Credit and Debt

November, 2008

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The Low Arithmetic of High Finance
Looking Backwards and Forwards
Currency Sense and Nonsense


When my father bought his new house in 1945, he had already saved up enough money to pay for it. I'm pretty sure he paid in cash — because I never saw him use a cheque book, and "plastic" money had not then been invented. All he had to do was go to the bank, withdraw Ł250 (probably in the form of fifty of the large, crisp, white Ł5 notes that were in vogue at that time), and hand them over to the vendor. Both parties were satisfied with the bargain; all that remained to be done was to register the change of ownership of the property in accordance with current procedure. His savings had given my father a degree of freedom that is no longer very common in the UK.

Nowadays, the great majority of people who wish to buy a house no longer have enough savings to pay for it; so they usually have to beg for credit from the manager of a bank or building society who will, they hope, lend them the money on certain conditions. In my father's time, it used to be said that you took your credit to the bank with you — meaning that if you were reputed to be of good character, could demonstrate financial responsibility by putting up a sizeable deposit out of your savings, and could show that your employment prospects were good enough to enable you to pay off the loan and accrued iterest over a period of 25 years, the manager would advance the balance of the purchase money in exchange for a mortgage on the property. This implied that you were considered credit-worthy, because credit was generally available only to people who could be trusted to meet their financial obligations; however, you had to sacrifice part of your financial freedom because the house would not be fully yours until you had "paid off" the mortgage.

We are now coming to the end of a period in which banks and building societies had become much too lax in their determinations of credit-worthiness, and had lent far too much money to people who should not have been trusted to keep up their payments. As people love to "take the waiting out of wanting", borrowing became first a vogue and then a disease. The people believed politicians who announced that "boom and bust" were at an end and that "things could only get better": and so they borrowed more and more heavily. On the strength of their own propaganda, governments took the lead in borrowing wildly against unrealistic expectations.


The party is over. The spectre of debt looms over the populace. Mortgage payments are in arrears and lenders are getting a bit rough with repossession orders. Food and energy prices are high, and few people have any spare cash to buy non-essentials. Companies large and small are having to close down for lack of trade and unemployment is increasing. Even Santa Claus is looking sad and dishevelled.

Instead of drastically reducing their profligate spending, politicians now talk of "borrowing to stimulate the economy": but I find it difficult to see the logic of a cure that seems no different from a stronger dose of the poison that caused the disease. Governments in debt are no different from individuals in like case: they too lose much of their freedom, and put themselves in thrall to their creditors. The bigger the national debt, the longer it will take the tax-payers to pay it off — and the steeper the decline in the value of the nation's currency.


Genuine capital consists in savings. Without savings to offset loans, there can be no real value in borrowing. Like the level of the water in a reservoir, the value of a currency will fall when loans exceed savings and rise when savings exceed loans.

The prudent citizen who lives within his or her means is the true capitalist. This fine citizen is now confronted with a serious problem: to save or not to save.

On the one hand, anyone with cash to spare can expect to pick up some good bargains as heavily indebted individuals and organisations liquidate stock and assets, especially when "distress selling" becomes prevalent. On the other hand, debasement of the currency will defraud the saver unless interest rates on savings are equal to or greater than the rate of inflation — which seems unlikely, particularly if the derisory rates recently offered by National Savings are anything to go on.

Even in the "good times", government aimed to keep inflation at 2 per cent — which meant debasing the currency by 2 per cent every year. Although inflation has been close to 5 per cent for several months — partly because too much borrowed money and government handouts have been sloshing around in the economy — the rate is bound to fall sharply as unemployment rises and optimism declines. Inflation may even become negative for a short time, meaning that "the pound in your pocket" will actually buy more and represent better value than it has done for some years. But this will not last because a heavily indebted government depends on positive inflation to ensure that internal debt repayment becomes less onerous as the value of the pound declines. Of course, the opposite applies to borrowing in currencies other than sterling, and the cost of imports will accordingly rise steeply.

All in all, I see no material reason for rejoicing in the near future, but there will be plenty of scope for the spiritual fortitude which thrives in hard times.