It’s the moment of truth: we need a detox

The borrowing party is over. We must face the pain or the hangover will be fearsome.

January is the month when some drinkers try to detox. Once the chimes of Big Ben usher in the new year, they give up the demon drink for a month in order to allow their bodies to recover from the excesses of Christmas. This makes them grumpy: cold turkey is never easy at the best of times and January is a particularly grim month to be on the wagon. Still, by the time February 1 rolls around, the temporary abstainers feel fit, healthy and, of course, smug.

We no longer have banks but high-street debt factories. Borrowing is aggressively marketed; there is more profit to be made out of a customer who has an overdraft than one who is in credit. And the notion that debt is socially acceptable, even admirable, is inculcated from an early age, not least through student loans. A much better way to have funded the expansion of higher education would have been through a progressive graduate tax, but that was a public-sector solution, whereas student loans allowed the private sector to cash in.

Diana Choyleva at Lombard Street Research puts it this way: “For the UK to continue to expand beyond its means it needs asset price inflation. Higher mortgage costs have rendered house prices unaffordable, causing a sharp turnaround in the housing market. Equity and commercial property prices have plunged as the world began to see greed turn to fear. The rebalancing of the UK economy is set to entail domestic demand, in particular consumer spending, growing slower than output.”

The alternative to a tough period of detox now is an even longer and tougher period of detox later. Any attempts by the Bank to get the borrowing party going again with deep cuts in bank rate would, ultimately, be self-defeating.

Writing a prescription for the economy is easy. We need to see less consumer spending, more investment and production. We need a weak pound to help start the rebalancing of the economy. Forcing a reluctant patient to take the medicine is another matter. What we certainly don’t need is any encouragement to go on bingeing, because in the end that means even greater misery.