Bankruptcies in UK Soaring

The number of citizens in England and Wales going bankrupt reached a record high during the last three months of 2004. Specifically, individual bankruptcies increased 34.6 percent compared to the same period the previous year, while 8 percent higher compared to the previous quarter. This data was released by England's Department of Trade and Industry, and reported in a BBC News article dated 4 February 2005.

The article went on to cite Howard Archer, an economist with Global Insight. He noted that the significant rise in personal instances of insolvency "indicates that higher interest rates have increasingly pushed heavily indebted people over the edge". In particular, the Bank of England has boosted its prime lending rate no fewer than five times since November of 2003, from a historically low value of 3.5 percent, up to the current level of 4.75 percent. This increase of 125 basis points has been enough to drive many of the countries' residents into throwing in the towel financially, and seeking legal shelter from creditors.

Who exactly is at fault in this case? One could argue that the Bank of England is more than justified in raising rates in an attempt to slow down inflation and consumer spending, and that over-leveraged consumers are to blame for voluntarily going deeper into debt. In fact, even as the bank continued its series of measured rate hikes, debt accumulation — in the form of mortgage borrowing and consumer credit — not only maintained its dangerous pace, but accelerated during December. Consequently, total consumer debt rapidly rose above the level of 1 trillion pounds.

Given that none of the previous rate hikes have dampened consumer appetite for red ink, it is quite possible that the Bank of England will continue raising rates. The results of this policy are not difficult to imagine, given how many residents of those two countries are already up against the wall with excessive debt obligations. Howard Archer noted that "The record high level of consumer debt suggests that a number of people have borrowed to their limits and are vulnerable to even a modest rise in interest rates."

While U.S. citizens often think that English news has little effect upon their own lives, these developments could presage future pain for U.S. consumers, a sizable portion of whom are already up to their eyeballs in credit card balances, house and car loans, and cash-out mortgages. At the same time, the U.S. Federal Reserve has made it clear that it has no intention of slowing down its current schedule of rate hikes. In 2004 there were an estimated 1.6 million households in the U.S. that sought bankruptcy protection. That number could certainly rise during the current year as more American consumers feel the pinch of higher lending rates.

Interestingly, of all the sources examined when researching this particular article, not one suggested that a root cause of the problem could be the government's issuance of fiat currency, i.e., a currency backed only by the government's ability to force taxpayers to pay its debts, as opposed to one backed with intrinsic value, such as precious metals. In addition, the mainstream media chooses to ignore the long history of central banks manipulating money supply, often escalating rates too high until the economy breaks, and then over-correcting to the other extreme, in the form of excessively low rates leading to currency inflation and asset price bubbles. We choose to ignore these aspects of monetary policy at our peril.