of ordinary workers assumes chronic proportions, and especially as now they face cuts in Housing Benefit too. Its no wonder the fastest growing companies are the pay day loan sharks, as millions of people find they have exhausted normal means of credit, and as they can't make their income last till the end of the month. But, that is not a sustainable situation. Either wages will have to rise very substantially, which seems unlikely under current conditions, and would anyway cause profit rates to fall sharply, or else sooner or later there will be an avalanche of defaults.

Osborne's help To Buy scam can only exacerbate that situation. That's why every economist thinks its bonkers. Even Vince Cable has called for it to be scrapped. Weasels like Danny Alexander, who is more a Tory than the Tories, have defended the scheme in the most ridiculous terms. He claimed it was necessary, because people could not raise the necessary level of deposit. Besides the fact of whether such people should then be taking on a mortgage, he seems to have failed to realise that the reason they can't is largely due to the astronomically high level of prices! Juicing those prices even further will make the situation worse not better.

But, even the Royal Institute of Chartered Surveyors whose members work in the Estate Agencies have now become worried about the size of the bubble. They have asked the Bank of England to intervene to prevent any rise in price over 5%. There is not much hope. The policy is being implemented to protect the banks whose balance sheets depend on inflated house prices. Banks themselves seem to be continuing to take advantage of the situation, by restricting new lending that might go bad.

Back To Part 5