From: "Crowley" 
Newsgroups: uk.politics.misc uk.finance
Subject: =?iso-8859-1?q?In_1997_household_debt_stood_at_=A3500bn...now_it's_=A31,158bn?=
Date: 15 Feb 2006 00:49:11 -0800
   posting-account=yGNAvw0AAABsgRsckUU2yFAQy4yH8Lsf

In 1997 household debt stood at =A3500bn...now it's =A31,158bn

By Edmund Conway, Economics Editor (Filed: 15/02/2006)

http://portal.telegraph.co.uk/money/main.jhtml?xml=3D/money/2006/02/15/ccde=
bt15.xml&menuId=3D242&sSheet=3D/money/2006/02/15/ixcoms.html

Gordon Brown is now spending most of his time out of the Treasury,
laying the ground for his ascension to the top spot. But while he is
keen to talk up government initiatives on a range of topics from
security to being British, it is his economic legacy on which he will
be judged.

Ask City experts to list what he will leave behind as Chancellor and
the answers are likely to be the same.

His greatest achievement? The decision in 1997 to grant the Bank of
England independence to set interest rates. This radical move meant the
Government could no longer use monetary policy to its political
advantage, and laid the foundation for low inflation and interest
rates.

His worst legacy? The massive debt mountain threatening economic
growth.

This comes in two flavours: the huge government deficits generated
since 1997 and - more worrying still - the record levels of personal
debt facing families.

It emerged this week that the amount families have borrowed has now
overtaken the size of the country's entire economic output. At
=A31,158billion, the debt mountain was =A330billion bigger than Britain's
gross domestic product and, unlike the economy, shows little sign of
slowing.

The simple truth is that this decade of debt has, in part, been caused
by the Bank of England's very independence. By keeping interest rates
so low, the monetary policy committee fuelled this debt explosion, and
caused a massive house price boom.

But whereas previous house price bubbles were burst when the Government
lifted rates, the independent MPC managed to keep borrowing costs low,
convincing families that their debt-servicing costs would remain small
forever.

And as house prices rose, more and more homeowners used mortgage equity
withdrawal to borrow against the value of their homes.

But can we survive such a massive debt burden, or will it cause a
severe slump during Mr Brown's likely reign at Number 10?

Many economists are sanguine, claiming low interest rates are here to
stay. They argue that inflation targeting in the UK and Europe - and
possibly soon the US - has closed the door on the days of high
borrowing costs.

Others are less certain. They fear a global economic catastrophe, such
as a collapse in the dollar, could re-ignite inflationary pressures.

John Butler, UK economist at HSBC, says: "I think the debt issue is a
problem. It makes the consumer and the economy much more sensitive to
shocks."

Lib-Dem Treasury spokesman Vincent Cable argues that one of the chief
problems with the way the MPC is arranged is that it does not
explicitly target asset prices.

"The Government and the Bank of England have become seriously
complacent about the potential problems created by very high levels of
debt, which are increasingly being translated into higher levels of
debt services in relation to family income," he says.

"Underlying this problem is the fact that under the current monetary
policy regime, interest rates aren't being used to manage just domestic
inflation but are also being used to manage asset markets and actual
levels of debt.

"If British levels of household debt in relation to people's income
continue to rise, we could end up with debt deflation of the kind which
caused so much damage in Japan."

A land tax is one theoretical solution. But the idea of taxing people
based on the value of their home is, to put it lightly, a difficult
political sell.

Instead, it seems likely that future governments will have to
re-examine the role of the MPC, and ensure that in the future it cannot
allow such massive asset bubbles to build up. It is increasingly clear,
then, that even Mr Brown's greatest achievement could be discredited in
the not too distant future.

http://www.housepricecrash.co.uk/forum/index.php?s=3D866f6453dbcf0ef3e4401a=
165537f7c5&showforum=3D22