In this issue we are looking at DEBT. In part 1 we look at the macro economic background to growing debt and in part 2 we will identify actions people can take to tackle personal debt.  

The Navig8or Newsletter
November 2015 (6251)

'Don't follow the crowd, follow knowledge'
Greetings Readers
I hope you are all well. Thank you to those of you who completed the reader satisfaction survey. Ideally I would like to get a greater number of responses, so I am leaving it open for a little while longer. If you have not already done so and are so minded you can assist me by completing the survey. Here is the link  Once I have received some more responses I will share the results and let you know my ideas for adapting the newsletter going forward. Making it shorter seems to be one of the emerging themes, so if you like the current mega issues you need to tell me via the survey! However, until the survey results are fully in here's another big issue!  
Anyway, a new Gregorian year approaches and since it is the season to be jolly before becoming broke, I thought I would focus in this two part issue on the question of debt and personal finance.
In part 2 I am going to give you some information (N.B. Disclaimer I am not a financial adviser and so do not give financial advice,  you should seek the advice of a qualified financial adviser or debt counsellor in relation to your financial decisions) that will hopefully be of use. Now obviously for many of you debt will not be a problem but you may know someone who could benefit from reading the next newsletter.
In this issue I am going to set the scene by giving you the bigger macro-economic picture so that you can see how and why this huge level of personal indebtedness has been encouraged by successive governments in 'the West'. In the next issue we will deal with what individuals can do on a practical level to deal with debt problems.

Despite what you may have been led to believe the scale of UK government Indebtedness is nothing like as great as the government and media pundits suggest, although definitely increasing in recent years. If you look at debt as a percentage of GDP over time you will see what I mean.
UK Total Government Debt in the 20th Century

UK Total Government Debt since 1692 

The scale of the personal debt problem
What has really exploded in the UK (as well as many other nations) is the scale of personal indebtedness. In 1974 there were around 6 million credit cards in the UK, but a decade later this figure had quadrupled. The following articles highlight what has been happening in terms of household debt in the UK over the past year.

New consumer debt reaches seven-year high in UK (Hilary Osborne 3rd January 2015)

"Consumer helplines have sounded a warning after Britons ran up their highest level of new debt in November for nearly seven years, with the month’s borrowing on credit cards, loans and overdrafts hitting more than £1.25bn.

National Debtline and StepChange said the figures from the Bank of England showed a worrying rise in consumers’ reliance on credit, and warned they expected a rush of people seeking help when the first credit card bills of the year started to arrive......

The £1.25bn net increase in unsecured borrowing during November was the biggest rise since February 2008, when Northern Rock was nationalised as the credit crunch took hold. It was the third month out of five that consumers had taken on more than £1bn of new debt."

This trend has continued since the November 2014 data detailed above as the article below describes.

Levels of UK household debt at record high, says think tank

"Levels of household debt have soared to record highs and a new way of lending aimed at the poor is needed, according to a new released report by the Centre for Social Justice (CSJ).

The right wing think tank, founded by Iain Duncan Smith, the work and pensions secretary, warns that household debt has risen by more than £34 billion in less than three years and is £1.47 trillion – the highest ever........

Some 8.8 million people are “over-indebted.” And borrowing on credit cards, bank overdrafts, and pay day loans amounts to more than £170 billion - the highest in four years.

Fifteen million Britons are going into debt just to cover their bills, says the report - based on research commissioned by JPMorgan Chase Foundation."

