Economic Dark Matter

IT SEEMS WE'RE NOT the only people trying to figure out where all the money went from this decade's debt bubble.

"Where did all the debt go?" asked Bank of England economist Spencer Dale in a speech last Thursday in Exeter. Sadly for US and British households, however, let alone savers and investors, he had fewer answers than even us here atBullionVault.

"Household debt as a proportion of income increased from 100% to 165% in the 10 years to 2007," Dale noted of the United Kingdom. "[Yet] this big run up in debt was not used to finance a surge in spending," he added, as if taking his cue from our essay of last Wednesday, Economic Dark Matter, and scribbling his speech the next morning as the train crawled through Reading.

"Where did it all go?"

Where indeed...? Because as the chart shows, the surge in Britain's household debt ratio starting 10 years ago coincided with a marked slowdown in consumer spending growth.

In the US, the same picture...with personal indebtedness ticking higher from the same point in time, too. Which hardly seems fair. Just imagine! Borrowing a record multiple of gross income – fully 120% in the US by 2007...and a whacking 170% by the start of '09 here in the UK – just to ease up on discretionary spending.

"In fact, there was no such boom," Spencer Dale went on in this week's speech, pretty much quoting yours truly. But just like his policy-making predecessor,Stephen Nickell, five years before him, he thinks the missing billions – borrowed but not spent in the shops or malls – are explained away by "developments" in the housing market...

"House prices trebled in the ten years to 2007. And mortgage debts were accumulated to pay for the housing that had become so much more expensive. The conventional wisdom that the sharp increase in household debt was associated with the house price boom of the past decade is well founded."

So far, so good. The missing digit in our grand sudoku puzzle – that economic dark matter which forced consumers deep into hock without consumption soaring – lies in house prices. Right? Not quite, says Dale.

"What is less often appreciated is that much of that rise in household debt was matched by a comparable increase in the value of financial assets held by households."

Just like Nickell in late 2004, the Old Lady's man sees a matching asset to balance the debt. Borrowing here must equal new savings there. The volumes, though swollen, still equal each other. Net-net, we all got richer by taking on debt. That's why economists call it a balance-sheet, stupid!