Global Policy Forum

Economy reaching "tipping point"- Middle class consumers will carry the can for financial collapse

A new annual report on the global economy published by nef today, Monday September 1st, predicts that a giant credit bubble, created by globalisation's decades of ‘easy money', has now reached a "tipping point" – a point that has historically triggered financial crises.

Ground-breaking new analysis in the report – titled Real World Economic Outlook - shows that Japan's financial crisis was triggered in 1990 when the total stock of financial assets began to outstrip GDP by nine times. Two of the world's richest countries, the US and UK have followed Japan's example, inflating the credit bubble and the accumulation of financial assets through de-regulation and reckless lending and borrowing. This bubble has been fuelled further by the decisions of Central Bank governors and their boards to lower interest rates to historically low levels.

Jubilee research at nef, the team that spearheaded global awareness of a third world debt crisis, are releasing provocative new research into the first world's huge debts. This shows that credit and other paper ‘promises to pay' now exceed levels of real income (GDP) by ten times. Recent stock market falls, drastic though they have been, have barely dented the credit superstructure. When this credit bubble bursts, the report concludes, it will be middle class consumers in both the US and UK that will bear the brunt of the financial crash.

Ann Pettifor, editor of the annual report, the Real World Economic Outlook, said: "Gullible consumers, acting as heroically as Atlas once did, are holding up the US and UK economies by dutifully borrowing and spending. But take-home pay is falling in the UK, and unemployment is up in the US, so consumers will soon buckle under the strain of single-handedly propping up these economies. As we live in a deflationary era, the burden of debt will be much more painful than it was say, during the aftermath of the Lawson boom." - "When tipping point is reached, consumers buckle and the credit bubble bursts, it is the middle-class debtors who will bear the full brunt of a debt-deflationary financial crisis. Sadly, they will suffer much more pain than a minority who have resisted the siren calls of lenders and instead watched as their assets have been inflated by the actions of central bankers – enriching the already rich."

The report notes that the decades since 1970s have been characterized by a near-total abrogation by central bankers and politicians of any control over the growth of credit. As a result the total stock of financial assets has mushroomed. At the same time, these central bankers and politicians have clamped down on wages and consumer price inflation. Ms Pettifor added: "Central bankers and finance ministers have engineered the Anglo-American economies so that we now have a combination of consumer price deflation and asset price inflation. The rich can't believe their luck. This is their dream economy as labour and commodity costs fall, but property, stocks and bond assets rise. But for farmers, manufacturers, retailers and employees, these economies are turning into a nightmare".

Romilly Greenhill, senior economist at nef added: "While Japan has managed to keep interest rates very low through a financial crisis – the same will not be possible here and in the US. The British and American governments are building up substantial foreign and domestic debts – and in order to continue attracting finance to fund these debts, will have to raise interest rates. There are already signs in the US bond markets of this happening…. .A rise in interest rates would, in our view, tip the credit bubble over the edge and cause it to burst."

The report warns that in a deflationary environment the real value of debts rise, and against a backdrop of rising unemployment in the US and falling real wages in the UK, will fast become unpayable for many. While house prices remain artificially high both in the US and UK, there are ominous signs that these assets too could fall in value. Falling asset prices combined with spiralling debts would impact most severely on middle class borrowers in the UK where total household debt is now 120 per cent of disposable income.

When the "tipping point" comes, likely to be triggered by higher interest rates in the UK and US - then it will be those same obliging middle income borrowers and spenders that will be made to bear the burden of the ensuing debt crisis. "Debtors tend to forget that assets do not pay off debts. Debts are paid off out of take-home pay, and in the UK take-home pay is falling in real terms", said Ms Pettifor.

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