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Thursday, 21 November 2013

Some international consumer debt data points - part 3a in Corrosive Debt series

In this week's British press, one article about spiralling consumer debt in the UK, another about similar happenings in Russia.

Personal debt in the UK now stands at £1.4 trillion (with a T).  That's about $2 trillion.  A report by the Centre of Social Justice (CSJ), called 'Maxed Out:  Serious Personal Debt in Britain', reports the following:

  • The average household debt stands at £54k, almost twice of what it was a decade ago
  • Households owed the equivalent of 94% of the UK's economic output last year (!!)
  • Thankfully (my words, not CSJ's), a vast majority of this debt is in the form of mortgages (see Part 3 of my Corrosive Debt series - this should be consider "good" debt)
  • However, is it really "good" debt?  Unlike many other countries, British mortgages are typically based on floating interest rates.  The UK government is concerned that when record low rates (currently 0.5%) start to rise, many of these 'good' mortgages will become unaffordable.
  • According to CSJ, nearly 4 million families do not have enough savings to cover their rent or mortgage for even one month.  
  • Looking at non-mortgage consumer debt, the amount outstanding is £158 billion (so an average of £3k per citizen).  This will mostly be 'bad debt'.  Credit card debt represents about £58 billion (£1k per citizen) - a lot of the remainder are 'pay day' loans (loans to help folks reach their monthly payday) and similar.  As a comparison, The US average household has $14k of credit card debt.  So Britain, with 26 million households, is slightly better off than their US counterparts with a little over $3k in credit card debt.
  • Unlike the US, where people have been paying down debt in this low interest rate environment, people in Britain don't seem to be taking advantage of the same opportunity.  
The full CSJ report can be found here.   

Switching gears to Russia, yesterday's Financial Times reported various Russian central bank warnings regarding 'high household indebtedness'.  Some snippets:
  • The central bank head states 'there are already visible elements of overheating'.  She notes 'exceptionally high level" of households' debt and is concerned on its impact on financial stability.
  • Russia's largest bank is now warning of a consumer credit bubble in 2014.

You may be asking yourself what is the relevance of these stories to the New Investor?  Well, as I have stated emphatically before, you cannot prudently start a long term investment program if you are mired in bad debt.  If you are one of those with high personal debts, make a plan to start paying yourself first NOW and use this 'new-found' money to get out of debt asap.  Because interest rates WILL go up.  It is a mathematically certainty.  

And when interest rates do rise, if you have crushing, floating rate debt, not only won't you be a successful investor, you'll be fighting for financial survival.  See the difference?