Jonathan Owen Thursday 4 June 2015

As medium to high wage jobs have been offshored in the UK and US in particular; and the manufacturing base has been decimated, these nations have moved to a service sector based economic model fuelled by consumer spending. However given that the purchasing power of the average consumer has been steadily eroded by stagnant wages and under-reported inflation (see for the U.S. Data) the only way that government has been able to maintain the illusion of a healthy economy is by orchestrating and promoting a consumer credit boom. Consumers are in effect borrowing to cover some of their general living expenses as well as one off treats. 
Low interest rate policy - It seems appropriate at this point to explain the purpose of the very low interest rate policy being pursued by most governments in the rich world. This policy has some significant benefits for people with variable rate mortgages, who outnumber savers, who are the big immediate losers, therefore you don't hear a lot of fuss about it. However, I am going to explain to you the real purpose of this policy, how everyone with a pension is losing out and the debt timebomb it has created.
Why was this low interest rate policy pursued?
If you want to put a single name down as the author of this disastrous low interest rate policy it would be Alan Greenspan, former Chair of the U.S. federal Reserve (1987-2006), and during his tenure in office a man probably more powerful than Presidents  in terms of shaping the U.S. Economy. As I have told you and shown you on several occasions, the U.S. Economy has been in recession for most of the past 30 years (see for details of how GDP growth figures have been manipulated). In the early part of this century Greenspan was looking for a way to artificially boost the U.S. Economy and came up with the idea of creating an asset price bubble by steadily decreasing interest rates, when there was no valid reason to do so. It is also important to understand that in the 1990s President Bill Clinton's administration had overseen the repeal of the Glass Steagall Act of 1932/33, which had been introduced during the Great Depression of the 1930's to prevent such a calamitous economic meltdown occurring again. The Act essentially created tighter regulation of the banking sector and introduced a separation between retail and investment banking. 'Slick Willy' as Clinton is sometimes known did away with this (aided and abetted by Robert Rubin) and facilitated the Wild West in banking. One of the wheezes to emerge from this deregulated environment was mortgage backed securities, which was essentially where a bank packaged together a whole load of junk (high risk) mortgages, obtained a AAA rating from one of the credit ratings agencies, such as Moody's, and sold it into the financial markets. What happened was that risk became separated from reward which created 'moral hazard' and encouraged reckless behaviour.

