The real UK debt problem is personal
debt and is being actively promoted by the Chancellor through austerity
and quantitative easing for the "parasite banks". Many people in
Scotland are on the brink financially, but one group in society benefits
- Britain's banking sector
COMMON WEAL Policy’s analysis piece on the UK economy
last Thursday [25 February] argued that George Osborne’s commitment to
austerity flied in the face of the fiscal policy prescriptions of just
about every economist on the planet. Nonetheless, we argued, he was
likely to ramp up the madness as the weakening of the global economy
meant he was going to miss his arbitrary target for a budget surplus by
2020 unless he made yet more cuts.
Low and behold, the next day, our Chancellor
announced that “we may need to undertake further reductions” as the global picture now looked “markedly worse”.
Channel 4 Economic correspondent Paul Mason
pointed out
the obvious contradiction of on the one hand stating “the economy is
smaller than we thought” and on the other cutting people’s wages and
jobs – deliberately sucking demand out of the economy when economic
activity is grinding to a halt is the medical equivalent of taking a saw
to a gaping wound.
"Far from austerity being a policy of
reducing debt, it is simply a mechanism for transferring the debt burden
(that governments incurred from bailing out the banks) to individuals."
In this piece we aim to delve deeper into
this economics of the madhouse by looking at the consequences of
austerity economics on personal debt. Far from austerity being a policy
of reducing debt, it is simply a mechanism for transferring the debt
burden (that governments incurred from bailing out the banks) to
individuals. That personal debt trap damages the economy as a whole and
makes people extremely vulnerable to a financial shock, but it does help
one group in society – the bailed out banks, which suck up money in the
interest paid on debt repayments in a great transfer of wealth from the
poor to the rich.
Two reports published over the past week should make the scale of the problem absolutely clear. The Bank of England’s
'statistical release' for January shows the extent to which personal debt has risen over the past year (and especially the past few months).
Chart 9 clearly shows how personal debt
has risen considerably since 2013, with a sharp increase over the past 3
months as the global economy has stuttered. The rise in consumer credit
in January was
the fastest in over a decade.
This explains how, for example, retail sales have continued to rise
while wages stagnate – unsustainable use of credit cards and loans.
Chart 7 shows how over the same period
debt on house buying and re-mortgaging of existing properties has
increased – rising house prices combined with flat lining wages
inevitably drives increased personal debt. The fact that mortgage
approvals are
also at a two-year high at a time of stagnant wages suggests a bubble in the housing market.
Looking at bank credit from a more
long-term view, the FT graph is revealing of the trend in increased
credit since the crash as banks have returned to the same behaviour that
had created the massive credit boom in the 2000's prior to financial
meltdown.
The picture in Scotland is no less ugly. A report by
the Scotland Institute last week found that median household debt had increased by a whopping 65 per cent since 2008. While personal debt in Scotland
is still one of the lowest in the UK, lower house prices means it is more likely increasing debt is being spent to cover everyday living costs.
The Scotland Institute’s table 3 is
revealing of how nearly a decade of wage repression is making those near
the bottom of the income bracket look elsewhere to maintain their
income.
Look at the third lowest income decile in
particular: the percentage of their income that comes from wages has
more than halved from over 50% to just over 20%. At the same time, their
reliance on social security has nearly doubled, rising from 36% to 66%.
Far from the Tories claims to have introduced policies that reduce
people’s need for welfare support, their wage squeeze has actually
increased the working poor’s need for financial support from the state
to keep their head above water.
Of course the social security support does
not make up entirely for the wage drop, and as table 4 shows basic
living costs have risen over the same period.
While food costs have generally risen by
about a quarter, look at fuel costs: for the poorest half of Scots it
has approximately doubled in the space of five years. The past few years
of exceptionally low oil prices has only brought very slight respite.
The table mixes up rents and mortgages with other living costs but we
know that rent prices in the private sector have
continued to surge after the recession to all-time highs in Scotland.
There is, therefore, a mismatch – falling
incomes and growing living costs means something has to give, and so far
that something is unsustainable levels of personal borrowing.
