The "Debt Timebomb"
Mark O'ByrneThe British Conservative Party's Debt Commission gave it's conclusions during the week. They say that the standard of living of around 15 million people is threatened by the current unsecured personal debt level of £1,920 billion.
The Chairman of the commission, Lord Griffiths, a former director of the Bank of England, warned that Britain's personal debt 'timebomb' mountain poses a real financial threat to more than 15 million people or more than 25% of the population.
We are bombarded with so many facts, figures and statistics these days that when confronted with such large figures one's eyes can easily glaze over. When one gets into the realms of such astronomical figures one can easily fail to grasp the enormity of such sums of money or debt and their implications for the wider economy.
£1.92 trillion is £1,920 billion or £1,920,000,000,000 that has to be paid back to lenders plus interest. Much of the debt is in the form of credit card debt which is subject to adjustable rates and in a rising interest rate environment the costs of servicing such debts will increase.
The majority of people should be in a position to maintain their debt repayments. But in an era when many couples are dependent on two salaries in order to pay their mortgages any change in their financial position due to serious illness, family difficulties, loss of a job or any of the many other difficulties which life has a habit of throwing up will create financial distress. There may be a significant minority of borrowers at the margin who will not be able to maintain their debt repayments and their difficulties may have implications for the wider economy with regard to consumer confidence and consumer sales going forward.
Also during the week came the news that in the UK, often held up as a paragon of economic virtue compared to the more lack lustre economies of France and Germany, the banks were forced to write off record levels of debt last year, new figures from the Bank of England have shown. This is in an economy which is meant to be healthy and growing.
Concerns about soaring levels of consumer debt are likely to rise, particularly over the willingness of banks to give large loans to poorer households. Write-offs in the fourth quarter of 2004 are expected to reach a record level of more than £6 billion for the year as whole, according to a report in the Financial Times. The last time bad debt write-offs reached this level was in 1993, when Britain was mired in a recession.
This situation is the same, if not worse, in the U.S. The number of bankruptcy filings is a barometer of the intensifying economic insecurity and ever-rising debt load of American families. Personal bankruptcies have soared from 200,000 a year in 1978 to 1.6 million in 2004. The debt burden carried by the average US household is staggering. In 1946, at the beginning of the post-World War II economic boom, consumer debt amounted to 22 percent of after-tax household income. Now debt is proportionally five times as great, amounting to nearly 110 percent of income.
For much of the postwar boom period, rising consumer debts took the form of home mortgages, car loans and revolving credit balances with department stores or essentials such as shelter, transport and food. Credit card debt (which was generally used for the purchase of less necessary consumer goods but is increasingly being used by distressed citizens in order to buy food and other essentials) only began to become a major factor in the 1970s and 1980s. From 1989 to 2001, according to a recent report by the public policy group Demos, credit card debt nearly tripled, from $238 billion to $692 billion. During the same period, the savings rate plunged and the number of bankruptcy filings jumped 125 percent.While middle-class families saw a 75 percent increase in credit card debt, the more vulnerable were much more likely to plunge over their heads: credit card debt for senior citizens rocketed 149 percent, and for very low-income families, making $10,000 a year or less, the increase was 184 percent.
The explosion in consumer debt is also due to the boom in home mortgage refinancing and the increasing instability of working class and middle class incomes, which has compelled more and more families to rely on credit to offset sudden drops in earnings and sustain consumption. From 2000 to 2003, home mortgage debt soared by more than one-third, from $4.9 trillion in 2000 to $6.8 trillion in 2003. Even though many homeowners refinanced their mortgages to use home equity to pay down debt, non-mortgage consumer credit still climbed by 15 percent, or $300 billion. The proportion of homeowners' equity in their own homes was 86 percent in 1945; by 1990 it had fallen to 61 percent and by 2003 to only 55 percent of the value of their homes.
These huge debt levels in two of the leading economies of the world do not bode well for the long term economic health of the global economy.
Weekly Markets - Precious Metals
Gold futures for April Delivery were down 3.37% for the week. On the New York Mercantile Exchange, gold for April delivery closed at $424.00 an ounce.
Silver was down 6.12% for the week ending at $6.90 an ounce.
Platinum (April) won back a portion of Wednesday's weakness, closing up $6.50 to $862.50 an ounce.
Palladium for June delivery closed the week at $196.15 an ounce.
Performance ( % Change)
Some commodity and currency analysts voiced expectations that any further weakness in gold and silver prices could prove temporary. "Gold investors should take heart because if inflation is indeed back, gold is the ultimate hedge against it," strategist and publisher of the Grandich Newsletter, Peter Grandich said.
As Wednesday's trading in the Nymex metals pits got under way, financial markets already had a case of the jitters brought on by Federal Reserve policymakers saying Tuesday afternoon that inflation has become a concern for the U.S. economy. Compounding this, fresh signs of inflation emerged in the consumer price index for February released by the Labor Department earlier Wednesday.
Rightly, there has been much talk recently of Asian Central Banks and particularly the Central Bank of China diversifying their reserves out of dollar denominated assets and into the euro, other currencies and gold.
China has less than 2% of its reserves in gold. China and Japan hold a lot of US debt, but they may not want to hold U.S. dollar-denominated debt for the long term. They are starting to look at diversifying and one of the time-honoured and traditional ways of diversifying one's assets is to buy gold.
The Chinese recently deregulated and liberalised their gold market which allows private companies to sell gold bullion to Chinese citizens and Chinese citizens to invest, save and own gold. This was illegal for most of the 20th Century due to the Chinese Communist governments monopolisation and strict control and suppression of the gold market. An exchange for the sale of bullion in larger quantities have been set up in Shanghai.
Tyrannical and authoritarian governments do not like their citizens to own gold as gold confers economic and financial independence and means that citizens are not dependent on the State and therefore do not adhere to 'the Party' line. Thus there is likely to be a lot of pent-up demand which will have ramifications for the gold price going forward. Like the people of India the Chinese have a strong cultural affinity for gold and there is strong physical buying out of China in recent months.
Chart courtesy of Break Point Trades
Gold's 200 day moving average is at $418.70 and this should provide support. It's 65 week moving average as shown in the chart above is at $414. Were it to fall through these levels it may test it's February low at $411.50. On the upside resistance is at $429.80 and then $436.10 and the March 11 peak of $448 which if it takes out and closes above could result in gold heading to new bull market highs.
Silver found support at the 200-day moving average (680.90) and looks to be consolidating at these levels. Look for mild resistance from 705.00 up to 710.80 the 100-day moving average and then resistance at $7.50.
The U.S. Dollar index gained 0.14 points to 84.18 on Thursday and is higher by 2.06 points or 0.8% on the week.
The U.S. dollar index closed at new 5 week highs, the euro index closed at new 5 week lows, the yen closed at new 4 month lows, gold closed at new 5 and ½ week lows.
The euro index lost for its sixth straight day and lost 0.18 points to 129.54 to further its five week lows. For the week, the euro index is down by 3.54 points or 2.66%. The yen lost 0.18 points to 94.06 to further its four month lows and is down by 1.38 points or 1.45% on the week.
Nearly all currencies were down against the dollar for the week. The Icelandic krona dropped 4%, the New Zealand and Australian dollars 3%, the Norwegian krone 2.25%, and the Swiss franc 1.8%. The Latin American currencies generally outperformed their global counterparts.
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