Saturday, 5 May 2007
Bankruptcy - another data-shocker
Yesterday, the government released the latest bankruptcy figures. Over 30,000 people declared insolvency during the first three months of this year. That is an increase of 24% compared to the same period last year. If bankruptcies keep increasing at that rate of growth, then pretty soon the entire country will be declaring bankruptcy.
Of course, a large proportion of the population is already bankrupt. It's just that they don't know it yet. Just think of assets and liabilities of a typical mortgage-soaked homeowner. On the assets side, they hold a house. However that asset is valued at an unsustainable price. Going forward, that is almost certain to incur a massive capital loss. On the liabilities side, the homeowner has a huge mortgage, several multiples of income. In addition, the homeowner also has several thousand pounds of unsecured debt, typically taken out with credit cards. The only income source is wages, which can barely finance the mortgage payments.
So lets summarize the financial position of UK homeowners today. Invariably, they are holding over-inflated assets, they are heavily indebted, and they have little prospect of any serious income growth. So, from an accounting perspective, private-sector balance sheets are in deep distress. In reality, liabilities are greater than assets, and that is a fairly reliable definition of bankruptcy.
Looking forward, the financial position of most Britons is even more bleak. Currently, the median age in the UK is around 40, where is life expectancy is approaching 80. Since most people expect to retire at 65, this raises the unpalatable question how will people finance their remaining 15 post retirement years.
There are only for answers to this question. First, we can rely on the state pension. This is already a pitiful level, and can only fall further in relative terms. Second, some of us might have private pensions. However, virtually all pension schemes are now busted. Given current returns in both the bond and stock market, private-sector pensions will continue to be worthless for the foreseeable future. Third, people could convert their wealth into cash. For most people, their home is the only wealth they hold. However, if all our fortysomethings do this at the same time, say in 2025, we can be fairly sure that the price of housing will collapse. Finally, we can rely on the generosity and charity of our children. Frankly, this seems the most sensible strategy to me. However, there are few of us who are producing children at the moment.
The 30,000 people who just declared bankruptcy are the advance guard of a massive army of financially deluded fools. They have saved nothing, spent everything, and who have taken out debt with little thought for how it would be paid back. However, debt is a merciless master. If is not served, it will crush you. Bankruptcy is about to replace house prices as the next big bubble.
Just for the record, I have no debt.