Banks know that with wages in historic
decline, the ability for people to pay back these debts is reducing not
increasing, but in many ways that is how they like it – if wages grew
and inflation grew it would eat into how much interest banks would get
on debt repayments, which is one of their most important sources of
profit.
American economist Michael Hudson
calls this process
“debt deflation”, and says it has been the specific strategy of the
American and US Governments post-crash to hold down wages while boosting
asset prices through quantitative easing in order to improve the
balance sheets of the banks at the expense of the majority.
"Banks gain by making labour pay more
interest, fees and penalties on mortgages, and for student loans, credit
cards and auto loans. That’s the postindustrial financial mode of
exploiting labour and the overall economy." Michael Hudson
Referring to the US Federal Reserve, he
states: “There are two sets of prices: asset prices and commodity prices
and wages. By “price stability” the Fed means keeping wages and
commodity prices down. Calling depressed wage levels “price stability”
diverts attention from the phenomenon of debt deflation – and also from
the asset-price inflation that has increased the advantages of the One
Percent over the 99 Percent.”
He continues: “Wall Street isn’t so
interested in exploiting wage labour by hiring it to produce goods for
sale, as was the case under industrial capitalism in its heyday. It
makes its gains by riding the wave of asset inflation. Banks also gain
by making labour pay more interest, fees and penalties on mortgages, and
for student loans, credit cards and auto loans. That’s the
postindustrial financial mode of exploiting labour and the overall
economy. The Fed’s QE program increases the price at which stocks, bonds
and real estate exchange for labour, and also promotes debt leverage
throughout the economy.”
The exact same can be said for the City of
London – the percentage of their loans that go to productive economic
development is tiny (as the New Economics Foundation's graph below
shows); they extract wealth from the productive parts of the economy
through indebtedness. The Bank of England’s quantitative easing
programme simply boosted banks stock market value and re-inflated asset
prices, which has been why the post-crash era has seen one of the
greatest transfers of wealth in human history from poor to rich. Osborne
and BoE chief Mark Carney preach 'getting the debt down', but they are
actively promoting the increase of household indebtedness to boost bank
profits.
If you don’t believe me that banks are
parasites on the productive economy, how about reading the Bank for
International Settlements, an international company owned by Central
Banks and known in financial circles as ‘the bank for Central Banks’.
In a recent paper
on the relationship between the financial sector and real economic
growth, they found that “manufacturing sectors that are either
R&D-intensive or dependent on external finance suffer
disproportionate reductions in productivity growth when finance booms.”
They continue: “…By draining resources from the real economy, financial sector growth becomes a drag on real growth.”
The paper concludes with this statistic
that should shock us all: “…a highly R&D-intensive industry located
in a country with a rapidly growing financial system will experience
productivity growth of something like 2 percentage points per year less
than an industry that is not very R&D-intensive located in a country
with a slow-growing financial system.”
"By draining resources from the real
economy, financial sector growth becomes a drag on real growth." Bank
for International Settlements
In essence, the Bank for International
Settlements is saying that banks are a parasite sucking the blood out of
the real economy.
To add insult to injury, the lifelines that many of us have in social security are about to be torn from under: the IFS stated
earlier today
[2 March] that the move to Universal Credit will see living standards
fall for most of the working poor over the next five years. Add to that
more Osborne austerity, and personal indebtedness is only set to
continue rising.
"Next time someone says to you ‘we need to
get the debt down’ ask them: whose debt? Government debt is perfectly
manageable with almost zero interest currently being paid on it; whereas
personal debt is a ticking-time bomb."
Next time someone says to you ‘we need to
get the debt down’ ask them: whose debt? Government debt is perfectly
manageable with almost zero interest currently being paid on it; whereas
personal debt is a ticking-time bomb that the forces of austerity, QE
and the parasite banks are driving us into penury with.
In Scotland, we need to do what we can to
tackle the dominance of the parasite banks over our economy, and Common
Weal will be publishing a paper next week alongside the New Economics
Foundation, Move Your Money and Friends of the Earth Scotland about how
to do this. Stay tuned.