So US interest rates were reduced inexorably. Property prices boomed, creating an investment frenzy and the propertyless were exhorted to 'get on the property ladder' before it is too late. Banks and mortgage brokers offered highly dubious mortgages including the notorious NINJA mortgages (No Income No Job) which were essentially mortgages provided to people with little to no income and no way of verifying the income put down on the mortgage application form. Now it is important to note that it has been concluded that about 75% of the mortgage fraud committed during this period was committed by the lenders and only 25% by the borrowers. So In essence the lenders knew that the borrowers could not  afford the repayments, especially as many of these mortgages enticed people with introductory low interest rates, but then had steep interest rate escalators built in.
However the lenders weren't bothered about the medium to long term as they knew these mortgages were going to be packaged and sold on and hence there was an absence of consequential restraint on their behaviour. They just wanted their commission payments.  Now as you are probably aware, many of those borrowers who were duped and lost their homes a few years later were Afrikans who were still grimly pursuing the American Dream even though it has often been an Afrikan nightmare. Since Black Wealth in the US is almost wholly tied up in property, the eventual unwinding of this mis-selling scandal (in which European politicians in the US blamed the borrowers) has  had a devastating effect on the overall Afrikan balance sheet in the U.S.
So, the whole thing (there were many other nuances which would require a super mega edition to go into!) went pop when Lehman Brothers was allowed to go bust in 2007 which precipitated a banking crisis. This was when we started to hear that very uncapitalistic phrase 'too big to fail' to justify the massive bail out of banks using tax payers money. You note there has been no everyday person bailout!
So governments essentially turned private debt into public debt when they didn't need to. They have spent trillions propping up insolvent banks by allowing them to inflate the value of junk assets and  boosting the banks' balance sheets via Quantitative Easing and other dubious schemes. Meanwhile the banks have not lent on the money they have been donated, to the real economy to boost economic production, but rather have battended down the hatches. The reason the low interest rate policy has been pursued even more vigorously since the crash of 2007/2008 is not to assist people to purchase property (it actually makes it harder by inflating property prices) or to reduce our mortgage repayments, it is to allow this merry go round of banking and corporate debt to continue. Banks are able to borrow money at essentially 0% interest from Central banks ( which are also private banks) and lend on at a profit. Chief executives of large corporations whose bonus payments are linked to their company share price started to carry out share buy backs, where the company bought its own shares from private and corporate shareholders such as pension funds. These share buy backs artificially boost the share price and are facilitated by borrowing at you've guessed it, very low interest rates.
Basically the debt can is being kicked down the road and whenever the LIBOR interest rate (LIBOR stands for 'London Interbank Offered Rate'. and is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London) 
  returns to historically normal levels i.e. 3-5% there is going to be an incredible fallout, with corporate bankruptcies galore, unless they can find another scheme to pass the debt onto the public books. There are literally trillions of dollars of debt being passed around in this high stakes game of musical chairs. It's just a question of who will be left to carry the can when  the music stops!
The consequences
Pensions - Pension funds generally operate a fairly conservative investment policy and have been able to do so successfully over time whilst interest rates have averaged between 3-5%. The near to 0% interest policy that has been pursued over the past few years has decimated many pension funds and as someone who has sat on boards during that time period I can tell you that every year I see increasing deficits in pension funds that have to be made up by the member companies. It is simply not possible for pension funds to operate effectively in a 0% environment which gives them precious little return on their investments. This is the real cause of the pension timebomb, not just an ageing population. Therefore what you gain in lower mortgage interest repayments you will lose at the back end with your pension. Happy retirement! For example in the US we have seen Emergency  Finance Managers in cities such as Detroit coerce pensioners into accepting significant cuts in their pension payments (12.5%) and this only the beginning.
UK House Prices - A bubble that's bound to pop
The British have a very particular relationship with their homes. There is a saying that 'an Englishman's home is his castle' which probably reflects both the English's delusions of grandeur and their fierce sense of individualism and desire for personal autonomy.
Owning your own home is ingrained into the British psyche in a way that is not the case in many parts of continental Europe, e.g. France and Germany where long-term renting is viewed as quite normal. Apart from national culture there are some important regulatory differences. In the UK the private rented sector has minimal regulation and six month tenancies are the norm which does not provide the kind of stability that many people, especially those with children are seeking. Successive UK governments have also acted as if rising house prices are a barometer of economic strength and pursued policies to assist people to buy their own homes. In the 1980s, the then Prime Minister, Margaret Thatcher introduced the 'Right to Buy' policy which essentially allowed Council House tenants to purchase their properties at massive discounts. This was both an ideologically driven and politically astute policy which in essence offered many working class people a huge bribe courtesy of the public purse. As expected this policy proved a vote winner. She also prevented local authorities from using the receipts from these sales to build replacement homes thus accelerating the process in the UK where housing demand far outstrips supply.  If one thinks about house prices it would seem logical that there should be a causal relationship between income growth and house price growth i.e house prices should rise roughly in line with wage growth however as the next two articles below show this is no longer the case in the UK.

House price to earnings ratio points to a 19pc fall - but is the measure flawed?

 "One crucial measure of fair value is included within the data on Halifax's websiteEach month it publishes a price-to-earnings ratio going back to 1983. This p/e relationship, based on a comparison of house prices and average wages should be closely watched; history shows a high p/e ratio often heralds price falls (although the credit boom sustained a p/e above 5 between 2003 and 2007).

In the last two months, the p/e ratio has lurched above five. It was 5.07 in December, the highest since June 2008 when the market began to buckle. This is way above the long-term average of 4.1.

At a most basic level, and assuming the elasticity of markets means prices return to their long-run average, expect a fall of 19pc.

But that may be a conservative estimate if you sit in the camp that believes the market has been artificially inflated since the millennium. For the Eighties and Nineties, the p/e average was 3.64, or 28pc below today's level."


Long-run average (1983-2015): 4.1

Long-run average (1983-1999): 3.64
By  1:41PM GMT 08 Jan 2015

Now, there are other factors that can drive house price growth e.g. A significant under supply of housing as noted above and London is an obvious example where the Green Belt ( land surrounding Greater London) where there are severe restrictions on residential development acts as a severe constraint on the geographic  growth of the city and leads to ever higher land and property prices in a city with a growing population. The above article goes on to correctly highlight that the very low interest rate environment has dramatically reduced the proportion of people's incomes that is being spent on their mortgage repayments

"... the property bulls often point to another measure of affordability, the percentage of wages swallowed up by mortgage repayments. This is relatively low, despite high house prices, because a low central bank rate and state-backed lending schemes have made mortgages dirt cheap ..... repayments today only swallow 34pc of wages compared to 52pc in 2007 and 55pc in 1989)."

