The Bank of England has driven a surge in UK unsecured credit

Today sees the latest UK consumer credit figures and shows us that a week can be a long time in central banking. After all at Mansion House we were told by Bank of England Governor Mark Carney that its surge was in fact a triumph for his policies.

This stimulus is working. Credit is widely available, the cost of borrowing is near record lows, the economy has outperformed expectations, and unemployment has reached a 40 year low.

Happy days indeed although of course his expectations were so low it was almost impossible not to outperform them. But of course it was not long before we saw some ch-ch-changes.

Consumer credit has increased rapidly……….Consumer credit grew by 10.3% in the twelve months to
April 2017 (Chart B) — markedly faster than nominal
household income growth. Credit card debt, personal loans
and motor finance all grew rapidly.

But this is a triumph surely for the last August easing of monetary policy and Sledgehammer QE? Apparently no longer as we note that a week is as long in central banking as it is in politics.

The FPC is increasing the UK countercyclical capital buffer
(CCyB) rate to 0.5%, from 0% (see Box 1). Absent a
material change in the outlook, and consistent with its
stated policy for a standard risk environment and of moving
gradually, the FPC expects to increase the rate to 1% at its
November meeting.

There is something of a (space) oddity here as monetary policy is supposed to be a secret – although if we go back to last July Governor Carney forgot that – whereas we see that the same institution is happy to pre announce financial policy moves. Also we need a explanation as to why financial policy was eased in a boom and now tightened in a slow down

But that was not the end of it as yesterday Governor Carney went into full “unreliable boyfriend” mode.

Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues
to lessen and the policy decision accordingly becomes more conventional.

This saw the UK Pound £ as the algo traders spotted this and created a sort of reverse “flash crash” meaning that it is at US $1.298 as I type this. Maybe they did not read the full piece as there was some can kicking involved.

These are some of the issues that the MPC will debate in the coming months.

So not August then? Also the Governor loaded the dice if you expect consumption to struggle and wage growth to be negative in real terms.

The extent to which the trade-off
moves in that direction will depend on the extent to which weaker consumption growth is offset by other
components of demand including business investment, whether wages and unit labour costs begin to firm,
and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit
negotiations.

Indeed as this week has been one for talk of central banks withdrawing stimulus let us return to reality a little. From @DeltaOne.

BOJ HARADA: NOT PLANNING TO REDUCE ETF PURCHASES UNTIL 2% INFLATION TARGET ACHIEVED – DJN

So it would appear that you might need to “live forever” Oasis style to see the Bank of Japan reverse course although they will run out of ETFs to buy much sooner.

Pinocchio

I spotted that Governor Carney told us this as he relaxed in the Portuguese resort of Sintra.

Net lending to private companies is been growing
following six years of contraction. Corporate bond spreads are well below their long-run averages.. And credit conditions among SMEs have been steadily improving.

Regular readers of my work will be aware that I have for several years now criticised policy on the ground that it has boosted consumer credit and mortgage lending but done nothing for smaller businesses. I will let today’s figures do they talking for me especially as they follow a long series.

Loans to small and medium-sized enterprises were broadly
unchanged

Also I have spotted that of the total of £164.3 billion to SMEs some £64.5 billion is to the “real estate” sector. Is that the property market again via the corporate buy to let sector we wondered about a couple of years ago?

Buy To Lets

Sometimes it feels like we are living in one of those opposite universes where everything is reversed like in Star Trek when Spock becomes emotional and spiteful. This happened to the max this week when former Bank of England policymaker David “I can see for” Miles spoke at New City Agenda this week about the house price boom. Yep the same one he created, anyway as you look at the chart below please remember that the “boost to business lending” or Funding for Lending Scheme started in the summer of 2013.

Today’s data

There is little sign of a slow down in this.

Annual growth in consumer credit remained strong at 10.3% in May, although below its peak in November 2016

I have been asked on Twitter how QE has driven this as the interest-rates are so high? Let me answer by agreeing with the questioner and noting that low interest-rates are for the banks not the borrowers as we note this from today’s data.

Effective rates on Individual’s and Individual trusts new ‘other loans’ fixed 1-5 years increased by 3bps to 7.68%,
whilst on outstanding business, effective rates decreased by 4bps to 7.38%.

I had to look a lot deeper for the credit card rate but it is 17.9% so in spite of all the interest-rate cuts it is broadly unchanged over our lost decade. My argument is that we need to look at the supply of credit which has been singing along to “Pump It Up” by Elvis Costello as we note £445 billion of QE, the FLS and now the £68.7 billion of the Term Funding Scheme. My fear would be why people have been so willing to borrow at such apparently high interest-rates?

