Monday, 19 September 2011

Defining Debt... Wilkins Micawber

(Warning! reading this blog post could seriously damage your mood, so readers be aware that you do so at your own risk!)
It has to be said that I have, for many years, been preoccupied with the balance sheet; my own balance sheet, in particular, but everyones including the world's in general. This is not to say I am a boring accountant, because I am not; far from it. I would never have been cut out to be an accountant; it bores me quite frankly. Finances for me, like DIY, are something I deal with out of necessity. I am perhaps more of a Wilkins Micawber, that fictional Dickensian character in "David Copperfield", who was known for his chief characteristic of being "someone who lives in hopeful expectation", and who, out of his own debt, promulgated what has become known as Micawber's Law: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery".
A few years ago, I came up with a quote for my children, in the vain hope that it might infuse them with the beginnings of some sort of financial common sense, that fairly quickly developed a 'tumbleweed' reputation; a response that was... well, "la-la-la-la-la, boring, Dad!" It simply said: "you don't get rich by spending money".
This is seemingly in contravention of the consumer economic model for growth and prosperity, which, in recent times, propelled us from the Thatcher years of economic recovery (the 1980's) to where we got to in 2007-08. Constant growth in GDP and consumer spending was the goal, the punitive consequence of which we are having to live with right now. We consumed our way out of a potential financial melt-down at the end of the 1970's, but back into another one... now! Without getting myself into the murky waters of economic theories, which I am completely unqualified to do, the one thing that sits on my mind constantly is the business of credit, or, I should say more correctly... debt!
It would appear - and we are increasingly becoming aware of that fact - that the 'boom' of the past thirty years has been built on it; credit, borrowing, loans, mortgages, credit cards, store cards, all the stuff of debt; and this seems to be true, wherever in the scheme of things you are placed, whether as an individual household or as a nation. It starts with personal debt, that you and I accrue, because we buy a house, a car, a television or two, a holiday, another car, a three piece suite and so it goes on. All built on the assumption that we can accrue debt with apparent impunity. In my lifetime I have seen the advancing nature of the individual's ability to get their hands on 'easy' money. At the beginning of my conscious adult life, there was a attitude that said, if you want something save for it, then buy.
When I first bought a house, of course we had to borrow the money, but we could borrow no more than two or, at most, two and half times our combined incomes, which was deemed to be a sensible level of debt and in proportion to what we could afford to sustain. We certainly could not borrow on a mortgage to by a car, a three piece suite; anything other than bricks and mortar. This was because, at the time, a mortgage would offer modest tax breaks, particularly if you borrowed with an associated endowment insurance policy (thereby hangs another tale of woe!). But this all changed at some point in the late 1980's, whence we suddenly found lenders not placing restrictions on what we could use this money for; that is money that we borrowed on what at one time used to be called the 'never-never'; twenty five years to pay it back, made it seem cheap and of no consequence. So the accrual of debt began, with a vengeance.
But who is to blame for this mess? Who indeed. The key to answering this question lies in your own stance with regard to personal responsibility. Before I offer my own opinions on this question, I am reminded of a couple more quotes:
"Don't go around saying the world owes you a living, the world owes you nothing, it was here first
~ attributed to Mark Twain
"Ask not what your country can do for you, but what you can do for your country
~ J F Kennedy
So who is responsible? In short: we all are. Why? Because we spent more than we could pay back, we defaulted on loans too often. We succumbed to greed. Whatever, it is our fault!
But yes it is more complex than that. It has many complicated causes, a number of which, it could be argued are outside our control; or are they?
Now, I am no bastion of virtue when it comes to managing money, because I have run up my fair share of avoidable debt at some points in my life; there are mitigating circumstances, not least when under pressure to feed young mouths, to feed the landlord or the money lender and the meter. But, whatever the apparent pressures... and I will qualify this by saying that there are always needy exceptions to the rule e.g. those whose misfortunes are truly not of their own making, those who are disabled in some way or have been dealt  a seriously bad blow by the hand of fate... other then these, we will almost always have a choice. 
We can choose whether or not we want to keep up the the Jones' next door, whether or not we can afford to do so; we can always choose whether we move up to a bigger house, a better car, the latest technology; we can choose. If you are not one of those who are truly unfortunate - and you do know your lot, so don't pretend - there is no point in complaining how hard life is, if you are still able to keep dry and warm, feed yourself and breath! We don't need all of these luxuries, to which we have become accustomed; some of them are nice and we need to cheer ourselves up every now and then, but we don't need that exotic holiday abroad every year; we don't need that gas guzzling four-wheel drive that comes into its own for only one week every year; we don't need to drink the amount of alcohol we consume every week, or even the cigarettes we smoke every day. I could go on, but, what this amounts to is that a majority of us in the First World have the capacity to choose, the freedom to determine what we spend our money on and, beyond the necessities, whether we spend it at all; in other words we can choose to cut our coats according to the cloth we have.
What about the Banks, I hear you ask! What about all of those huge international conglomerates, whose interests are best served by growth and enabling mass consumerism and whose every action is made to ensure they grow bigger and more powerful; what can be said of their part in all of this? I say yes, they are responsible for enabling and encouraging excessive debt over the past few decades, by means both subtle and direct that have encouraged personal debt and dependence. This became very evident over the past ten or fifteen years as personal debt reached an all time high and personal bankruptcy with it. Governments, not least our own in the UK, but also right across the rest of the developed world, could have done something, albeit electorally unpopular, but they could have imposed some regulation, put some anchors on an over-heating economy before it melted. If a simpleton like myself could see that the bubble had to burst sometime, then I'm damned certain that there are at least a few people in powerful places who could not only have seen this coming but also begun to do something about it, slow it down, regulate it; that's what we elect them for isn't it?
For the past several years, at least since my children started to become more independent, this household for one has, as much as possible, been offloading debt, certainly not taking any more debt on, trying to live within our means - and with only one income that is still challenge enough, but we are trying nonetheless. 
As a post script to my earlier (boring) epithet, "You don't get rich by spending money", in case you should wish to understand me better, it should be followed by the statement: "better to save it first for something your want... or invest it".
I think it's time for a seed change in the way we think; in the way we educate young minds to manage their financial lives. Otherwise what will happen...? We are screwing with their futures. 

