A debt message from Mr Bean

In the seven years since it won its independence, the Bank of England has learned some lessons in spin. Earlier this month, it knew it had some disturbing news to announce: total personal debt in the UK passed £1 trillion for the first time, equalling the size of the British economy.A less media-savvy organisation might have sat back and waited for the lurid headlines of a nation drowning in borrowing to be written. And the bank? It brought out Charles Bean, its chief economist, to give a learned lecture on why debt isn't nearly as scary as once thought.Bean's message? Don't worry, enjoy the summer, and keep using the plastic. After discussing the rise in consumer borrowing, he concluded that so long as assets match those debts, the debts can be safely managed.In time, however, that view is likely to seem dangerously complacent. British consumers are conducting an interesting experiment on behalf of the developed world: how far can their debt be safely pushed?The trend everywhere is up. As George Magnus, UBS AG's chief economist in London, pointed out in a report published recently, every member of the OECD has seen a sharp rise in consumer debt in the past decade. The fastest rise hasn't been in either in the UK or the US but in Germany.In Britain, the thirst for credit looks unshakable. Rising interest rates, up from 3.5% last year, have so far done nothing to slow that. Debt is soaring worldwide for two reasons. One is low interest rates but it also reflects the way manufacturing has shifted to the developing nations of Asia and Eastern Europe. Most wealthy economies are now consumption rather than production led. If central bankers want to raise growth, and most do, they have to encourage consumption. That means encouraging debt.Bean thinks that's fine. "The household debt build-up has been primarily associated with asset accumulation rather than borrowing to finance current consumption,'' he said in his lecture to the Institute of Economic Affairs in London. In practice, most of these loans have been taken out to buy houses that are escalating in price. It's not just being blown on holidays. That, apparently, makes it OK.Yet plenty of London's economists have taken a look at Bean's arguments and decided there's something fishy about them. "Whether house prices would remain at current levels in circumstances where many households felt the need to raise liquidity is highly doubtful to say the least,'' said Stephen Lewis, chief economist at Monument Securities in London. So what should we make of this spat between the bank's Bean and his peers in London? While there's some truth in what Bean says, there are three points he seems to have missed.One, debt may be backed by expensive houses but that isn't going to help if the price of those houses drops. Two, while the overall balance sheet of households may be in fair shape, that doesn't mean some households aren't going to get in trouble. UBS's Magnus has analysed who holds the debt and who holds the assets and found that, with the exception of Japan, they are mostly different people. "All those who own assets have no debt and those who have debt have no assets,'' he notes.And three, households seem to be acting more like mini-corporations. They are leveraging up, buying assets but taking on more debt to do so. As we know from countless business cycles, what that leads to is a boom-and-bust cycle. That's why Bean's attempt to persuade us not to worry about debt missed its mark. A £1 trillion worth of debt is going to be a problem one day; the only issue is when.Matthew Lynn is a Bloomberg columnist