The UK owes a lot but also owns a lot, say the authors
By Michael Blastland and Andrew Dilnot
Media stories suggest the nation's debt is at worrying levels. But what's the full story, behind the statistics in the headlines?
Debt in the UK is out of control, hurtling to record levels, now well past £1 trillion.
Lenders can't chuck out cheap cash quickly or irresponsibly enough, the economy is built on shadows, bankruptcies are rising and the crunch is coming.
Records are all but inevitable in a growing economy
That's a story you've probably heard. Here's another.
Debt is basically fine. In fact, we're coining it in the UK, with more wealth stretching ever further ahead of the amount we owe.
The people in trouble - who do exist - are a tiny minority accounting for a vanishingly small part of the trillion. Most debt is a sign not of penury, nor impending crash, but prodigiously increasing wealth.
Why believe one rather than another? After all, can't you prove anything with the right statistics, as the old cynicism goes?
No, you can't. What you can do, if you want to mislead (or be misled) is treat one number as if it tells the whole story. But that's not proof, nor anything like it.
So here is a quick guide to seeing a story one way, based on one number, and seeing it another, based on a richer reading of others.
The single number in the debt crisis story is the one that shows debt going up. Shouldn't that worry us?
Not really. The number of pounds in circulation in the British economy doubles through a combination of economic growth and inflation, every 15 years. It quadruples every 30 years. The number of pounds of almost everything multiplies madly, almost all the time. This is normal. It's what happens in the good times.
"Gone Up!" says the headline, "Hits Record!" But what, really, did we expect? Do we really think that as the number of pounds in the economy quadruples in a generation, the number of pounds of debt is going to go down? The bad, the worrying world is the one where everything starts contracting.
So the first statistical point to get out of the way is that records are all but inevitable in a growing economy. And a record amount of debt, on its own, tells us nothing, except, perhaps, that life is proceeding much as usual.
To say simply that because debts have passed £1 trillion we are at a crisis, is like concluding that since your child has grown recently she must therefore be a giant.
Personal debt can have serious consequences
The next point is that debt is only one half of a calculation everybody makes all the time in working out how well off they are, but which news reporting strangely neglects. The half we're always hearing, the alarming half, is how much we owe. The other half is how much we own.
So we hear that the British owe more on their mortgages than anywhere else in Europe. But we seldom hear the obvious corollary - that the British also own more housing wealth than anywhere else in Europe.
This is straight from the Enron school of reporting. It looks at only one half of the balance sheet, and ignores the rest. Enron reported its assets and ignored its debts. Reports of debt are often the other way round. They tell us that debt is going up, shock, but don't say what is happening to wealth.
But no one would look at their own finances this way. If you did, you would compare what you owed aged 16, look at what you owe in later life, and conclude on the basis of a bigger number that you were heading for middle-aged financial calamity.
But are you really better off aged 16 than in the peak earning years of working life? The truth is almost always the opposite. Rising debts are an indication of rising ability to borrow, resulting from rising wealth.
So what do we see when we take both halves of the balance sheet? Here's the picture for the UK.
This graph shows that personal wealth has been increasing over recent years steadily and substantially.
In 1987 the total personal wealth of all the households in the UK added up to about four times as much as the annual income of the whole country.
By 2005 wealth was six times as great as annual national income. Not poorer, but hugely richer, is the story of the last 20 or so years.
This wealth is held in houses, pensions, shares, bank and building society accounts, and it is held very unequally, with the rich holding most of the wealth, as well as most of the debt.
Some of the increase reflects house-price growth, some increases in share prices, but there is no denying that as the economy has grown, and incomes with it, so have savings and wealth. Debt has been rising, but wealth has been rising much more quickly, as we see from the line showing wealth minus debt.
Guess who owes most? The richest - by far
And what of those debtors in real trouble? Their plight is genuine and miserable. We don't mean to belittle it.
And it's quite plausible that there are more of them, though it's not clear that the bankruptcy numbers are a sure guide to this, since the bankruptcy option may simply be more readily taken, given how widely advertised it now is.
But they have precious little to do with the big numbers, they do not indicate a national crisis, and they do not show that debt is bad.
Because guess who owes most? The richest - by far. Are they, or the nation, in crisis? Let's put it this way: they're not exactly weeping over their platinum credit cards.
The Tiger That Isn't by Michael Blastland and Andrew Dilnot is published by Profile Books
Below is a selection of your comments.
Nice article. Good to hear the other side of the debt crisis argument. But, one thing is missing in this analysis. Interest rates. These have been incredibly low for some time, but now appear to be on the rise. This might tip the debt-wealth balance in the wrong direction as people struggle to service their mortgages and other credit. Or, has the threat from rising interest rates also been overstated by a scaremongering media? John F, Congleton, UK
Not all instances of wealth or debt are equal. For instance, housing wealth, driven by a speculative bubble, has very little value. It's the perfect example of an over-valued asset, which looks good on paper, but is deeply problematic in reality. Housing has relatively little actual economic worth, and for your mortgage debt not to be a problem, it has to undergo considerable increases in market value. If there are falls in this market value the corresponding debt becomes problematic. The idea that high levels of personal indebtedness is not an issue comes across as both scary and ignorant. Jacob, London
Very reassuring I've got to admit and makes a lot of sense. Fergus Andrew, Glasgow
This is the most ridiculous piece of nonsense I've recently came across: is one wealthier because the house bought 10 years ago for 50K is now 500K? Maybe only if you decide to emigrate.
A system, in which liquidity in financial markets is secured by printing loads of new money, were a five-people-ten-computer company could be worth 100 millions today and nothing tomorrow, in which your pension is here today but gone tomorrow, is deeply flawed.
Yet more than half of the country's GDP comes from speculative financial transactions in the City, and most of the rest from an economy based on services. I guess we should all be very concerned.
H. Home, Leeds
It is nice to see a balanced piece of writing on this subject. In a world obsessed with new records of anything, including debt, it is always good to put this in perspective. My main issue with the commentary is the relation of wealth against debt. If wealth is based (in part) upon housing costs, and the housing market is being kept unrealistically high (some estimations indicate this is 30+% above actual cost) by lending. What would be the change in the balance between wealth and debt if housing prices corrected themselves overnight? Chris, Cambridge, UK
It would sound even better if you expressed it the British way instead of American: then it's only £1 billion! Des Howlett, Reading, England
Finally, a brilliant and sensible article. Was just getting tired of all the meaningless gross statistics being peddled to the low IQ public, so particularly grateful for this well written and intelligent article. Nathan, London, UK
I appreciate your point that the richest owe the most, and that the reporting of certain attention grabbing figures is misleading; however, this is no justification. The fact that many people live well beyond their means is what should be concerning, this is not a tenable situation, regardless of how much money one makes. Tom Lewis, London
Thank you for finally running this report. I become tired of the Metro and other papers running these scare reports. There statistics are clearly misleading whether it be samples sizes that are nowhere near sufficient to represent the population or tailoring it get their own results. Mi Ro, London