Downside of paying off your debts

Sep 24 2009 by Peter Jackson, The Journal

IF you are an average household and save £1 out of every £10, you’ll spend nine years bringing your wealth back up to the average of the past 20 years.

That’s such a sobering thought it makes you want to go out and get drunk on the remaining £9.

But that’s what a Bank of England report suggests – not that the Bank is the most prudent handler of money at the moment.

This is the sad but inevitable consequence of the credit fuelled spending splurge and cheap money policies of the past 20 years, as a result of which total UK personal debt at the end of July stood at £1.457 trillion. Average household debt, excluding mortgages, is £9,226, which increases to £21,457 if you base the average on households with some form of unsecured loan. Average household debt including mortgages is £58,280.

Little wonder that people are starting to pay off debt – £600m in July, the first net repayment since records began in 1993. On the face of it, this seems like a good thing, but it is creating a headache for the Bank of England and the Government.

This is because of the so-called paradox of thrift, which says that increasing saving and paying off debt means a decrease in consumer demand and therefore of output, meaning more job losses, short-time working and lower household incomes. The alternative, however, is to go back to the drug we were on: another consumer credit spree and even higher levels of ultimately unsustainable debt which will, sooner or later, have to be repaid and with probably even greater pain .

Governments need not despair however, there is a time-honoured way of squaring this particular circle and it is one they show every sign of adopting. That solution is quantitative easing, or printing money, as it used to be called.

This creates inflation, which lowers the real value of everybody’s debt, including that of government.

Sadly, it also ultimately lands us in Queer Street.

Peter Jackson is a writer and former business editor of The Journal – p.jackson77@btinternet.com