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Are we worse off than when we were 13?

Child with coins
As children we had no debt and minimal assets

Michael Blastland
Different ways of seeing stats

When you were 13 you probably didn't have any debts, while the typical adult often has plenty. But all that tells you is that understanding debt is a complex business, writes Michael Blastland in his regular column.

Here is the story of my financial ruin. It is a story writ large in most media analysis of the nation's fortunes.

Aged 13, I owed perhaps £1 to my brother. Today, my debts are in six figures.

How I am humbled, obviously. From that simple summary you perceive at once the explosion of my borrowing and thus the extent of my penury. As a teen, I was fiscal rectitude personified. A mere £1? How prudent. Today, I am ruined.

Credit card cut up
There are many doom-laden analyses of UK debt levels

But wait. I hear your objection. My calculation is foolish, innumerate, you say. It considers only half the balance sheet, the bad half - like Enron in reverse.

For example, did I own anything of value aged 13? The T-Rex single was scratched, after all. How far did the income from a paper-round stretch? And how does this more rounded view of my financial circumstances then compare with now?

These other factors - assets and income - might together mean that I am not worse off but incomparably richer than in youth, the big bang of my debts notwithstanding. To use another metaphor, taking the measure of my finances from only one side - the debt - is to sit me on a one-legged stool. Naturally, I appear to fall off.

Your criticisms are fair, I say. But I am merely aping journalistic and economic fashion. I am ruined. I insist upon it. Why, simply look and weep at the zeros on my mortgage.

Follow almost any economic coverage today and you find reams about debt. Last week, a business consultancy added up all the debt held by households, governments and firms. In a selection of economies, the UK was top of the list, the most indebted of all. This was well reported, the talk of the Davos economic forum.

But in this recent interest in debt, has there been any serious analysis of assets? None worth the name that I saw.

Isn't that a little odd? Curious to know what it might say, I undertook extensive research into one part of the calculation - that is, I Googled "OECD net household wealth".

The very first result was an edition of OECD Outlook that offered some tables, one of which was for net household wealth - that's after the deduction of debt - and measured the same way that debt is often measured, as a percentage of disposable income. Here in the graph is what it showed up to 2007, the last year for which this source offered full data.


The country in the G7 group of rich nations with the highest household assets as a multiple of income in 2007, as calculated by the OECD, even after taking account of all household debt, was the UK.

Some mistake, surely. For now the problem becomes less clear cut. Why were UK households so asset rich by international standards, relative to income? The same data suggests an answer. Partly, they owned a lot of shares, and for all that we are worried about pensions in the UK, our pension funds compare well with our international friends. UK households also own a lot of houses.

Another quick search. Curious to see the trends in home ownership in the UK, I turned to the National Statistics website, typed "tenure" and had the answer in about a minute - roughly 1.3 million more homes than 10 years ago.

If each of those required a mortgage of £10,000 (a modest assumption), we have added debt of £13bn. If a mortgage of £100,000, we have added £130bn to the UK stock of household debt. Now we are talking big money.

Real problems

But is this purchase of their own homes by households using mortgages necessarily a bad thing? Can we, should we, count £130bn in this case - or whatever the true figure - an unequivocal signal of financial doom? If not, why is it reported as such?

All in all, I feel somewhat puzzled. Perhaps I am not ruined after all. Perhaps readers will think of their own circumstances and conclude likewise, though a few will also no doubt have real problems with debt.

But doesn't it make a difference if the debt is backed by an asset, or rather, if the debt is backed by assets which far exceed the debt, exceed it indeed by more than in any other country in the G7 relative to income? None of us would look at our own debts without taking account of our assets, nor any firm.

Debt and assets are often sides of the same coin. The data is far from perfect, but it is instructive - and easily found. This whole exercise took perhaps 15 minutes.

I make no pretence that these snippets tell us all we want to know about the economic well-being of the nation. It is hard to say meaningful things about the assets of the government, for example, in relation to its debts. I certainly do not argue that the UK government's regular borrowing is trivial, far from it.

There are many more homeowners than there used to be

What economists refer to as the structural deficit is a monster of a problem, perhaps underestimated - though not the same problem as the national debt. Nor is this short observation of household debt any guide to the position among firms.

And of course it will be argued that recent falls in house and equity prices have wiped out some of the positive balance of household assets, even if they are now rising again. But how much? The full balance sheet matters.

So a plea to commentators and analysts - that they distinguish one variety of borrowing from another, that they balance debt against assets or income, as every fledgling accountant learns.

