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Pop! Britain's Bubble Economy Confounds Experts
One significant interest rate rise spells disaster for millions
Asad Yawar (AlexYawar)     Print Article 
Published 2006-04-05 15:42 (KST)   
It's the first proper spring weekend of the year, and Britain is a picture of economic beauty. Growth is high. Inflation is low. Interest rates are low. The nation's typical "shopping basket," as drawn up by the Office for National Statistics, now contains MP3 players and flat-panel televisions. Mass affluence has arrived. This is solid, sustainable economic expansion -- with not even a hint of a collapse, since in the immortal words of our Chancellor, there will be "no return to boom and bust."

There is one small problem. Britain's economic renaissance is based on the strength of three key macroeconomic indicators. Two are conventional: low inflation and low interest rates. The third is altogether new in its reach and depth: credit from credit cards and personal loans. The trouble is, only the last indicator appears to have any relationship with the economic reality on the ground; at the same time, the third indicator is essentially a fiction.

Take inflation. Officially, during the last decade, inflation has generally hovered between 1 percent and 3.5 percent. In 1997 it peaked at 3.7 percent, in January 2004 it was 1.4 percent, and currently it stands at 2.0 percent. But in most key areas of the economy, inflation has been off the scale. A March 2005 report published by Oxford Economic Forecasting and Cluttons Real Estate noted that house prices had risen nationally by an average of 11.4 percent per year every year for the past ten years. While property prices are controversially not included in the official U.K. inflation figure, similar if not larger rises have been recorded in transportation -- a one-day travel pass in London now costs £6.30 -- utilities, with 2006 seeing a one-year hike of 20 percent for many gas customers, and oil, the price of which skyrocketed following recent instability in the Middle East.

Plastic Nation: Advertisement in Weybridge, England for a debit card offered by credit card giants Mastercard and Europay International.
©2006 Asad Yawar
There has been some deflation in a few sectors: because of chronic oversupply, it is possible to pick up a second-hand car -- even an exclusive marque -- in the U.K. for relatively little. And in consumer electronics, prices continue to fall for everything from mobile telephones to laptop computers. However, given that many people will not even countenance buying anything less than a new SUV and a Jose Mourinho-endorsed phone, and that Moore's law is nothing new, this cannot possibly explain an inflation rate of 2.0 percent.

Then there is the little matter of interest rates. Again, these have remained remarkably low during the last decade. In 1997, the newly-convened Monetary Policy Committee of the Bank of England raised interest rates to 7.25 percent by the end of the year in what seemed like the start of a sensible trend to counter inflation. But rates stayed minimal: 5.75 percent in January 2000, 3.75 percent in February 2003, 4.5 percent in March 2006. Given the immense inflationary pressures from property prices alone, it seems a tad leftfield that interest rates have not been substantially increased for what is in economic terms an eternity. Yet the Treasury, seemingly unaware of the implications of the average price of a terraced house in London exceeding £1 million (as the Evening Standard reported on March 27), appears happy not to tinker.

However, when it comes to credit, the statistics seem eminently accurate. The U.K. is the easy money capital of Europe, with commercial television and newspapers saturated with advertisements for credit cards and personal loans. In 2003, for the first time in history, Britain had more credit cards (67 million) than people (around 60 million), with an astonishing 55 percent of all credit cards in Western Europe being British-owned. By 2008, there are predicted to be nearly 93 million U.K. credit cards in circulation.

And herein is the crux of the matter: the U.K. economy is built on consumer spending, which accounts for two-thirds of the nation's GDP. But consumer spending is in turn contingent on credit. The average salary in the U.K. is estimated to be around £22,000 before tax, which in most parts of the country is not enough to comfortably subsist on: for the majority of people, to save anything substantial from that figure would require frugality. Luxuries such as brand-new home cinema systems and cars should in theory be exactly that -- luxuries.

This is where credit steps in to distort reality. The UK population now owes £1 trillion in household debt, with 14 percent indebted to the tune of £10,000 or higher. This debt is more than the total annual GDP of the U.K. And this figure does not even take into account the gargantuan pile of mortgage-related debt -- £967 billion -- that casts a shadow over the U.K. economy. Including mortgage payments, the average British household has £83,722 of debt.

What conclusions can one draw? Firstly, the official inflation figures simply cannot be correct. Two percent inflation in an economy with rapidly increasing living costs and more credit than real money in circulation does not even begin to make sense. Secondly, the reason that interest rates have not been pushed up to act as a fiscal cooling mechanism on growth is simple: with the current levels of household indebtedness and mortgage-related arrears, any move towards a realistic interest rate level will result in economic meltdown. No politician with any electoral ambitions will want to initiate such a move, perhaps least of all Gordon Brown, whose desire to take over the post of Prime Minister from Tony Blair is one of the less well-kept secrets in global politics.

However, the most sobering conclusion of all is that many of the country's economic fundamentals -- and the foundations for future growth -- are rather shaky. In fact, we could be heading for the biggest bust since that of Lolo Ferrari. And economic historians may in the future liken the "Brown Boom" to the fate of the late French actress. Under the malign influence of her husband, Ferrari, a chronic depressive and body dysmorphic disorder sufferer, underwent 25 cosmetic surgery operations to alter her face and enlarge her breasts with silicone in the belief that it would catapult her to stardom. Like Ms Ferrari, we have flooded our system with plastic in the quest for growth. The result is likely to be similarly artificial.
Thumbnail credit: Simon Cataudo
©2006 OhmyNews
Other articles by reporter Asad Yawar

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