Economies can turn out to be naked swimmers too

From Prof John Muellbauer, Nuffield College, Oxford, UK

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Sir, Tim Congdon (Letters, January 26) criticises my comment (Letters, January 20) on Chris Giles’s attempt to reassure us that the high level of UK household debt is not a risk factor for the UK economy given the record level last year of net worth relative to household income. He concludes that “net worth is much more important than debt in explaining changes in household spending”. But to really understand the role of debt, one needs to control for shifts in credit availability, which simple correlations of spending with net worth and debt fail to do.

For much of the 1980s, UK spending and debt had a strongly positive correlation because this was the era of massive deregulation of the mortgage market, revolutionising access to credit. Indeed, Professor Congdon was a pioneer in tracking the housing equity withdrawal made possible by these changes. But credit booms can be followed by crunches. As I argued: “When debt levels are high, the combination of a fall in asset prices and a credit crunch leads to sharp falls in consumer spending, as we saw in the UK and the US in 2009-10.”

Warren Buffett’s famous saying, that “only when the tide goes out do you discover who’s been swimming naked”, can apply to economies as well as companies.

Prof John Muellbauer

Nuffield College, Oxford, UK

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