Every move you take

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UK current account deficit ballons

Failing banks, a mountain of personal sector debt, a crashing housing market, and now a massive current account deficit - the economic problems confronting the UK just keep piling up. All the UK needs now is a recession, and we would have a perfect storm.

During the third quarter of this year, the UK imported £20 billion more than it exported. That shocking number is equivalent to 5.7 per cent of gross domestic product (GDP).

The deficit is the inevitable consequence of the debt-driven consumer expenditure. UK households have borrowed too much and spent the cash on imports.

There is only one way out of this mess. People just have to stop borrowing and start saving. This will lead to a slowdown in growth, but to delay the correction would be to store up even greater problems in the future.

Don't blame ethanol for inflation

I thought this story was very interesting, especially in the light of the recent increase in world commodity prices.

CHICAGO (Reuters) - U.S. food inflation is rising but don't blame the ethanol-based boom in corn prices, the head of global agriculture and food-industry research firm Informa Economics said on Monday.

Memphis, Tennessee-based Informa, formerly called Sparks Companies, said a study based on 20 years of price data shows that corn prices have minimal impact on the U.S. Consumer Price Index for food, which has been on the rise.

The study, released on Monday, "debunks the concept that the ethanol expansion is the underlying and main significant reason for food price increases," Bruce Scherr, Informa's chief executive, told Reuters in an interview.

"We're not saying that corn prices are cheap, that ethanol hasn't helped underpin the growth in the corn economy," Scherr said. "What we are saying is to blame corn and corn-based ethanol for all of the inflation associated with food and food prices ... is to grossly under-consider all the other forces at work."

The CPI for food, a broadly used gauge for inflation, is up almost 6 percent for the first nine months of 2007, with the food inflation pace at a 25-year high, industry analysts said. Many have blamed the rising price of food on raw commodity prices which have soared to multiyear highs in 2007.

Feeling poor - you are not alone.

(Click on the chart to enlarge)

Do you feel that your income in real terms has barely changed in recent years? Are you relying increasingly on credit maintain your standard of living. Recent debt and wage data suggest that your experience is far from unique.

Average wages (including bonuses), adjusted for the retail price index have hardly grown in the last fifteen years. Since 1993, the index has gone up just 20 percent. Since the end of 2000, real average wages have increased by just 5.3 percent.

It is a very different story in terms of real household debt (again deflated by the retail price index). Since 1993, real debt is up 135 percent. Since the end of 2000, it has increased by a staggering 69 percent.

UK households have been hiding their stagnant income growth by ever increasing levels of personal debt. Today, household debt stands at almost 100 percent of GDP. It can not go on. It won't go on. We are maxed out on the collective credit card. It is now time to stop borrowing and start repairing our personal balance sheets.

UK banks get the message

UK commercial banks have finally woken up to the credit card debt crisis. For the last year or so, they have been quietly tightening lending standards. The new regime seems to be working. The stock of outstanding credit card balances is beginning to fall from its peak back in Christmas 2005. Since then, credit card balances have fallen by around 5.9 percent. Nevertheless, the stock of outstanding credit card debt in October 2007 was six times higher than in January 1994.

However, Britain's debt addicted credit junkies have gone elsewhere for their fix. Britain's debtors have moved onto the harder stuff. Unsecured loans and home equity withdrawal facilities have never been more popular. Personal sector debt has kept on rising. It is just isn't being charged to the plastic with the same reckless abandon.

Personal debt - a national affliction

When it comes to unsecured debt, the British are the champions of Europe. According to Datamonitor, individuals in the UK have an average of £3,175 ($6,223) unsecured debt, more than double that in the rest of western Europe. Furthermor, the UK now accounts for a third of all personal debt on the continent.

Despite these staggering levels of debt, UK banks seem unconcerned about rising levels of personal indebtedness; at least until the credit crunch rolled into town.. In recent years, personal bankruptcy in the UK has rocketed (see chart above). Last year, over a 100,000 people entered into Individual Voluntary Arrangements (IVAs) – the British equivalent of personal bankruptcy, forcing lenders to write of £1.4bn of bad debts.

Meanwhile, the total stock of UK mortgages now stands at over £1 trillion; a figure that has risen by over 24 percent compared to last year. Taking mortgage and unsecured debt together, this means that every man, woman and child in the UK owes an average of £21,000 ($41,660).

This rising stock mortgage debt has not been accompanied by a similarly rapid rise in personal income. Moneyfacts, the financial information company, said that on average mortgage payments account for 24 percent of people's pre-tax salary today. In 1996, just 16.5 percent of households' salaries went on mortgage repayments. The situation for first-time property buyers, is even more desperate. Mortgage debt accounts for nearly 27 percent of first-time buyers' salary compared to 18 percent in 1996.

Incomes have not kept pace with housing prices. Between 1996 and 2006 the average income for first-time buyers has nearly doubled from £17,308 ($33,924) to £34,216 ($67,063) while average house prices have soared from £64,692 ($126,796) to £211,453 ($414,448). During the same period, the ratio of house prices to incomes have risen from 3.7 to above 6. Yet despite increasing signs of a massive and bloated bubble, house price inflation shows no signs of relenting. Last year, house prices increased by a staggering 9 percent.

Given that UK residents pay around 40 percent in personal taxes, many people are paying almost a half of their personal incomes on mortgage costs. In such circumstances, it is perhaps not surprising that people have resorted to personal unsecured debt to finance consumption expenditure. Nor is it surprising that an increasing number of debt soaked homeowners have resorted to personal bankruptcy.

Demographics - the truth

It is extraordinary what rubbish building societies put out to convince us that the UK bubble will go on forever. Today, the Alliance and Leicester put out a report claiming that increasing life expectancy will keep the market buoyant. "Families will move more often to cope with adult children remaining at home as well as dependent elderly relatives."

The report suggests that "changing demographics and social attitudes will inevitably have an effect on the housing market in the future. For example, the number of times that people move in their lifetime, or the increase or decrease in the type of household they live in. These trends are predicted to change dramatically in the next 20 years.'

The A&L’s Changing UK Household Market report, undertaken in conjunction with the bogus Centre for Future Studies, claims that as the population is living longer, people are "spending more time at certain life stages and living in more houses than ever before."

We are being asked to believe that by 2026, the overall number of households will increase as a result of changes in the make-up of the housing market, with more people living on their own and an increase in lone-parent households as divorce rates continue to rise.

Here is a one-word refutation of this rubbish - pensions. Most UK citizens have made totally inadequate financial provision for retirement. Once the current 50-somethings reach 65, they have little or no income. They will have only two sources of income; a meager state pension and their house. So, by 2026, millions of penniless old codgers will be staggering down to the estate agents hoping to sell their overpriced homes they bought in 2007.

I will give you a second one-word refutation - fertility. UK fertility rates are around 1.6 children per woman, significantly below 2.1 needed stabilize the population. Fertility rates are declining as fewer woman have children and as the population ages. With ten or so years, the UK population will rapidly start to shrink. It would be shrinking today, were it not for record levels of immigration. The demographics implied by current fertility rates points to an unprecedented reduction on housing demand.

So demographics are the death-knell of the housing bubble. Demographics tell us that in the long run, housing is an extremely bad investment. Demographics tells us that in twenty years time, the UK will be one massive old people's home. Demographics tells us that we should sell our houses now, start renting from a buy-to-let idiot and buy cheap in 2015.

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