Addicted to Debt

Posted: January 31, 2007 in Finance

There’s a school of thought that says that much of the BOOM in recent years in Ireland hasn’t been driven so much by fundamental improvements in productivity and infrastructure as it has by borrowing.

Does it matter? Isn’t the Boom the important thing, not the source of it?

Well the difference is similar to the difference between a family that buys a new Merc and a big house because they get a big pay rise, and a family that buys a merc and a big house because someone gives them a big loan. To the neighbours the outward signs are the same, but the foundations of the apparent wealth are very different.

Almost certainly some of the boom in Ireland was down to the National Equivalent of a Pay Rise. Huge inward investment, a global IT Boom, in other wards at least in the early years of the so called Celtic Tiger there were fundamental factors that supported the growth.

By now it’s almost certain that the continuation of the boom far beyond the expectations of “experts” has been fueled to some extend by borrowing. In simple terms, Ireland has been like a family that got both a pay rise AND their house shot up in value and they released equity in it. They were swimming in Cash. They bought the big car, moved to a new house, bought every gadget they could find, holidays abroad, the works.

At some point they used up the cash they’d released from the house, but in the meantime house prices jumped further, and there was a whole new trough of equity to drink from.

It was a win win game because the spending itself drives the economy forward, drives up house prices more, It’s like a financial perpetual motion machine.

Except as everyone knows, perpetual motion isn’t possible. Some machines look like they achieve it, but ultimately on each turn of the motor they lose a little power until they eventually run to a halt, unless some fuel is added.

In terms of the Irish Economy the Fuel was debt, and the motor has started turning a lot slower. Even the Energiser bunny has to stop beating his drum eventually.

What should we expect when the fuel runs out? How should people start to behave? If the economy really is running on debt rather than prosperity then we should start to see a shift in the pattern of debt. When the House Equity ATM runs out of cash we should see a jump in other sources of credit. In other words when your Drug Dealer get’s locked up, you don’t quit drugs, you just find a new dealer.

According to this story it seems to be happening. The level of Credit Card debt has jumped almost 19% over the past year. That happened at a time when total lending growth (including mortgages) slowed from 27.9% to 25.9%.

If overall drug use was down slightly, but heroine use had shot up by 19% would you be happy? Neither would I. Hard Credit just like Hard Drugs sows seeds for an unhappy future.

The story ends with talk of sleight increases in mortgage lending towards the end of the year, but down overall from it’s peak. This isn’t good either. Again with the Drug metaphore, Weed use is down overall but there are signs that it crept up again towards the end of the year.

There’s no evidence that the Heroine addicts switched back to softer drugs, it looks more like a new crowd of customers were recruited. Perhaps the Weed dealer got released from Prison.

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