What do you think?


  1. Perhaps I ought to point out that anybody who does take the trouble to read this, digest it and leave a comment, is very much less likely to be someone who lives on credit. Sad to say a younger generation, too busy and too preoccupied by their own ambitions and survival plans, may well be the most likely victims of this 'era of debt'. I was once there and, who knows, could be again if the powers that be continue to fail to manage the money we pay them to manage the economy!

  2. John, great insight into a very complicated problem, and I agree with most of what you say. I’ll touch on a couple of points to provide perspective and speak only from a micro-economic level. Ultimately, the world debt is a result of all the individual personal debts, however I don’t know enough about government lending between countries to speak on the subject.

    In Canada, the banks are heavily regulated. We only have 5 major banks, and there are strict guidelines for what they can do. This is unlike the U.S. where small independents were able to open “mom and pop savings and loans” on any street corner.

    This accounted for the loan crisis of the 80s and 90s and I don’t believe we’ve ever fully recovered from it. We were just playing “catch-up” until the next crisis came along.

    As a former banker with 20 years in various roles, which included lending and fraud consulting, I saw the banks blamed for things that ranged from tight lending practices to excessive service charges to low investment interest rates. Let’s face it, everyone loves to hate the banks, but it’s really only an institution providing a service. In Canada in particular, banking is regulated primarily to protect the consumer—which brings me to my next point.

    Consumer groups have power to sway government. As an example, where banks were once only able to lend up to 75% of the appraised house value– they are now able to lend 95%. This change came about for many reasons, but one of them was to allow the “younger” generation to be able to borrow more to afford the house of their dreams. They felt it was impossible for them to save up for the down payment if they had to come up with 25%.

    I use the word “afford” in a tongue in cheek manner because it used to mean if you could afford something, you’d pay for it outright. Nowadays, so long as you qualify to borrow 950K, then you can “afford” a million dollar home. The thought of buying a less expensive home is not normally an alternative for the current generation.

    To understand how we’ve gotten ourselves into this, I think it’s important to know a bit about the core values and work ethics of the generations. Of course, these are merely generalizations, but they help provide a flavour for the changing times.


    The “Traditionalists” – the generation that lived through the Great Depression had a strong sense of duty, sacrifice and loyalty, and they put a great deal of faith in institutions and governments.

    Next came the Baby boomers who grew up during the civil rights upheaval. They were highly competitive workers who were determined to provide a better future for their children.

    Generation X entered the job market during an economic recession and was told they’d likely be the first generation less successful than their parents. Despite that, they were individual thinkers who strived for a good work-life balance.