The picture is not simple as some are no doubt using balance transfers which as people have pointed out in the comments section can be at 0%. But they do run out as we reach where the can is kicked too and a section of our community will then be facing frankly what looks like usury. The only thing which makes it look good is the official overdraft rate which is 19.7% according to the Bank of England.

Comment

The Bank of England is lost in its own land of confusion at the moment and this has been highlighted by its chief comedian excuse me economist Andy Haldane this morning.

Bank of England chief economist Andy Haldane said on Thursday that the central bank needs to “look seriously” at raising interest rates to keep a lid on inflation, even though he was happy with their current level.

Did anybody ask whether would also “look seriously” at cutting them too? Meanwhile for those of you who have read my warnings about consumer credit let me give you the alternative view from the Bank of England house journal called the Financial Times. Here is its chief economics editor Chris Giles from January 2016.

Britain is gripped by unsustainable debt-fuelled consumption. So fashionable has this charge become that Mark Carney was forced this week to deny that the Bank of England was responsible. The governor is right.

Indeed he took a swipe at well people like me.

Even armed with these inconvenient facts,ill-informed commentary accuses George Osborne of seeking to ramp up household debt.

As we make another addition to my financial lexicon for these times there was this which I will leave to you to consider.

Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.

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46 thoughts on “The Bank of England has driven a surge in UK unsecured credit

  1. Hi Shaun
    A late lamented Scottish friend had a wonderful
    phrase “New car in the drive and no food in the fridge.”
    How many people are currently living on the
    plastic, I would wager that the true numbers are scary!

    As Imagination sang, It’s just an illusion.

    JRH

    • JRH,
      Following on from your late friend’s thought,I wonder how many people could fund their PCP payment from savings for a month if they lost their job?

      I’d agree that the numbers living on the edge are scary.This site has long highlighted questions around the sustainability of govt spending and the real unemployment/inflation figure.

      When you look at the last few years and all the money that’s been thrown at the economy in terms of debt,QE,FLS, etc,then the wage growth has been derisory.

      • “When you look at the last few years and all the money that’s been thrown at the economy in terms of debt,QE,FLS, etc,then the wage growth has been derisory.”

        “Loans to small and medium-sized enterprises were broadly
        unchanged”

        It seems to me if you couple all that ultra loose policy with a zero-hours, low investment mindset then maybe, just maybe, it will result in poor productivity and hence poor wage growth and increasing consumer debt.

        The money has been thrown at the wrong target – we’ve had asset price ‘growth’ not wage growth. Wealth has triumphed over income. Capital over labour.

        Just a thought. As always I could be wrong.

        But, perhaps Carney should turn the BoE into a real bank and start lending to SMEs at 0.25%

    • My children are at or have just finished university. The general feeling seems to be that, if you are £50k in debt from fees etc, why not buy something/go on holiday, as what is another £5k?
      It was a lot easier for my generation, as
      1. We had no fees
      2. We were given a maintenance grant; and, most importantly
      3. No-one would lend you any money while a student (except for, for some reason, the banks all offered a £50 overdraft…)

      • the obvious one is that the good student moves abroad and becomes a non UK citizen

        Canada and the US benefit – used to be called “Brain Drain” …..

        Also in those days education wasn’t a business , today its a banker subsidized one and the repayment rate is really dreadful . Guess who’s on the hook to pay it back ?

        Student loans – one of the greatest mis-allocations of resources this century

        anyone got any other ideas on how to get “free” money into peoples pockets so as to boost the assets prices ? ( and save the Banks as they are still insolvent )

        Forbin

      • Nail on the head James, precisely why with such a bleak future, the lalaland promises of Corbyn are so appealing to the young, and explains their massive resurgence amongst that demographic.

      • What kids with so much debt should do is borrow to the absolute hilt squeeze every penny out of their credit rating they possibly can ideally hitting the 50K mark … and then with all this debt pay off their student loan …. then go bankrupt!

        This is not financial advice … though it should be.

      • So glad you said this. I’ve recently been saying this to a lot of people, if you can’t give people the hope of ever paying the money off then they just look at it like it’s a “tax deduction” and burden themselves with alternative debt.

  2. That word “seriously” seems to be getting more and more used by Bank of England officials doesn’t it? “seriously consider raising rates….” and “look seriously at raising interest rates…….”.

    “Serious” is a word often associated with liars who try and use the word to cover their deceit.

