private sector debt

In all the pejorative criticism of  the public sector for its spending profligacy we often miss the important and corrosive role private debt has had in getting us into this awful mess. This article raises that issue very interestingly. It would be very interesting to look at comparative levels of urban and rural personal debt . I have some slightly out of date information which maps for the north east – if you would like to see it and think about how it might be useful for you drop me an email. It suggests that in this part of England at least levels of personal debt were higher in affluent rural areas than dense urban areas. I know that in urban areas for a whole range of money lender reasons there are many debts which go un-recorded. Nonetheless this whole area merits more detailed discussion and consideration in my humble opinion and presents a stark challenge for the long term future of rural and urban communities going forward. The article itself tells us:

Together, families and non-financial firms’ debt is still worth 208pc of GDP and is merely back to levels last seen in mid-2007, a time when leverage was already utterly unsustainable. Current debt levels remain much higher than they were a decade ago (170pc of GDP) and 15 years ago (128pc of GDP).

Nobody knows what the “right”, sustainable level of private sector debt is, and it depends crucially on expected productivity, wage and jobs growth, as well as on inflation, but it is certainly far lower than today’s levels.

A fair bet is that the private sector’s debt to GDP ratio will have to fall back by another 50 percentage points or so; even if nominal GDP grows by a highly optimistic 4pc to 5pc a year over the next few years, net borrowing will also have to fall every year until 2020.

Debtors will actually have to repay loans, not merely assume that a growing economy will bail them out. This will depress consumer spending as well as corporate investment, unless the rise in the stock market continues, unlocking alternative sources of finance for companies. Inflation won’t bail us out: with private sector wage growth now almost zero, higher prices reduce household incomes just as much as they cut their debt, making no real difference