Let the rich carry the can

BRITONS are spending like there's no tomorrow. Just as in the '20s, we're doing it on the never-never. Shop tills are whirring, fuelled by credit cards.

House prices are rising, thanks to record-breaking borrowing. Students hold body and soul together, because banks shroud them in debts.

In June alone, we borrowed an incredible £10bn, according to the Bank of England. Mortgage lending leapt 14% in the year to June, the fastest rise since records began in April, 1993.

But it's easy to forget that we live in a deflationary era of falling prices. Companies can't make profits by pricing, so they cut costs, sack staff, or go bust.

When unemployment surges, wages and prices will fall further. In an inflationary environment, the real value of debt is eroded. But under deflation, the value of debt rises in real terms.

And debts are not usually repaid by selling assets, such as the family home. They are normally repaid from disposable income. Today, the average Briton owes 120% of their disposable income - at a time when real take-home pay is falling.

Who is responsible for this mess? And who will carry the can when the day of reckoning comes?

In an annual report out today, the New Economics Foundation (NEF) argues that it is central bankers and finance ministers in the US and UK that must take the blame for this looming First World debt crisis.

These respected, often knighted, bankers and politicians abrogated their roles as guardians of the nation's finances in the 80s and 90s.

Through deregulation, low interest rates and lax oversight of lending, they helped create a credit bubble - similar to the 'gigantic structure of inflated credit' that Sir Winston Churchill wrote about in The Gathering Storm. He said: 'The prosperity of millions of American homes had grown up a gigantic structure of inflated credit, now suddenly proved phantom...'

At the same time, they clamped down on incomes and prices, but let asset (stocks, bonds and property) prices rip.

The middle classes on the whole, rely on incomes, not assets, for their living standards. The rich, in contrast, rely on wealth to maintain their lifestyle. NEF's ground-breaking research shows that the middle classes have less income and the rich more assets, than in 1980.

Ordinary consumers, therefore, are not to blame. They have had to borrow, to maintain living standards. Their spending has helped the economy. The rich in contrast, have done little as their assets were pumped up by central bank actions.

In contrast to poorer neighbours, they declined to borrow, or to boost the economy by spending savings.

When the First World debt crisis breaks, it will be ordinary borrowers that will take the blame, and carry the can. The architects of an economy that has indebted the many and enriched the few will lie low, and evade responsibility.

The crisis is likely to strike when interest rates rise, and the credit bubble bursts. Then, as in 1929, the whole wealth so swiftly gathered in the paper values of previous years may vanish.

Ordinary middle class debtors will suffer grievously for heroically borrowing, and propping up the economy.

NEF thinks that would be unfair and unjust. We're calling on governments to re-regulate capital, by introducing exchange controls, and to take responsibility for the nation's finances.

They should rein in easy money by regulating lenders and credit card companies. But, above all, governments and central banks should bail out today's heroic, if gullible consumers and borrowers.

This must not be done by taxing ordinary consumers so that they carry the can for central bank policies. Instead, on the day of reckoning, the rich, who've benefited so much, but borrowed and spent so little, should take the strain.

Ann Pettifor is editor of Real World Economic Outlook, published by Palgrave Macmillan. She will present the report at an 'Anti-Apathy' event in London this Wednesday.