    So never forget the immortal words of Jean-Claude Junker who famously said “when things get serious you have to lie”

    • Good spot. I think that they use it to:
      1. Sound important;
      2. Show gravitas;
      3. Tell the little people that it is too complicated for us to understand, but not to worry, because their great and serious minds are on the job.
      A familiar pattern, in fact.

      • now now James you old cynic

        they’re being serious , mostly about the sweet trolley and the dessert wines …..

        forbin

  3. When Mark Carney tries to avoid responsibility for the state of the economy, I would like to ask him one question: what exactly did he think would happen if he drove interest rates down through QE?
    I would have said that the following were entirely predictable:
    1. People would borrow more:
    2. Those with good credit ratings etc would be able to buy houses;
    3. This would push up house prices;
    4. Many people would be priced out of owning a house;
    5. Those with poor credit ratings would be renting forever.
    If you then toss in stagnant wages, student debt (and a culture of ” I want it now”, you get a very unhappy generation who cannot get out of the debt/rental trap and on to the ownership ladder.

    • I think there was an assumption that money velocity was a constant on the part of many academic economists,hence they started down the QE road.

      As you highlight,there were a number of thoroughly predictable consequences that basically resulted in nominal GDP growth being achieved(if you ignore the population growth) at the expense of Joe Public’s living standard.

      • “…..at the expense of Joe Public’s living standard….”

        so long as the Bankers living standards are ok , they don’t care

        Governance of the People by the Banks For the Banks

        Forbin

    • “you get a very unhappy generation who cannot get out of the debt/rental trap and on to the ownership ladder” Maybe they don’t want to?……

      • Yeah, maybe they don’t want to, JB. Maybe some aren’t unhappy.
        But, by the time they realise they will die with nothing or in debt it could easily be too late – OTOH If they never realise they missed out on some measure of equality of opportunity, or income, or resultant wealth, then no doubt they will die broke- but not unhappy.

      • You make a good point which I had not thought about, but my (anecdotal) evidence from friends with grown-up families is that:
        1. They don’t really care in their twenties;
        2. They do really care in their thirties if they have a family
        However much we dress it up, people in their twenties thirty-forty years ago were progressing from tiny places in grotty areas to one step up to another step up to a reasonable place by age 35-40. It seems as though today those 35-40 year olds are at step one.

        • I’m not sure they did James. Certainly 30 years ago or slightly less 90,000 homes a year were being repossessed as the buyers could not afford the extortionate interest rates, while others found themselves stuck in negative equity until the late 90’s/early 2000’s.. Many were in insecure employment and should never have been offered mortgages (the liar mortgage era) but Thatcher was adamant that home ownership was going to be boosted from 60% of the population to over 70% of the population, hence the council house sell off, no matter how inappropriate it was to offer mortgages to people in lower income groups with no secure employment. In many ways the current situation is merely a rerun of the late 80’s and early 90’s that led to a housing crash which lasted for nearly a decade with the difference that it was 15% mortgage rates that burst the bubble, This time around it will be sky high house prices but if you think about it. we’ve been here before just under 30 years ago.

          I fear you are looking at this through a middle cl;ass prism. It was a very different story for the working classes 30 years ago, in fact the middle classes of this era are experiencing the plight of the working classes 30 or so years ago. Many came out of that not having moved up the ladder but having lost everything with creditors still chasing them,they vowed never to buy again and to always rent. It was observing that phenomenon 20 odd years ago which prompted my original comment.

  4. Not sure mark Carney would be happy if he read the comments on the latest piece by Chris Giles. Seems not all the readers are happy with him..

  5. On a personal note,I keep thinking my lack of faith in Carney can’t get any worse,then he comes out,does something that makes him look even dumber and I struggle even more to understand how these people get their jobs and keep them.

    Even worse,for the ordinary man on the street,they’re hasn’t been a vocal critic on the Board of the BoE who’s questioned not just their policy but their methodology,particularly in terms of inflation/GDP data.Quite how they’ve ignored population growth so easily,I just can’t understand.

    I suppose it helps when you have a MSM that’s carrying lots of Purplebricks adverts.

    • They keep their jobs because they are a clique who all know each other. Despite all of the comments about how awful Carney is, is he any worse than
      1. Christine Lagarde
      2. Mario Draghi

      etc etc

    • They get away with it because of the ignorance and economic illiteracy of the politicians and general public, but more importantly, the media give them a free pass by never questioning anything they say or do or ever pull them up on their record, since the media are controlled by the same people behind the central banks it’s hardly surprising is it?
      Could you imagine the BBC,ITV or any national newspaper employing the likes of Shaun, Steve Keen or Max Keiser as the economics editor?

