Time to give up the fiat pancakes

Today is Pancake Day and whilst many, including The Real Asset Co research desk, will be enjoying it, there is still an ongoing economic crisis in the foreground. Maybe its time to give up something other than chocolate or smoking. Maybe its time to give up on reckless spending and fiat money.

Shrove Tuesday, or Pancake Day, is celebrated the day before Ash Wednesday and is typically the day that signals the beginning of a period of abstinence and self-control.

Times have rapidly moved on since the death of Christ and very few of us take Shrove Tuesday as seriously as we once would have. Now we tend to give up vices rather than ‘nice’ things. Many give up alcohol or smoking, some give up swearing, others give up chocolate.

But times are changing once again, and many of us are already getting used to giving up such things due to tightening our belts.

May we make a suggestion of a new type of Lent, to suit modern times? A global, economic lent.

This year the financial crisis is 5 years old. The entire global event has been spawned from greed and wanting more and more tempting food from the larder of the credit creation machine.  Central Banks, governments and the financial markets have all gorged themselves on junk economic policies, junk money, and of course junk-bonds.

But have we not, as individuals, over consumed credit cards, low interest rates and cheap mortgages?

In the United Kingdom, public and private sector debt has now reached more that 507% of GDP. Japan is just ahead of us with 512%. This figure is made up of four main components: government, financial corporations, non-financial corporations and household debt.

Our household debt, as a percentage of GDP, is 81%, which is above average when ranked in the ten most mature countries. It is estimated that it will take more than a decade for private debt levels to reduce down to those seen before the millennium.

Whilst household debt does account for a large amount of our debt, it is the financial services sector that is responsible for nearly half, sitting at 219% of GDP.

Those of us with household debt shouldn’t feel too smug. Of the top ten mature countries globally, we still have debt which represents an above average amount of GDP. Whilst the MPC and the Federal Reserve, have each indicated they will not be raising interest rates for some time, this will be mathematically impossible to justify when inflation starts climbing. Over two-thirds of UK mortgages have floating interest rates; something that could cause a pinch, or worse foreclosure, when inflation begins to rise.

It took us just a few years to get our country’s debt to this level, but it took Japan twenty. Perhaps it’s time we stopped clearing out the easy money larder and took a period of abstinence and self-control.

Banks have to do global economic lent they’ve eaten too many fiat pancakes already… and so have we.