Now is the winter of our future consumer selves

The shortest day is one where attention turns to Winter, and the promise of an eventual Spring. I’m going to be contrarian and think about a nascent Winter – for the collective spendthrifts that seems to be the Great British Public, from hero to zero and beyond in six years:

this ain't gonna end well
this ain’t gonna end well

I see the party out and about, particularly at this time of year. So does Barclaycard – apparently the lower oil price has done wonders for the restaurateurs of the country.

apparently Barclaycard process half of credit card transactions in Britian, which I find hard to believe. Anyway, these are the changes in spending
apparently Barclaycard process half of credit card transactions in Britian, which I find hard to believe. Anyway, these are the changes in spending

The good thing is that the predicted rate of change in overspending is slowing. And of course everybody is feeling chipper. Bless their cotton socks, the opposition tried to make political capital out of this without doing what I am doing in this post and hollering out like Scrooge

Britons – you are overspending way beyond your means. Cancel Christmas and Stop It Now

After all Cameron got into no end of hot water when he said that a few years ago 😉 Learning from the flack he took, which is basically don’t you dare tell people to spend less, even if it is the very thing they need to do, what this came out like was

Ms Malhotra added: “Of course families need access to credit and the ability to borrow to invest for the future.

Families do not invest for the future. They live by YOLO.  Families overspend and firefight the mess as best they can later

No. I’m sorry, but the general level of financial awareness in Britain is just not that high. Families in general have no understanding of the meaning of the word invest. The principles my parents outlined thirty years ago still hold. Don’t borrow to buy wasting assets. Only borrow if you will save more in total (housing – where you expect a relatively settled lifestyle) or earn more than the total cost (education, in some circumstances which are getting rarer). For all else pay cash, and if you haven’t got it you can’t afford it.

There are very, very few good reasons to borrow money in Britain. Under some circumstances borrowing money to buy a house is one, although I am not so sure that now is one of those times. I borrowed too much money to buy a house. The damage to my personal finances is still visible after 30 years – the only reason I am in a better financial position than some of my peers is I managed to shut down some of the other ways British households misallocate capital by borrowing it.

Let me tally a number of ways many families fail to invest –

  • in the immortal words of a good lady friend “they pick up financial commitments like pets and children without thinking through the financial consequences”
  • They borrow for university, an asset that is being rapidly devalued through oversupply and becoming an increasingly unaffordable luxury. Once upon a time (1990s to 2010) you could have made a case for investing in a degree. It’s tough  to make that case now.
  • They borrow to buy wasting assets like cars, for God’s sake. You can get a damned fine used car for £5k and a decent runner for less.
  • They borrow to buy shit they don’t need to impress people they don’t like and keep up with the Joneses
  • They overspend on Christmas because they lack the integrity to tell their children that times are harder now. The road back from that sort of inattention is much longer and harder than recognising straitened circumstances at the time and shutting elective spending down until you know where you are.

There are other subtler ways that people malinvest, but borrowing to spend on wants rather than needs is never ‘investment’. The shortest day of the year seems a good time to recall that borrowing money is a great way to give your future self a hard time. There are going to be a good many consumers whose forthcoming financial Winter will hold no Spring.

The problem is that very few people invest. And those people, which probably includes many regular readers, are people who are relatively wealthy compared to most Britons. You don’t usually get wealthy by investing, that is what Work is for if you spend less than you earn, but it is often the way you stay wealthy. There is a massive difference between investing and spending. Opportunities to invest are hard to find and come rarely, and usually involve some sort of uncertainty. Opportunities to spend are commonplace.

Of course families need access to credit and the ability to borrow to invest for the future

is a chimera. I’m of the opinion that Britain would be a much happier place if there were far less access to credit for British families – like the credit controls of the 1960s and 1970s. The excess of credit since then seems to have made the banks richer and the people poorer, because they are increasingly forced to overspend on housing precisely because of this credit. It is a classic tragedy of the commons – of course I want to borrow more mortgage to outcompete you. But like an ostensibly neutral country supplying arms to both sides, the banks have no specific loyalty to me, it’s when you can borrow more to fight back that this becomes a gun that fires on both ends – we both pay more for our houses and the banks get to lend more money out. What’s not to like? Well, the opportunity cost of what else we could have done with that money!

Sooner or later we are going to have to nail this problem. Sometimes you shouldn’t be allowed to do what you want to do, and the litany of commonplace consumer cock-ups with credit is getting longer and longer. It’s no fun any more, and the promise of endless financial winter doesn’t sound so great either. We managed to shut down a lot of Money Shops. We managed to slow the number of Liar Loans on owner occupation. We are taking the battle to the tragedy of the commons otherwise known as BTL. There is hope. Perhaps we need to make it easier to repudiate consumer debt, then banks would be more circumspect about who they lend money to, since the old ways of having credit controls is considered dirigiste and fuddy-duddy in these laissez-faire times. What exactly is so terribly wrong about expecting people to have the money up front for their consumer wants?

