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Are we in a household debt crisis?

A pound symbol sinking in the wavesDuring the middle of last year, Washington Post columnist Ezra Klein noted that rather than beating around the bush, he would call “what we’re in [now, in the US] a “household-debt crisis,” or something more elegant that gets the same idea across”.

The reason being that household debt to GDP ratio are dangerously high, banks aren’t lending, people aren’t spending, businesses aren’t growing, jobs aren’t being created and recession is giving us a sarcastic wink.

Perhaps as daunting is the growth industry of alternative lenders. What kind of household debt crisis awaits us if spending is only supported by rapid increases in borrowing from high-cost lenders, in a country where there is no law as yet to stop people borrowing over and over again, or borrowing to service other debts (roll over loans in other words).

Remembering the OBR’s forecast for household borrowing and debt, which show this rising from 160% of income last year to 173% by 2015, and prompted by being told by one Labour politician that the next economic crisis in this country will be one caused by household debt, I asked some economists and economy commentators their opinion on what they thought.

As this is research for something else I’ll leave names out, but one academic economist told me, bluntly, no. The reality, for them is:

levels of secured and unsecured borrowing are falling in nominal and real terms … the personal insolvency rate is falling … [and] the OBR’s projections appear too high

Contrary to that, the economics editor for a leading newspaper told me potentially yes. Aside from low interest rates acting as a mask for the real debt problem:

there has been little reduction in the level of household debt since the crisis started

He told me what potential damage there would be if the Bank of England pushed up interest rates back up to normal levels.

The Consumer Credit Counselling Service identified last year 6.2 million “financially vulnerable” households, 3.2 million of which “are already either three months behind with a debt payment or subject to some form of debt action,” and on top of that unemployment is rising fast.

Utilities are costing us more and our wages are not reflecting the increasing cost of living. When David Cameron asked us to pay back our debts, rather than doing as he says, we are doing as he is doing and staying in debt at the expense of some rather hideous economic policies.

Something exploding in household debt is clearly plausible. But depending on your definition of household debt crisis we could be experiencing one now. Or, indeed, OBR could have projected too high, too soon last year for 2014-15 and the whole thing could be fuss for nothing.

What do you think?

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