Never Never Rule Out Deflation

In Australia, the “Never Never” is an old term used to describe the remote, desert outback, especially the sparsely populated part of the Northern Territory and Queensland. Perhaps related to this, British soldiers stationed there used the term “on the never” to refer to gaining something at no cost to oneself or to get something without the proper payment, either by credit or by wangling. Nowadays in the UK, the term “on the never never” refers to using a credit card to fund your lifestyle. You’re just putting off the bill in the hope that it never comes. The latest report from the Bank of England suggests that the “never never” day of reckoning will always arrive; in fact, it is now.

In recent years, there has been a large inflation of credit card debt in the UK. According to data from the British Bankers Association, amounts outstanding on credit cards has risen from £24.5 billion in 2009 to £43 billion today.

UK Consumer Credit Card Amounts Outstanding

If this ballooning of debt weren’t scary enough, a quarter of all UK households have credit card bills that are not paid off in full at the end of each month, half of those with an average bill of £1,700 outstanding. This is equal to around $2,200 and if you think that is bad, in the US the average credit card debt is $7,527 per card that usually carries a balance.

As Brian Whitmer pointed out in the June issue of the Elliott Wave European Financial Forecast, 3.3 million people in the UK are judged to be in “persistent debt”, where the minimum payment goes to repaying interest and charges and not the principal amount borrowed. This statistic has prompted the Financial Conduct Authority to float the possibility that interest and charges could even be waived for such people.

The fast pace of credit card growth has also caught the Bank of England’s eye with their Financial Policy Committee (FPC) warning back in April of this year that:

“The recent rapid growth in consumer credit could principally represent a risk to lenders if accompanied by weaker underwriting standards.”

The FPC was particularly worried about long, interest-free periods when debtors shifted balances to new credit cards, a system that further encourages borrowers to bury their head in the sand and hope that they are never asked to repay the loan.

It now appears that people are starting to renege on even paying back the principal.

The Bank of England’s Credit Conditions Survey for the second quarter of 2017, released on 13 July, provides a warning that the credit card bubble in the UK may be bursting. The report states that:

“Default rates on both credit card and other unsecured lending to households were reported to have increased significantly in Q2, and were expected to increase further on credit card lending in Q3.”

This is a clear sign that credit card delinquency rates, which up until now have been remarkably low, are about to start moving higher.

Another sign of looming credit card deflation is the share price performance of Virgin Money Holdings, the UK bank which has a heavy exposure to credit card debt.

Virgin Money Holdings Relative Performance to UK Banks

Since the second quarter of 2016, Virgin Money has been underperforming the rest of the UK bank sector which makes us wonder if the market already suspects that a credit card loan issue is developing there.

Evidence is mounting that those living life “on the never never” in the UK are about to face a reality check. You can follow events as they unfold here on