Is there no way to solve the UK debt conundrum?

Feb 18 2010 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. That 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 than we face now.

Governments need not despair, however, as 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. Keynes, the arch proponent of this policy, dismissed long-term concerns about it by saying “in the long run we’ll all be dead”.

He is dead, of course, but many of us will still be around to pick up the pieces.

:: Peter Jackson is a freelance journalist and former Journal business editor p.jackson77@btinternet.com