Vince Cable: rising debt and cheap money risk an economic storm

Former Business Secretary Vince Cable was famously one of the only senior parliamentarians to predict the last financial crisis.  And he’s sounding the alarm bells again.

Writing in the Independent, Dr Cable is issuing a dramatic warning that “severe economic storms” may soon threaten the UK economy.

He writes:

“Even if Britain were in great shape the global slowdown would be a serious matter. But, actually, the recovery is precarious and unbalanced.”

Dr Cable argues that it is misguided for policymakers to prioritise reducing the public debt above all else. He writes that the problem of public debt is dwarfed by that of an over-availability of cheap money.

More significant [than the problem of public debt] is the fact that many of our economies remain on the life-support system of ultra-cheap money. Official short-term rates are close to zero (or sub-zero as in Switzerland) and there is a reluctance to raise them and snuff out recovery (as happened in Sweden in 2012) and add to the problems of indebted households and companies. Long-term market rates are also at historic lows.

One side-effect of keeping economies growing through cheap money and credit creation through quantitative easing has been the generation of asset bubbles, especially in property markets. Britain demonstrates the problem in an extreme way, magnifying underlying imbalances between housing demand and supply. Double-digit housing inflation is not merely creating appalling social problems and division between classes and generations but grossly distorting investment from productive activities to property holding.

In Dr Cable’s view, the “obsession” with public debt also obscures the challenge of the UK’s overall debt burden, taking into account household and corporate debt as well.

Since the crisis, aggregate debt has risen further – to around 280 per cent – with a sharp rise in public debt (roughly from 40 per cent to 80 per cent of GDP) and a modest fall in household and corporate debt, though household debt is now rising back to the previous peak as mortgage borrowers chase a rising housing market. The current obsession with public debt, under a third of the total, obscures this bigger picture.

Debt matters since it can have a depressive effect on the willingness to invest – by companies and governments – and on the willingness of consumers to spend.

Describing a recent discussion with a group of hedge-fund managers, he recalled that

“All agreed, however, that we are in for an uncomfortable period in which severe economic storms are all too plausible.”

Sobering stuff.