• 368 days Will The ECB Continue To Hike Rates?
  • 369 days Forbes: Aramco Remains Largest Company In The Middle East
  • 370 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 770 days Could Crypto Overtake Traditional Investment?
  • 775 days Americans Still Quitting Jobs At Record Pace
  • 777 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 780 days Is The Dollar Too Strong?
  • 780 days Big Tech Disappoints Investors on Earnings Calls
  • 781 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 783 days China Is Quietly Trying To Distance Itself From Russia
  • 783 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 787 days Crypto Investors Won Big In 2021
  • 787 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 788 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 790 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 791 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 794 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 795 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 795 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 797 days Are NFTs About To Take Over Gaming?
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Billionaires Are Pushing Art To New Limits

Billionaires Are Pushing Art To New Limits

Welcome to Art Basel: The…

  1. Home
  2. Markets
  3. Other

Economic Dark Matter

"A debt bubble, yes. But a consumption binge...?"

IT'S A COMMON-PLACE of political, investment and bar-room debate that the Anglo-Saxon economies enjoyed a debt-fuelled consumer boom over the last decade or so.

In fact, it's a given...the one sure thing any analysis builds on, whether it's begging for votes, fund-management fees or a shared cab-ride home. The US and UK piled more debt on household balance-sheets than any other nations in history, forgetting to add a balancing item beyond the apparent value of the roof over their heads.

Thing is, the data don't support it. Worse yet, they don't deny it either. Anglo-Saxony took on a record volume of household debt, simply to keep household spending growing on trend. Something ugly but hidden - economic dark matter - forced consumers deep into hock just to keep pace during the early 21st century.

The UK, for instance, added 30 pence of new private debt for every £1 of output at the very top of the bubble.

Not merely 30p for every extra pound. (New debt to growth averaged 4:1 from 2000 to mid-2008). No, private debt-growth peaked at equivalent to 30% of GDP full-stop, accelerating by more than one-sixth each year from the turn of the decade.

Yet household consumption failed to leap higher in tandem, remaining "on trend" from the previous four decades and growing in lock-step with total activity. The extra credit and debt must have gone on funding something else entirely.

Across the Atlantic, the same story, albeit with different data.

Personal consumption, as a proportion of GDP, broke sharply higher in the last years of last century. It stayed there too, equivalent to 70% of the annual economy, despite flagging in terms of year-on-year growth - and despite increasing in lock-step with GDP across the 10 years to end-2007.

Clearly something's wrong with the maths, but where it's broken the data won't say. It didn't add up five years ago either, back when then-Bank of England policy-maker Stephen Nickel spotted the puzzle...only to dismiss it. Nickel noted the huge leap in UK house prices in terms of income multiples (from the near-record four times salary then, they had another three multiples to go before peaking), but he guessed that "debt accumulation" by one family buying a home typically meant "financial asset accumulation" for the seller, using the proceeds to buy shares or bonds. Thus all was for the best in the best of all debt-driven worlds. Net-net, we were borrowing ourselves richer.

Fixing the worst slump since the Thirties thus comes down, or so everyone assumes, to either reversing a course that never took place...and forcing a reduction in consumption that enables households to reduce debt...or reviving a fresh (meaning first) surge in consumer spending with sub-zero interest rates and tax-funded cash incentives.

The likely outcome, we guess here at BullionVault, is both or neither. More urgent for investors and savers, let alone policy pooh-bahs, is identifying quite what the historic burden of debt that households now carry actually financed.

 

Back to homepage

Leave a comment

Leave a comment