041 When the borrowing and spending stop

CONTRARY VIEW

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No. 41 3rd January 2003 When the borrowing and spending stop

It seems that the growth in consumer borrowing and spending is drawing to a close. This is consistent with our long held view that natural economic forces will curtail the game of creating growth by artificial methods.

When consumers borrow the resulting spending shows up as growth. Such growth always carries a price tag - interest and repayment. If repayments exceed new borrowing then the economy must slump. Slowly, commentators are realising some basic truths:-

consumers are already overborrowed, as shown by debt distress
buy to let has pushed up house prices beyond realistic price levels
people will be better off paying down debt than saving for a pension

All these issues interact. If we save more then there is less economic activity and we apparently have less future resources. If we borrow more we create growth yet cripple ourselves with even more debt.

The change in our financial future will deeply affect our assumptions about how the world ought to behave. We will have to learn that deflation has replaced inflation - we will certainly need to learn that there is no such thing as "benign" deflation. Society can no longer expect politicians and central bankers to deliver an easy answer for every want.

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