Bank of England is alarmed about the increase of personal debt

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mark carney personal household debt

The Bank of England has been warned of complacency over the big rise in personal debt. In its toughest warning yet about the possibility of a rerun of the financial crisis that devastated the economy 10 years ago, the Bank of England admitted it was alarmed about the increase in the amount of money being borrowed on easy terms over the past year, reported the Guardian, 24th July 2017.

Household debt as a proportion of household income rose from 95% in 1997 to 160% before the financial crisis. And the OBR predicts it will reach 153% in 2022. Household debt has been growing much faster than household income.

According to the Bank of England’s household debt figures, the total household debt is at £1.5 trillion, which is an average of £28,000 for everyone over 16 in the UK. Most of that – about £1.3 trillion – is made up of mortgages, and the remaining £200 billion of credit cards, overdrafts and loans, according to BBC Reality Check, 25th July 2017

Households in the UK are increasingly relying on borrowed money with one in four people seeking a loan applying for at least half of their annual income, according to new figures that will add to worries about Britain’s mounting personal debt burden, in analysis by as shown in the Guardian, 25th July 2017.


So, the Bank of England is worried about personal debt growing faster again – a 10% increase in the last year. But their policies rely on growing the economy by, guess what? More borrowing and more debt.

Personal debt is growing because:

  1. our economy relies on people getting into debt to spend money into the economy
  2. banks create most of the money in our economy, and they create it as debt
  3. people’s wages aren’t keeping up with the cost of living
  4. the effects of austerity and public sector cuts

When you add to this the fact that the people in charge don’t really understand how money, banking or our economy works, then the UK’s huge debt mountain seems too big to climb.

So why are we in so much debt?

Because we have a system where the vast majority of money is created by private banks when they make loans.

Banks create new money when people go into debt. For every pound of money, there’s a pound of debt.

To get extra money into the economy we have to borrow it from banks, which is leaving us all trapped under a mountain of personal debt and mortgages.

And every £1 we repay to a bank is destroyed, thus removing purchasing power from the economy.

If we want to stimulate the economy, new loans have to be taken out faster than old loans are being repaid; i.e., we have to go further into debt.

And the corollary is:

If we want to reduce debt, we’ll slow down the economy.

So, if the Bank of England wants to grow our economy, they must encourage further bank lending and further private debt.

When you couple this with public sector cuts, austerity, wage stagnation and a higher cost of living, you put people under even more pressure to live constantly in debt.

But that’s a problem!

We know high levels of private debt can cause financial crises. The Bank of England identified “the high level of UK household indebtedness” as one of the “most significant near-term domestic risks to financial stability”.

Taylor and Schularick, who examined 14 advanced economies over 140 years, show that

“the best pre-crisis indicator is a rapid build up of private debt.”

And the former chairman of the UK’s Financial Services Authority, Adair Turner, has argued that:

“The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money”.

So, right now, one of the biggest risks to our economy is being used as the primary solution.

This ‘hair of the dog’ strategy shows how unsound the foundations of our economy are. It exposes why the banking system doesn’t work for the people, and that the Bank of England’s monetary policy toolbox urgently needs updating. 

So what should the Bank of England do?

Ultimately, we need a system change. But right now there is another way of getting money into the economy, that doesn’t rely on an increase in debt.

The Bank of England is already creating money through Quantitative Easing. But it is using that money to flood financial markets, pushing up stock prices and increasing inequality.

Instead, that money should be spent through the government, reaching ordinary people, boosting wages, improving public services, and taking the pressure off the need to grow our economy through debt. This is called Overt Monetary Financing (OMF).

Many high-profile economists are supporting the idea of Overt Monetary Financing as a way of starting to tackle the UK’s debt mountain that is crushing us all.



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