Since you, dear readers, are presumably not among these consumer spendthrifts, a happy Christmas to y’all!

15 thoughts on “Now is the winter of our future consumer selves”

  1. I’ve noticed a few bloggers (weenie, RIT) recently tooting the horn of P2P lending, for greater returns on cash.
    I wonder what your thoughts on P2P lending is then? Are they simply taking advantage of the overspenders or is this lending sensible?

    Merry Christmas to you and yours.



    1. I have a some money in Zopa, but to be honest, it frightens me more than my Russia ETF. The trouble with these leveraged households is that is it will unravel very quickly. It’s hard to see what is the underlying productive asset that is generating the P2P return – in some ways it’s a bit like BTL which is also taking advantage of a particular set of circumstances as opposed to a sustainable productive earnings base. We will all be using oil and gas in 10 years time, will we be having interest rates still at historic lows and ever-increasing price to earnings multiples? I’m not so sure there. Great if you can get out at the right time, but that is the rub…


    2. @Dom
      My recent post was actually about my first P2P loan default haha! That said, I’m happy to continue investing small amounts in P2P – eggs and baskets spring to mind when it comes to P2P!

      Interesting post, Ermine.

      That Cameron overspending quote reminds me of when Jamie Oliver was on his anti-poverty trek and dared to say “the mum and the kid eating chips and cheese out of styrofoam containers, and behind them is a massive TV. It just didn’t weigh up” and some critics appeared to think that the massive TV was a need, not a want!

      Hear what you’re saying re P2P, will be interesting to see how it all goes when interest rates go up etc. I’m with UTMT on BTL though – I’m not bothered if the bottom drops out of the property market, as there will still be someone who will want to rent instead of buy.

      All the best to you and yours for the festive period and the new year!


  2. I can’t disagree with anything in this post!

    I’m also a P2P lending skeptic. You nailed my concerns when describing the lack of a productive asset. That said I’m not convinced BTL is in the same category. Even if house prices fell 75% there would be some that could not afford or would not want to buy and would want to rent. My rental properties would service those people, producing a stream of cash flow for me. The future cash flows can be modeled with some certainty, unlike P2P lending.


  3. I thought P2P is not the saver/spender transaction mediated by a bank that an old-fashioned loan was. (I hope) Its lending to businesses that can make the money work, not car loans.

    The other big no-no is borrowing to invest in the markets, as the Chinese middle classes have found. Leverage is a bad idea unless you really understand the risks, which few do. Of course a low deposit mortgage is exactly that, but with the housing market so out of control, so many people are forced to do that they become a significant electoral block that can influence government policy.


  4. I hear you on people being increasingly unable to say no to the every whim of their kids – this is all the more strange when those kids in question are even too small to really understand. In which case you wonder if it’s the parents trying to make up for something they felt they lacked in their own childhood anyway. The damage from the subconscious lesson this can instill could last a lifetime – the single worst financial lesson someone can learn; you can have anything you want now – there’s always another way.

    The immaturity of that attitude makes you wonder if the parents themselves have refused to grow up, as a refusal to accept reality is intrinsically childish …..& this applies to most young adults today, not just those who’re parents.

    Either way, most developed countries of today have lost their competitive advantage(s), so other than their ruling elites, their populations are going to have to learn how to be poor again in the face of the rising East/Asia. Denial = what you want to believe, minus the facts. Enjoy the end-of-year break. [although that might be a case of ”Which one?” to the FI/RE community 🙂 ]


  5. A house price crash that caused significant repossessions would leave some renters, but they’d have no money. Cheap houses would allow current renters to transition, driving rents down, and new people to enter the BTL market at lower cost, so they could afford undercut current landlords. Very bad news if you are a heavily leveraged BTL landlord, who has been borrowing to invest.


  6. Tomorrow will mark the general release of The Big Short in the U.S., and we will be in line (with discounted tickets purchased from Costco) to see it.

    That book/movie seems to be an appropriate tie-in to what Ermine is referencing here in this post about access to credit to buy more house than people can really afford. Reading the book–and, no doubt, watching the movie tomorrow–makes you aware of how criminally ridiculous the mortgage crisis was.

    (Since you reference Shakespeare in your title, I’ll end with another, to P.B. Shelley: “If winter’s here, can spring be far behind?” Hopefully soon!)


