LONDON — Last week, the Bank of England decided to keep the
benchmark UK interest rate at 0.25%. It has been near zero for
years. This cannot last forever.
BOE Governor Mark Carney knows this. He knows that as long as
interest stays near zero, the chances grow stronger that
he is inflating a calamitous debt bubble inside the UK
And if that bubble pops suddenly, the British are in no position
to deal with the consequences. They are carrying too much debt
and they’ve stopped saving money. In other words, when the
downturn comes, they’ve got nothing to cushion the blow.
Two charts from HSBC analyst Liz Martins tell the tale. The UK
savings rate is near zero but the debt people are carrying
has reached a peak:
As this chart from Societe Generale analyst Albert Edwards shows,
low savings rates are loosely correlated with impending
recessions. When consumers become fearful of the future they pull
back on their spending, creating the very recession they don’t
want. The scary thing about this chart is how far below
the 2008 crisis the current savings rate has fallen:
We don’t know how dangerous all that debt is.
Or where the most dangerous debt is located.
The usual suspect is the housing market, but that has moderated
recently — an increase in the “stamp duty” tax on house sales and
buy-to-let mortgages has reduced the number of people who buy
property as an investment rather than a place to live.
More recently, the BOE has become concerned that UK car finance
has become unsustainable. Personal contract purchases — a type of
rent-to-buy agreement —
allow drivers to own cars while paying less than the total
price of the car at the beginning of the contract. And that
is creating a supply of high-quality used vehicles which is
greater than the entire aggregate demand for new cars in Britain
in some years.
Morgan Stanley analyst Harald Hendrikse told Business Insider
recently, “The mechanics of the situation are exactly the same”
as the mortgage crisis. “We are repeating exactly the same
problems in the US and the UK specifically that happened with the
mortgage market in 2007,” he said.
What has been the response of the finance sector? To bundle all
those car loans together and sell them as asset-backed
All of Britain, downgraded
If this is beginning to sound familiar, that’s because it is.
That’s why Moody’s
downgraded its outlook on almost all types of UK consumer
debt last week, in part on the basis of this chart:
Carney knows all this.
His problem is that the economy is too feeble to withstand the
rise in the interest rate required to deflate the bubble before
it pops uncontrollably.
Only when the economy is growing so fast that wages start rising
will he be able to increase rates.
The obvious solution is to raise the minimum wage substantially.
Carney cannot say this on the record because his position as a
central banker is supposed to be apolitical. And even if he could
say it, he would still need the government to act — a big “if”
under Prime Minister Theresa May. But it would be the quickest,
easiest, tax-free way of rebalancing the economy and juicing
productivity is the other handicap that keeps the UK economy
When interest is low, capital gets lazy
Raising wages would make the cost of investing in work higher,
forcing a reallocation of capital away from crappy
businesses that only exist because wage levels are low, and
toward businesses whose returns are substantial enough
to withstand wage increases.
When interest is low, capital gets lazy: Any investment that
returns greater than zero starts to look good. So money flows
into marginal schemes. That “feels” good initially because money
becomes easy to get, especially for people with B, C and
D-level ideas. That’s a problem because it means money is sucked
away from the A-grade ideas that really ought to get the funding.
And even if it is not, those A-grade companies find themselves
competing with a bunch of second-rung companies who are creating
a lot of noise in the market even though their long-term models
just don’t work.
(This is why London is currently being served food delivery by
Deliveroo, Eat 24, Jinn, Uber Eats, Just Eat, Feast, Hungryhouse,
and Etefy, to name a few. These companies are all good enough to
get investment funding. But are they all good enough to survive
in the long run?)
Higher wages — especially minimum wages — are thus a good test of
which companies can actually grow and make money, and which are
simply floating on easy credit.
And with workers earning more money, they have more chance of
paying off some of that debt and boosting their savings without
crashing the economy.
Uber is like an app for lowering wages
Normally, you’d expect wages to have started rising already.
Technically, we have full employment. Workers should have
But wages have not risen. In fact, in real terms (after you
take out inflation) they have declined. Brits are getting poorer.
One reason for this is that the
UK has been importing deflation in the form of cheap goods
and services from other countries, and through digital businesses
that make the cost of everything so much cheaper.
The existence of Uber, for instance, is likely reducing the
demand for new cars. That would be fine if Uber was also
was also creating jobs that paid as well as automotive factory
jobs. But it isn’t. Nobody gets rich driving for Uber.
The government has one big, blunt instrument to wield in this
fight: It can boost the minimum wage.
The resulting wage inflation will require BOE to raise the
And that is Carney’s best hope of deflating the bubble he worries
he is creating, while at the same time rescuing the economy from
a sudden pullback in consumer confidence.