Deleveraging is Easy. Deleveraging is… Good?
I had not realised the extent of UK household deleveraging until I looked at the household income data. Using the normal definition of leverage (the ratio between the stock of outstanding debt and the annual flow of income), household leverage has fallen from a 2008 peak of 175% to 144% by the end of 2012 – a level last seen in 2004.
Using that ratio obscures the underlying movement of the two series, so if we split them back out we get this:
Those who assert that households “need” to deleverage (which is really an argument about expected future income) must address the question of the desired level of leverage. Is 144% too high or too low; how should we decide where to draw the line? Should we let central
plannersbankers decide by plucking numbers out of the air?
And because debt is just (ah ha) money we owe to ourselves… let’s not forget household assets, which continue to dwarf liabilities; household net worth was up from £6tn in 2008 to £7tn in 2011 in the last Blue Book estimate, mind-boggling numbers.
When the OBR forecasts for household debt and debt/income were published in 2011 there were some rather hysterical responses from Labour MP Chuka Umunna and others. (Krugman’s claims there are surely too strong; income is just money that we pay to ourselves, so what has debt got do with it? There was no debt in the babysitting co-op!)
The OBR have in any case now revised down their estimates and predict household debt/income will rise only to 153% by 2018 (previously 175% by 2015). This revision was celebrated by nobody at all, as far as I can tell.