Relief Debt Systems

As they focus on repaying their debts, are Britain`s `Scrooges` slowing the economic recovery by spending less in the shops? It`s a question asked by businessweek.com, among others. `For years,` the article states, `economists have felt that British consumers – who have the world`s highest debt levels relative to discretionary income (more than one-third higher than Americans`) – should rein in spending.` Today, it seems this is happening. Figures from the Bank of England reveal that individuals` collective debt actually fell in July, for the first time since records began in 1993. Overall debt levels fell by 600 million, made up of 400 million of secured debt and 200 million of unsecured debt. However, while this focus on paying off debt is good for individuals` financial health, it can be bad for the economy as a whole. It`s something the Bank of England refers to in its Quarterly Bulletin (Q3 2009): `Any adjustment in saving is likely to have important consequences for the economic outlook, given the importance of household spending within aggregate demand. Indeed, any attempt to reduce consumption is likely to push down on output and hence household incomes. That could actually make it harder for households to increase their saving – an effect known as the paradox of thrift.` Nonetheless, this should be a good thing in the long term, the article concludes, quoting Jamie Dannhauser, economist at London`s Lombard Street Research. Mr Dannhauser says that in the near term: “the adjustment to less debt will be severe”, even though it`s “exactly what Britain has to do”.

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