Last week there was a slew of headlines on the alarming growth of personal indebtedness. The annual report of the Consumer Credit Counselling Service revealed that calls to its debt helpline rose by more than a fifth in 2005.
Since 1994, "unsecured" debt - credit cards and other personal loans - has increased more than fivefold. The average UK household is now shouldering loans above and beyond the mortgage of £8,000.
The CCCS also reported that the incidence of "extreme debt" - households with unsecured borrowing above a hair-raising £100,000 - almost doubled last year.
"For those who experience over-indebtedness," said Malcolm Hurlston, the CCCS chairman, "life can be very miserable indeed".
Mervyn King, the Bank of England governor, has also stressed this human fallout. "All the statistics on households in trouble with debt have been rising and rising quite sharply," King said recently. "The signs are this is potentially quite a large social problem."
With personal insolvencies now at record highs, rising debt clearly has serious consequences for those who get out of their depth. But there is a general view that the broader economic impact of such personal difficulties is quite small.
"This is not a major factor," said King, "in determining the swings of consumer spending in the economy as a whole."
The UK's strong growth in recent years owes a lot to a consumer boom funded by a frenzy of borrowing. A decade-long shopathon has helped the British economy outperform much of western Europe.
So any indication that debt-soaked consumers might call a halt would be of serious concern. Well, I'd argue that such evidence now exists. The personal debt burden is on the verge of biting. And it could be a drag-anchor on the economy for years to come.
Indebted consumers are finally taking steps to reduce their unsecured borrowing. A recent Alliance & Leicester study found that the stock of outstanding personal loans fell by £360m during the four months to April - the first reduction in seven years.
Over the same period, credit card debt dropped too - by almost £1bn.
I don't share the common view that the recent rise in personal insolvencies is simply the result of more debtor-friendly rules.
The doubling of the insolvency rate in England and Wales since 2004 did coincide with new laws reducing the bankruptcy discharge period from three years to only a year. But insolvencies also accelerated in Northern Ireland and, particularly, Scotland - where there was no change in the regime.
Also, because insolvency stays on a person's credit record for six years, its effect can linger - making it hard for individuals to access credit and resume spending long after their bankruptcy ends.
And the banks have started to react, tightening their credit conditions more generally in response to a sharp rise in insolvency losses. That spreads the impact of debt to other consumers too.
But the main reason maxed-out consumers could soon retrench is of course the prospect of higher interest rates.
Households are now spending more than 20 per cent of their incomes servicing secured and unsecured debt. That is as big a burden as during the crisis years of the early 1990s, even though interest rates today are much lower.
In other words, UK consumers are highly geared, and therefore vulnerable to rate increases. If rates rise sharply over the coming year - and expensive oil means they might - debt repayments would reach dangerous new highs.
King is right to point out that personal indebtedness in Britain isn't nearly as bad as in the US. The proportion of American adults filing for insolvency is three times higher.
But the US not only has escalating household debt, it has accelerating government debt too. That makes the world's biggest economy hyper-sensitive to tighter money. And the old adage still holds: when America sneezes, Britain catches a cold.
So, whether the impact falls on us or our American cousins, rising household indebtedness is a threat to the UK economy as a whole.
- Telegraph