  7. @John B. weenie – I was thinking of Zopa with that observation, rather than Funding Circle et al. Having said that, those are outwith my area of expertise and risk tolerance, not because they’re inherently bad but because at the moment I would struggle to qualify the risks, and at this specific time, though hopefully not for much longer, my risk tolerancfe is lowered until I can establish if i can get my hands on my DC pension money in a timely manner 😉 It is certainly something I will take a look at in the next couple of years. Whereas the consumer P2P that is Zopa I regard as a punt, not an investment.

    > Very bad news if you are a heavily leveraged BTL landlord, who has been borrowing to invest.

    I think that’s the general push – BTL isn’t inherently bad, it is the amping up of leverage that leads to perverse incentives. Britain has always had landlords, some good, some bad. Rachman presumably owned his properties outright. But the highly leveraged ones have a brittle business case that’s running against Government policy now. That’s a big 600lb gorilla…

    It is now over twenty-five years since I was dumb enough to buy a house at a high. I still remember how horrifically quickly it started to unravel, and it was people like me who were at the high water mark of leverage who got foreclosed. That I didn’t was luck, not judgement! Both my neighbours took a bullet…

    @UTMT > My rental properties would service those people, producing a stream of cash flow for me

    it would presumably change less – after all with consumer P2P it’s entirely possible for the capital value to fall to zero if enough people default and/or Zopa becomes overwhelemed by bad debt whereas it’s hard to envisage the value of housing falling to zero in the UK

    @Survivor though it’s uncharted territory for me I believe parents often live their unfulfilled lives projected through their children – Freud and Jung were there years ago and it seems to be borne out in a study, as if it weren’t clear enough by observation 😉 The frustrated ice-skater’s daughter has the best pair of skates in town even if she really wants a chemistry set or a horse. And because it’s an unseen dark river running through the subconscious that has no voice any reference to it meets with tremendous resistance. Which is a shame – the ad-men know how to play this harp so well to make lucrative, though unlovely music.

    And as you say, it’s a terrible lesson passed on, though unwittingly. Depressingly I figure you are right – we will have to learn how to do less with less. That Jamie Oliver quote that Weenie referred to was true, even if it had a hint of let them eat cake, but it was shouted down because we can’t acknowledge that the tide is drawing out.

    @Julie That sounds a fun movie 🙂 In some places credit enables people to buy more house than they can afford – in other laces like hte UK it seems to lead us to jack up the cost of houses to prices that are more than people can afford. Which is even worse – paying more for the same amount of house – barmy.

    We need a bit of Shelley’s romanticism -this post turned out a little darker than I had originally meant!

    A happy Christmas to all!


  8. i think we will soon see what a rise in mortgage rates looks like for the first time in a decade

    this will be interesting as much fewer people have mortgages these days

    – fewer young people own

    – more old people have paid theirs off

    but if rising interest rates does not affect consumer spending much, will the pace of interest rate rises up to the new normal of 2% base rate come quickly


  9. £1500 per household doesn’t seem vast – they are simply ‘unlocking’ a small fraction of this year’s increase in ‘value’ of their house. My generation and the next will simply bail them out one way or another. 😦 It’s simple really, if we import more ‘value’ than we export, someone has to borrow: if business and the Government cut down, then it’s the populace who take up the slack!

    Sorry for my recent silence – I’ve had a lot going on; having never really used it before, it now appears I’ll be a net recipient from the NHS over my lifetime. (Don’t worry; it’s not that bad – just some autoimmune unpleasantness.)

    It seems to me that the NHS is overstretched, underfunded and has a rubbish IT system. Not exactly a revelation… It is interesting to see people who have a powerful urge to heal – I now understand why people join MSF and travel to vile places simply to help out.

    Anyway, happy Christmas everyone! (Especially Scrooges if you follow Tim Harford!)


  10. Can I join in with the seasonal quotes? – Here is Wordsworth –

    The world is too much with us; late and soon,
    Getting and spending, we lay waste our powers;
    Little we see in Nature that is ours; ….

    But some of us do… see Ermine’s next post on the Solstice celebration!
    Enjoy the Season!


  11. My daughter and son-in-law are in the process of parlaying their one-bedroom flat in a tatty but (now) expensive part of NW London into a nice little house in a non-trendy area.

    Being sensible young people from families who taught them financial savvy, they have decided to go for the modest house, large deposit and (relatively) small mortgage option. They want to be able to have a life, cope if/when rates go up and manage ok if one of them has an employment blip. So they are borrowing substantially below what their mortgage lender has decided they can ‘afford’.

    This seems to have blown the mind of the mortgage adviser (also young) who simply cannot understand why they don’t want to borrow to the max. How quickly the bad times are forgotten, until they come around again…


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