It’s ceasing to be possible for households to use cheap debt to live beyond their means

I think my general point is about affordability compression. It’s ceasing to be possible for households to use cheap debt to live beyond their means – though that’s another issue that we need to think about* – whilst the costs of necessities are on a continuing up-trend. This means that discretionary consumption will fall, and businesses in discretionary sectors will shrink and, in many cases, fail. These businesses, in particular, will cut their ad spending, though businesses in most sectors are likely to see this as a comparatively easy way to cut costs. For households, it’s easier to cancel your news, entertainment or sport contracts than to reduce other outgoings.

Investors have noticed this where both mainstream and social media are concerned. Streaming seems not to be living up to expectations, and I’ve read that unit advertising prices are falling. The markets haven’t yet joined up all the dots on this for Big Tech, though no doubt they will. Ad-supported and subscription-based business models are extremely exposed to downside. Sports finance is particularly exposed – broadcasters often have multi-year, multi-billion rights deals which are only viable if revenues from ads and subscriptions keep growing or, at least, don’t shrink.

The overall credit picture, meanwhile, is worrying, and the declining proportionate role of conventional, regulated banks – ‘deposit-taking institutions’, in the jargon – is significant.

Fixed-rate mortgages are not retained by banks, but packaged and sold to investors – in the US, part of this is underwritten by the government. This reduces risk to banks, but transfers it to investors, important where the latter are leveraged. Meanwhile, various forms of consumer credit are now provided by NBFIs, known colloquially as “shadow banks”. If you buy something and pay for it in instalments, it’s likely that the credit provided by the supplier comes not from a bank but from an NBFI. Banks themselves seem to have sizeable exposures beyond their orthodox (regulated) lending-books. The data on non-bank (or should I say non-regulated banking) loans is incomplete, and delayed, and this sector, though partially monitored, is NOT regulated on a consistent basis (and I question how effectively it is regulated even within individual nations’ borders).

In short, there is enormous scope for financial failures outside of the conventional banking system, together, of course, with huge transmission risk. We do know something about proportional national risk where, if we ignore specialist financial centres like the Caymans and so on, the exposure league-table is headed by Ireland, the Netherlands and the UK.