In our current state of mind it is all one - a great pit of homogenised ruin in which government, people and firms languish equally. That analysis could be improved, first and foremost by removing the strange assumption that we can know anything useful from only one side of a balance sheet.

The point is trivial but it seems that it has to be made. As a 13 year old, the modesty of my £1 debt did not make me affluent. As a six-figure borrower, I am not necessarily heading for the Clink.

Below is a selection of your comments.

So having graduated from five years of university with a Bsc, M.Arch and about £20k of debt, my "assets column" would list intellectual assets at a value of how much? These would presumably allow me to get a highly-paid job; except there aren't any. The same problem applies to any asset ownership, because the value of something is directly related to how much someone else is willing to pay for it. In many cases it's not the debt that's the problem; it's misestimation of assets.
MP, Essex

Debt makes me nervous, and I've never been in it as far as I can remember. Even when borrowing $1 as a kid, I only did that because I knew I had such money stored away somewhere that I couldn't directly get to at the time. I haven't been in a position to buy a house or any other major asset, so I'm not necessarily better off than many people who are in debt. However, I have seen among my generation (people now in their early to mid-20s) an attitude towards debt that doesn't consider the asset side of the equation. Friends of mine have racked up thousands of dollars in credit card debt because they like shopping, or travelling, or buying high quality items despite not having a job. They borrow money to pay for university that they take just for fun with no career prospects behind them. That is a kind of debt I just can't handle. I know I do eventually have to take out a mortgage if I ever hope to own a house, so I'll have to get over this fear eventually. I don't think it's an irrational fear, either. It's a caution instilled through the mistakes of others, and a very useful one too.
Khris, Winnipeg, Manitoba, Canada

As one who's moved from the UK to Germany, I can explain the UK's higher net wealth. I am much more asset-rich than any German peer I know (and I am hardly "wealthy"). This is in part because I lived for 15 years in a country with high rates of property ownership and rising prices. However, the less obvious reason is that the UK has a smaller welfare state. This means people not only keep more of their earned income to invest, but also have to hoard assets for the hard times. In contrast, Germany has a much bigger welfare state. You pay more tax but, in return, you know you don't have to hoard personal assets because the state will provide in hard times. (This also goes some way to explains the much lower rates of property ownership in Germany). So, personal asset ownership is just one side of the coin. State "ownership" of your assets is the other.
Vicky, Germany

The £1 debt to your brother was a simple debt that you'd pay off on pocket money day. Paying off the six-figure mortgage debt relies on you either getting fantastic returns on your investments or flogging the box on to someone else willing to take on even more debt than you - and there aren't so many of those around anymore.
Mark, Guild

This shows how difficult it is to shake the media away from their set underlying story, and how gullible we all are for lapping it up as gospel. The mood music is that we are all doomed for generations with debt, whereas in actual fact it is (mostly) all quite serviceable.
Andrew, Leeds

I've often thought the same thing in relation to the poor in the developing world. In some ways to have no debt is freedom but perhaps it's better to have a decent house rather than a hovel. Debt may not be a problem as long as there are means to pay it off. Your six-figure debt is OK while you have a job but what happens if you are suddenly made redundant and can't meet your repayments? This is where debt is bad. Also the interest on the debt can be excruciating as anyone with a mortgage will know when they look at their annual statement and see that they have hardly touched the capital repayments. Unfortunately UK plc is in danger of having so much debt that we may have difficulty in meeting the repayments especially if/when tax receipts go down. Everyone just ends up running faster and faster on the treadmill whereas with no debts or having paid off one's debts (and so no interest payments) life can be so much more relaxed.
Janet, Chippenham

I'm not convinced that mortgage debt should be included in discussions such as this about national debt. People who pay rent don't have there lifetime rent included. And all a mortgage is a method of paying one's rent in advance with a loan.
Maurice Childs, Orpington, UK

I was definitely best off when I started my first job. I earned £19 a week, paid in cash on a Friday and lived in lodgings. I spent what I earned on food, beer, entertainment and petrol, ran out of cash on Wednesday, borrowed a fiver from the front office and paid it back from my next wage packet on Friday. Life was simple; no credit cards, no debt.
Kevin Blick, Braintree, UK

When we were 13 - well, certainly when I was 13 - mortgages were obtained from building societies which were prudent, well managed institutions, insisting on a small multiple of borrowing to income, and a decent deposit. That is no longer the case, hence the value of the assets underpinning household debt is no longer solid.
Jennie, Inverness, Scotland

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