I think that median wages vs house prices represent a much better barometer of affordability and also presents an even more stark picture of how the UK house market has been distorted in recent years. The article below uses comprehensive data from 2012. 

Revealed: the widening gulf between salaries and house prices

"The gap between income and house prices has sky-rocketed so much in the last 20 years that even in the most affordable regions of England and Wales buyers are forced to spend six times their income, a new data analysis reveals. The situation is most dire in the capital, where the median house now costs 12 times the median London income. ...................................................

In 1995, the median income in London was £19,000 and the median house price was £83,000, meaning that people were spending 4.4 times their income on buying a property. But by 2012-13, the median income in London had increased to £24,600 and the median house price in the capital had increased to £300,000, meaning people were forced to spend 12.2 times their income on a house."
Helen Bengtsson and Kate Lyons Wednesday 2nd September 2015 

OK let me show you how insane the situation has become by comparing the above 2012 house price data with data released on 17 November 2015, the day before I wrote this section of the newsletter. Remember compare the average house prices by region/city:

UK house prices up 6.1%, says ONS -  17 November 2015

"House prices rose by 6.1% in the year to September 2015, according to the Office for National Statistics (ONS). That was up from 5.5% in August, and 5.2% in July. It brings the average house price to £286,000. However, the rise is still much lower than a year previously, when prices were rising by more than 12%. .........


John Hawksworth, the chief economist at PwC, said house price inflation was now running at twice the rate of average earnings.

"The ongoing rise in house prices reinforces our projections that, by 2025, only around a quarter of 20-39 year olds in England may be owner occupiers, compared to around three quarters of over-55 year olds," he said.

Jeremy Leaf, a former chairman of Rics, said that, far from running out of steam, the housing market was re-energising itself.

"With the average property price in London now £531,000, unless you earn way above the national average salary, you have precious little hope of being in a position to buy," he said."

The irony of UK government policy is that home ownership (or more accurately mortgage ownership) levels are at their lowest levels for over 30 years at 63% and now lower than in France (64%) and much lower than the European Union average of around 70%.

If you watch the following video from which the above screenshot is taken you will hear about the growing number of people in London who are opting for 40 year mortgages in order to make their repayments affordable. Heaven help them when interest rates rise! 

So why does this matter?
 It matters because these artificially inflated property prices are distorting the British economy. Money that would otherwise be used for investment in businesses that produce real goods and services is being diverted into property speculation. It is creating a rentier economy and if you examine  per capita productivity figures you can see that Britain has little to crow about.

Three charts that show how poor productivity is in the UK – but is it because we’re just lazy?

"The .... charts below reveal just how poorly Britain’s workforce has performed over the last couple of decades; how it lags embarrassingly behind countries such as France, Germany and the United States; and how much is at stake if we start producing more for every hour we work."

Matt Dathan Friday 10 July 2015

So you can see that despite British Prime Minister David Cameron and Chancellor George Osborne constantly mocking the French economy Britain's productivity is over 20% lower than that of France. However Britain's political class view rising house prices as a better barometer of economic strength than productivity. You should also be able to deduce that the ruling class have successfully disconnected productivity increases from wage increases as the US figures amply demonstrate. The wages of the vast majority of the US population have decreased in real terms over the past 40 years whilst productivity has increased dramatically.
This property price bubble also means that millions of young and not so young people in Britain have been locked out of the home ownership/mortgage market as the rate of increase of property prices outstrips their capacity to save a large enough deposit. These people are forced into the private rented market where rental prices have also sky rocketed and there is very little security of tenure.
If we take a house costing £500,000 (around $750,000), which is not expensive by London standards, as you can see from one of the earlier tables, then a first time buyer probably needs a 20% deposit to obtain a reasonable mortgage interest rate. 20% of £500,000 is £100,000 which is daunting enough, but if the property is increasing in value by 10% a year ( which is the case for many properties in London) you will need to find an extra £10,000 for your deposit (20% of the 10% [£50,000] price increase) after one year. So you can see that as fast as you save up the property price and consequent deposit required seems to keep running away from you, and we have not even considered the repayments and the fact that eventually interest rates will have to go up significantly. This is why so many people are desperate, particularly in London and the South East of England, to get on the property ladder.

