Massive personal debt seems to be driving consumption all across what Martin Wolf today calls the 'Anglosphere big spenders' (the US, the UK, Canada and Australia). From the NYTimes:
Despite frequent forecasts of a [housing market] slowdown, moreover, the average [housing price] increase is running at up to 18 percent a year, according to Halifax, the mortgage lender, far outstripping consumer price inflation of 1.1 percent. Even the International Monetary Fund sounded a warning recently that the main risk to Britain's economic outlook "is the possibility of an abrupt correction in the housing market.''
A collapse could have dire consequences, since the large increase in real estate values has persuaded more and more people to increase their mortgages to fuel a boom in consumer spending. (In Britain, consumers can add to their mortgages to finance home improvements and other types of spending using their home, at a higher assessed value, as collateral. In contrast to the United States, interest on mortgage payments is not deductible for tax purposes. )
As Mr. Lewis's debts showed, much of the spending is on credit cards issued by companies like Capital One, MBNA and the major British banks. So fierce is the rivalry to lure customers that issuers compete with low- or no-interest introductory offers that soon give way to much higher annual interest rates.
Those higher rates have not deterred consumers.
And just like Fed Chair Alan Greenspan, Chancellor of the Exchequer Gordon Brown shrugs the whole thing off.
Will this boom end in tears as most periods of irrational exuberance do? Britain is quite different from the US in that the US has multiple large housing markets; the UK is dominated by one, London. Brown is confident that interest rates won't rise rapidly or to large levels, cushioning any blows to homeowners. Much of that depends, of course, on the willingness of Asian savers and central banks to continue subsidizing low interest rates in the Anglosphere.
All is for the best in this best of all possible worlds?