UK Car Lending

Cost of living crisis: you can’t borrow to get by

There is no doubt that households are facing the worst budget pressures in 30 years. Inflation has already reached 9% and could well climb to 10% by next month. An average car costs £100 to fill up with gas and groceries are more expensive than ever. With wages only rising by 3-4% at most, people are getting poorer and many are already cutting back on spending just to stay afloat.

Plastic takes the pressure

Many of us borrow money to make up the difference. According to Bank of England statistics, consumer credit is now growing at the fastest pace in 17 years. The growth rate for credit card borrowing hit 11% last month, while overall consumer credit is now growing at 6% a year. In the past three months alone, UK borrowers have spent an additional £3bn on their credit cards and borrowed an additional £1.6bn elsewhere.

It’s pretty much the same story in the United States. In April, consumer borrowing jumped 10% on an annual basis, with nearly $40 billion in loans taken out in a single month even as inflation hit nearly 9%. Meanwhile, new ways to lend are emerging all the time. Klarna pioneered ‘buy now, pay later’ apps and with the arrival of Apple it will be easier than ever to buy things you can’t really afford. A few swipes on your smartphone and the money is there.

The harsh truth, however, is that we can’t get our way out of inflation. The only way to fix the price spiral is to produce more or consume less. It’s no big mystery why prices are rising so rapidly: for nearly two years, governments locked down society and printed lots of money to pay for it all. Indeed, we worked a lot less and did less things, and at the same time we threw a lot of extra money into the economy.

Worse still, as the pandemic waned, many governments injected even more money into the economy in the belief that it would speed up the recovery. You hardly need to be Milton Friedman to understand that prices will inevitably rise.

If government borrowing is replaced by consumer borrowing, it will only make the situation worse. Inevitably, this pushes the demand even higher. After all, no one uses their credit card or signs up for a buy-it-now, pay-later program unless they’re actually buying something. Thus, each pound increase in consumer credit is spent and adds to the total level of demand. Yet, we need demand to drop so that it can start to match supply. Rising credit only postpones that moment.

Judgment day is coming

Worse still, it postpones the moment when households will have to recognize that they are in fact poorer. If we don’t produce enough to meet all the demand, and we have no way of increasing production very quickly, then we will have to consume less. People will have to tighten their belts and cut certain items from their budget, and once that happens, companies won’t be able to raise prices anymore because the demand just won’t be there. Only when that happens will inflation really start to come under control.

Eventually, central banks will have to tackle consumer credit. First, they will have to raise interest rates even higher and faster than they otherwise would to try to get it under control. And because consumer credit isn’t very responsive to rates – credit card fees are usually very high anyway, and buy-it-now-pay-later systems are even worse – they’ll have to resort to checks direct.

In the hyper-inflationary 1970s, governments eventually imposed strict limits on consumer credit as the only way to control lending. It will be much more difficult with a much more deregulated and open credit market than we had 40 years ago. It’s going to take a lot of work to stop banks from tossing credit cards like confetti, and fintech and internet giants from giving loans to anyone who checks a few boxes on their smartphone. But in the end, there may be no choice; it will be the only way to bring the economy back under control.