Bless us, has Christmas past caught up again?
Guy Monson is chief investment officer of Sarasin Chiswell
money.telegraph.co.uk
While the England of Charles Dickens may seem gloriously irrelevant to Christmas or January sales shoppers, it is surprising to see how much of the economic landscape is in fact rather similar.
A Christmas Carol was written in 1843 and at that time Britain was seeing extraordinary new technologies emerge, many of them in communications, which transformed productivity and business practice. In 1842, for example, the first steam mail ship sailed to India. A year later the first public telephone line was completed, while a year after that Samuel Morse transmitted his first message from Baltimore to Washington.
At the same time a surge in 'free trade' was leading to a sharp rise in imports from the emerging economies of the day: America, India and Australia.
The parallels today are clear as we see the impact of technology and the internet economy on jobs and growth. At the same time there is the surge in productive capacity in today's emerging world of India, China and Eastern Europe. In 2004 14 emerging economies experienced annualised GDP growth of more than than 5pc.
The framework for a modern industrialised economy was falling into place with the passing in 1844 of the Companies Act, the Bank Charter Act and the Railways Act. Meanwhile Britain's industrial strength and innovation were displayed for all to see at the Great Exhibition of 1851 at Crystal Palace.
Bank of England base rates in 1843 were less than 1pc below where they stand today, while inflation in the decade following publication was about 1.3pc annualised, hardly different from today's CPI rate of just 1.5pc.
Despite the UK being the richest country on the globe in the mid-19th century, poverty was still acute. A Christmas Carol describes this vividly with its portrayal of the impoverished Bob Cratchit and his family, the clerk in Ebenezer Scrooge's counting house.
Much of that poverty came through debt, a theme that runs throughout Dickens' work and one of which he had first-hand experience. His father, a clerk at the Navy pay office in Portsmouth got into deep financial trouble and finally ended up in Marshalsea Prison. He was only released when a relation died and left him enough money to pay off his debts.
For many people, these debt-related problems were exacerbated by the drop in inflation as the impact of the Napoleonic Wars and increased free trade started to flow through into domestic agricultural prices. This in turn encouraged a decline in real incomes.
This is not unusual. Typically the winners in an inflationary world are the borrowers who see the value of their debt shrink in real terms and their incomes rise in nominal terms. But in a deflationary or low inflation world, the winners are more likely to be the Ebenezer Scrooges who hoard savings and fixed interest bonds.
Any of this sound familiar today? According to the recent Bank of England Financial Stability Review, the debt-to-income ratio in the UK is running at about 140pc and for homebuyers the ratio is even higher. This leaves the average UK consumer among the most highly indebted in the industrialised world. Much of the debt is secured on housing which after years of double-digit increases is beginning to look less secure.
While the absolute level of debt is at record levels the cost of servicing it is lower than for many years. While this may have increased 'affordability' and encouraged households to buy homes, it has also meant that these debts stay around for much longer, and it seems that the strain is beginning to tell.
Personal insolvency cases have been rising steadily over the past three years at the same time as households reporting mortgage payment problems has started to climb.
So, perhaps, this year the Ghost of Christmas Present will be paying a visit to Threadneedle Street to ask Mervyn King why he has been raising interest rates amid this mountain of debt, when inflation has been consistently below his targets.
At the same time the Ghost of Christmas yet to Come should probably drop by 11 Downing Street and remind the Chancellor that in 1844 a typical senior clerk like Bob Cratchit paid a net tax rate of less than 5pc of income.
Guy Monson is chief investment officer of Sarasin Chiswell
6 November 2004: Personal bankruptcies running at record high |