How will this property bubble end?
Well, it will end like most bubbles with a resounding pop. What goes up must come down and the trigger will be when interest rates are significantly increased I.e. To 3% and above. This will lead to the global unwinding of huge amounts of borrowing that has been predicated on virtually zero interest rates. Much of this debt will become unaffordable and this scenario will probably trigger a global recession.  On a micro level many people who extended themselves to the limit will find their mortgage repayments unsustainable and repossessions will increase. We will then see a significant fall in house prices.

As an example of what will happen to some people, who get on the ladder at or near the top of the current boom cycle,  when interest rates rise, if you take a £400,000 mortgage (on a £500,00 property after a 20% deposit) then with a 5% annual interest rate you will have to pay £2,339 in monthly mortgage repayments. That's £28,068 per year! You can do your own calculations on this webpage
Even now in Britain we are seeing the general public adopting the wrong approach to debt. We have seen increased credit card spending and borrowing (as highlighted earlier), which is driving retail sales, at a time when people should be focused on paying down debt. Mortgage interest rates are not going to get cheaper so people should be focused on paying as much as they can towards what is most people's biggest debt.
The US Federal Reserve and Bank of England are in a real bind. To begin to address the problems of the 'real economy' they need to raise interest rates by 2-3% over a period of a couple of years (by around a quarter to a half of a percent a quarter), however they know that any significant rise in interest rates is likely to precipitate a stock market crash, as happened in the US after Alan Greenspan ( yes him again) raised interest rates in Sept 1987. In the US we keeping hearing that the Federal Reserve is going to increase interest rates however they have been putting it off for literally years due to 'market concerns'. The market concerns are that increased interest rates means the end of corporations borrowing at these historically low interest rates; which has funded share buy backs and mergers and acquisitions that have artificially inflated share prices. This is why the stock market is running counter cyclical to the real economy. What is good for Wall Street is not good for Main Street.  So don't use the FTSE 100 index, Dow Jones, NASDAQ index or any other stock market index as a barometer of economic health in your country. Janet  Yelland, the current Chair of the Federal Reserve, is acutely aware of all of this. However if they don't raise interest rates the economy will remain in the doldrums and we are likely to see further rounds of Quantitative Easing to stave off the inevitable deflationary recession. Basically the systemic problems with the banking and financial systems, which underpinned the crash of 2007/2008, were plastered over but never fixed. It's a case of pain now or pain later, however the effects of the great unravelling, when it does occur, are going to last for many years. Remember, the economies of the USA and Western Europe only really recovered from the effects of the Great Depression with the onset of the second European World War in 1939!

Because Afrikans in 'the West' have our relatively small wealth disproportionately tied up in property we need to be hyper vigilant to what is occurring in the property market, however, just as importantly we need to diversify our portfolio, or put more simply spread our risk. We need to teach our children what is really going on in the economy, which means we first have to learn ourselves, and learn how best to protect our hard earned assets In a system set up to serve the needs of the 0.1%, but supported by the large majority of the population against their own self interest.

In the next issue I will offer you some options for consideration, starting from the worst position i.e. Being mired in debt, right up to those of you who are more comfortably situated.

OK, I am going to end there. I am not quite sure if this was a mini mega issue or the usual mega mega issue, however I have really enjoyed putting it together as I have great interest in macro economic policy. In the next issue we will look at personal finances and how people can begin to piece together their personal finances, especially if they have fallen down a debt hole.
Finally, please remember to complete the reader satisfaction survey  to help me improve the newsletter.
Black..It's actually an Afrikan thing!
It's time to win! 



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