        • In the usa, it is the deep state or military industrial complex. Here in Britain the US deep state exerts some influence via formal UK govt channels to leverage/ mimic their influence but we also have major landowners, english partnership, crown estate, duke of westminster and their lobbyists via parliament, the City/ bankers and the stasis of local govt conservatism.

  6. Hello Shaun,

    Truly Orwellian…..

    “Official figures show that after deducting debt, net household assets stood at 7.67 times income in 2014, a stronger financial position than at any point in almost 100 years.”

    Freedom is slavery
    Debt is wealth

    and popcorn ration has been increased from 4 oz to 2 oz ……..

    All Hail Our Banking Overlords !!

    Forbin

    • Hi Forbin

      Each time I read that it gets more extraordinary. If you just apply a simple “sense test” how could possibly be true? And yet the economics editor of the FT was so keen on it. For a start such numbers depend on valuing a stock such as housing with a marginal price which would work fine until you actually tried it…..

  7. If something cant go on forever it wont.
    The debt bomb is ticking is will result in a financial catastrophe ,global debt was $152T and it is rising exponentially .
    No way out and no way back that debt is counted is an asset by the lenders,the counter party risk is unimaginable
    To give perspective a billion seconds is 31.69 years a trillion seconds is 31709.8 years

    , ,, ,

    • Totally agree PF but the timing is everything. As this new money further inflates all bubbles, it is impossible to time the precise top, since the central banks having created something like $15 trillion of new money so far, could just do the same again, or add a further $30 trillion or $100 trillion – who is going to stop them?.

      If you do nothing or try and short these casino markets you will be wiped out by hyperinflation if they continue , or if you try and protect yourself from the actions of central bankers and join the madness, when they stop you will also lose the lot as markets crash, so these times are very different to all previous bubbles.

      The difference is that previous bubbles involved an element of choice in that they involved speculators(South Sea Bubble,Tulip Bubble, Florida Land Bubble, 1920’s/dotcom US stock market Bubbles etc , however this time central banks have involved literally everyone by their ZIRP and QE policies, and most have had no choice in their participation and will have no protection from its consequences.

      There are massive bubbles in stocks and government debt, consumer credit and car loans, pension funds and individuals are all in on zero or negative rate government bonds and stocks, the masses have grabbed the “you can’t lose with property” mantra by over-leveraging on their main house and in many cases using them to extract capital for other purchases or even bought multiple other properties(as a pension), so this time the masses AND governments will go bust when this finally ends.

  8. In a sick making read of how the Bank of England is responding to recent criticism, Andy Haldane tours the impoverished wastelands of his policies and provides hope to the poor.

    I wonder how long it took the Bank of England to arrange this puff piece with the Telegraph?

    What was I saying in an earlier post about the media being controlled by the very people behind central banks?
    https://www.theguardian.com/business/2017/jun/29/bank-chief-tours-wales-help-make-policies-for-hardest-hit

    • ‘Instead Haldane – who some regard as a potential successor to the governor of the Bank, Mark Carney – is in listening mode, on the first leg of a nationwide tour that is aiming to feed the everyday experiences of ordinary households into monetary policymaking.

      Britain’s poorest families, he says, are being hardest hit by the rising prices of essentials like food and fuel, and action to prevent higher inflation becoming entrenched must therefore be a priority.’

      I’m speechless at that second para.

      • You think someone who wants higher interest rates sneaked into last weekend BoE summer party and took some photographs of those in the MPC collectively doing rude stuff to farmyard animals.

        Its the only explanation i can come up with thats caused this rather sudden U turn.

    • That is a great link. Low interest rates the fault of low paid workers is a new one on me.
      The link is really interesting, as it shows that the bank has absolutely no idea what is going on or what it can do about it.
      It is wonderful to be in such great hands.

      • Yep, I just saw that story on the BBC and had to read it twice. It’s incredible that the Bank doesn’t make the connection with the results of a decade of ultra loose monetary policy. They have cause and effect totally reversed. Apparently we are in this mess because 95% of workers just aren’t pulling their weight. And that’s the one of the causes of low interest rates. And rates will stay low unless we pull our socks up.

        This insight into the thinking of the Bank’s chief economist is truly astonishing.

        Gee Shaun, I knew things were bad but I never ever imagined this sorry, sad state of affairs. This is a National disgrace.

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