Debt (4)

"Non-productive lending by banks is beggaring the country."

It has been said that we shall never get out of the present quagmire of debt in which the Western democracies find themselves unless there is growth. And I guess that is true in a horrifyingly simple way.

If I were to borrow money to build a windmill it would be with the thought that the windmill would earn me 10% per year in flour. I could pay 5% to the capitalist and still my enterprise would be worthwhile. If I borrow money to buy a car, how on earth am I going to pay the money back, let alone pay 5% interest to the lender of the money? Except from another source, so borrowing off Peter to pay Paul.

According to Credit Action [1], personal debt in the UK in April 2012 stands at £1.459 trillion (of which mortgage-secured housing debt is £1.252 trillion). To grasp the magnitude of this, you should note that the gross domestic product (in 2009) was £1.396 trillion, while the assets of Barclays Bank plc (in 2011) was £1.459 trillion. On average each adult in the country is £30,000 in debt, largely for their house. Suppose they can pay the interest at 5% p.a., but cannot pay down the capital. Without what the politicians call 'growth' (and I call inflation) these citizens will spend their lives, like a herd of dairy cows, being milked by the bankers for the whole of their lives.

However, since the war, we have got used to a steady 'growth' of the economy. That is to say, the uncorrected data of the Office of National Statistics (a mixture of inflation and 'growth in real terms') shows a strong and persistent logarithmic 'growth' in GDP of some 9% p.a. Look at the data [2]; in the 50 years since 1958, the uncorrected GDP of the UK has grown 63-fold! If correction is made for inflation the growth is a mere 3.7 fold. In other words, the apparent growth of the economy (averaging over those 50 years) is 9% per annum, though GDP 'in real terms' has grown logarithmically at a pauky 2.7% p.a., while the value of the pound has fallen at an average rate of 6% p.a. (largely, no doubt, because of an increase in the money supply). As I have pointed out elsewhere [3], that which the Office of National Statistics calls growth of GDP is very largely inflation.

If that 9% 'growth' were to persist, it would still make sense for our average citizen to borrow £30,000 to buy a house; in 30 years time, when the debt was due to be repaid, it would only feel like £2260.  But, with an economy in stasis and house prices sinking, the average adult will be less able to repay in 30 years than he is today; he is going down the chute. Not the banks, however.

Loans fall into one or other of two categories: productive loans (for the purchase of industrial plant, land, farm stock, education, etc.), and non-productive loans (consumer goods, food, luxuries, accommodation). It makes sense to borrow, or lend, money for the former. It makes no sense to lend for the latter, yet that is the preferred type of loan for the bank. Particularly loans for housing, for, with the (supposed) security of the title deeds, there is very little risk. Banks are neither patriotic nor philanthropic; they are there to make money, even if their activity is bad for the country and bad for the customer. For a decade or two after the war, the lending by banks was under fairly strict governmental control. Perhaps we need to return to such thinking.

References:

[1] http://www.creditaction.org.uk/helpful-resources/debt-statistics.html

[2] https://docs.google.com/spreadsheet/ccc?key=0AonYZs4MzlZbcGhOdG0zTG1EWkVPX1k1VWR6LTd1U3c#gid=6

[3] http://occidentis.blogspot.co.uk/2011/11/growth.html

 

L. Cawstein
cawstein@gmail.com