Around the world, our precariously-balanced household finances need salvation

Unstable job - Low section of a business person walking on thin red line. Credit: D-BASE / Getty

Peter Franklin

December 6, 2017 2 mins

According to Reuters, the image of China as a nation of savers is badly out of date:

“Outstanding household debt in China equalled 45.5 percent of gross domestic product at the end of the first quarter, according to the Bank of International Settlements, compared to 27.9 percent five years ago.

This understates the growth of household debt, because the figures don’t include loans from online providers – a big deal in China:

“Online consumer lending in China, of which cash loans are a significant portion, dwarfs similar activity in the rest of the world combined, accounting for over 85 percent of all such activity globally last year…”

To make matters worse “nearly 40 percent of Chinese households lack savings”. This, puts China in the same providential league as America, which, as Megan McArdle explains in a piece for Bloomberg, is not a good place to be:

“The number of people scraping along from paycheck to paycheck is astonishing; surveys routinely find that somewhere between a third and half of all Americans don’t have the savings to fund ordinary emergencies – a moderately large repair, a month with no income. These are not the kind of astonishing runs of bad luck that no one could realistically expect to cover, like a $100,000 medical bill, or a multi-year illness that makes it impossible to work. They’re just the normal vicissitudes of regular life, and somehow, Americans are unprepared.”

America’s wage stagnation doesn’t help, yet previous – and much poorer – generations seemed to manage. Arguably, that is because they lacked the financial alternatives that are available to us now:

“…it’s a lot easier not to save than it used to be. The refinement of credit rating and the relaxing of state regulations that often made it hard to extend credit has resulted in much greater access to borrowed cash than my parents had when I was born… widespread credit has certainly made it somewhat easier for people to scrape by without a rainy day fund, or even any cash in their pocket at all.”

As McArdle points out, that’s fine until you run out of credit – or find yourself forced to pay the sky-high interest rates of the sub-prime credit sector.

In countries as different as America and China the growth of household debt, if you offer people credit they will take it. Megan McArdle blames a consumerist arms race – most households are borrowing not to fund basic needs, but to keep up with the Joneses (or the Changs).

Still, it’s interesting that in countries as different as America and China, the growth of household debt appears to be a supply-led phenomenon – i.e. if you offer people credit, they will take it (despite being richer than their parents or grandparents).

McArdle blames a consumerist arms race – most households borrowing not to fund basic needs, but to keep up with the Joneses (or the Changs). She especially blames parental spending on children – e.g. by paying for expensive hobbies, for private tuition or to move to the best school districts. This is a waste of money, she argues, because “bright, motivated kids” are going to do pretty well for themselves anyway:

“Yet parents can convince themselves to spend near-infinite amounts seeking marginal improvements.”

Smarter parents might realise this, but they don’t want to be seen as doing without the things enjoyed by other families:

“It’s the mother of all collective action problems: If all the parents agreed at once to stop this mad arms race, everyone could breathe easy and have a more secure life.”

It’s almost as if some form of community institution is required, one which brings families together outside of a commercial environment, and where non-materialistic values come first.

I wonder what sort of place that could be?