The Gap Widens

Credit crunch diary – 26th August 09 – The gap widens

Yesterday we talked about deflation and the disadvantageous affect it has upon debt. This theme can be developed. A recently published analysis by the Institute for Fiscal Studies shows that lower income households (broadly those in the bottom one fifth of income levels) are still experiencing personal inflation of up to 5%. This means that while prices generally are falling (deflation) and their debts are increasing in real terms, spending on the things they are wrapped up in, such as debt servicing, in rising. Contrasting this to the top fifth of economic cases, these people are enjoying lower prices coupled to not being burdened with debt or having lower priced debt.

What is happening, and not least in the UK, is that the rich are getting richer and the poor are getting poorer. The age-old economic gap is widening and ironically under basically socialistic administrations. Sandy Chen, a director of Panmure Gordon, makes the point that unlike in previous downturns, this credit crisis stands out as one in which the poor were allowed to rack up debt to unprecedented levels.

To me, this analysis goes far in explaining the dichotomy to which this diary has eluded in the past. Namely that the UK high street is still buzzing, the restaurants are full and the booze still flows. What we are looking at (the queue for tables at our favourite Indian restaurant last Saturday night) is those on the right side of the fence. In other words, the ever-so-slight recovery being recorded, and with Japan now joining the party, is a “narrow” and a “privileged” one.

Having tracked this crisis from more or less a beginning, it seems to me that what history will record as a salient factor is the differing position of the poor. In the past, the poor lived within their means simply since there was largely no option. Remember HP deposit requirements, remember credit purchase terms, remember strict multiple-of-salary loans? Throw this bath water away and the baby really is in trouble.

The crisis of the widening gap has arrived.