    The current Generation Y live in a world ubiquitous with technology. They have a pack mentality and believe they should get what they want—now. Raised by attentive boomers who treat them as equals, their core values rest with material comforts, and as their loyalties lie with people, not institutions, they also take their time looking for the “right jobs.”


    The changes in thinking over the years only highlight the daunting task of how to educate about financial responsibility. It’s a complex task to balance current wants with future needs. Depending on where you fall in the generation spectrum, you may not even care about the future.

  3. Wise words, indeed. And interesting to read a perspective from Canada too.
    I am not going to add a great deal here, but just to comment on growth versus debt, and make an observation of what I believe is happening in the UK right now.
    Above all many, many people are cutting down on consumption and paying down debt. Figures out today show that the economy has grown even less than we thought in the last 9 months and even Tesco's sales are down. This bad for firms and employment that relies on the consumer sector and will lead to a brutal period of re-adjustment in economic life in this country. With government trying to reduce debt at the same time as individuals cut spending (ie. no Keynesian balancing), this shock will extend into public sector employment and services in a big, big way. But at the end of it we will have a more financially savvy population who realise their responsibilities.
    The banker bashing is a diversion. As they seek to re-build their balance sheets so they never again need bailing out, why would they look to expand commercial credit in such a risky period? The widespread desire for retribution is nonsense. The treasury functions of the major international banks that pay taxes in the UK have been hugely profitable over the years, and like premiership footballers and chat show hosts, the labour market for those individuals with "the midas touch" has determined their pay and conditions. Anyone who watches Skysports and bashes bonus culture is engaged in highly selective reasoning. The city traders did not do this "on the back" of ordinary citizens, many of whom benefitted indirectly from the increased consumption of these individuals. (Free "in credit" banking can be set up by anyone with 10 minutes to spare and an internet connection, so the "high bank charges" justification is also flawed.)
    Lastly - there will be huge business opportunities for those nimble footed enough to be able to adjust to the new circumstances or who are not reliant on consumer culture.

  4. Charlie, thanks for your 'tuppence' worth as you called it. You have made some very valid points. We all need to take our share of responsibility and, yes indeed, there absolutely does need to be a seed change in the way future generations have to manage their personal balance sheets. As for bank charges, I willingly pay a monthly subscription, because I think I get sufficient benefit to justify it, and I almost always avoid the overdraft. Have to say I get the feeling - reading between the lines - that you could well bring more than tuppence worth to this blog post: business opportunities and products that don't rely on consumer culture... hmm, makes you think.

  5. Eden, thanks so much for the lengthy input; I expected no less from someone with whom I have already enjoyed considerable and stimulating exchanges elsewhere.

    The 'loan crisis' of the 80's and 90's, you mention you don't think we've ever fully recovered from these times. Have to say that makes sense. Vision is always clearer in hindsight, but, do you know, didn't we - and I mean not only personally but also on a corporate level; didn't we just borrow our way out of recession during that time? Whatever happened, now we are back in recession - verging on depression - this is the very last tactic we need, lest we want to go completely bankrupt!

    As for hating the banks, yes, human nature always requires a scapegoat! You're right they do provide a service and it is essential that they remain healthy for the sake of the economy as a whole, but two points: (i) they still manage to retain an anonymous and arrogant attitude; they could all do with a public face that is capable of talking common sense to explain the complexities of the money markets and (ii) I have a close friend whose business folded after ten successful years, simply because when lightening struck twice - a supplier let him down and a customer went bust within a short space of time - when he needed short term money to see him through, seemingly without discretion, they pulled the plug and just turned their backs on him. Unable to balance the books he had to sell up and close his doors earlier this year and lay off his employees. Can we presume your heavily regulated big five Canadian banks didn't need bailouts?

    I can identify the generation types to which you eruditely refer; I am in the baby boomer generation and worked in trade and commerce all my life, my wife as a nurse in public service (and guess who's getting the better pension!) but I still feel fortunate, as much because of the opportunities that have come my way, as for the fact that I was capable of taking them by the horns; I had opportunities to do my best. But perhaps more importantly, I also had a pretty good education and a 'middle class' upbringing, which was what I call 'traditional' rather than the newly ambitious, aspiring middle class. This taught me not to spend beyond my means; that saving for a rainy day was a virtue; that debt needs to be managed.

    And I have another saying that often rings in my head, from my mother, who used to say what her own (business minded) mother used to say to her: "be in debt to no-one". That would have been a difficult concept for either X or Y generation to take on board.


Don't leave without letting me know what this article made you think, how it made you feel ... good or bad, I'll take either.