Stop decrying the great British debtholders Perhaps the most pernicious canard about the British economy is that growth is held back by heavily indebted consumers. Only when household debt comes down, the story goes, can consumption growth get back to normal. Nonsense. Worse is the moralising tone, which insults millions of creditworthy households. Take me for example. I am a UK consumer and aspire to become a more heavily indebted consumer. I hope to achieve my ambition to increase my debts sometime over the next few years when I buy a larger house with a larger mortgage. Of course, I never think about it in that way. The prospect of higher debt does not excite me nearly as much as a new home, but I am rational enough to know that with the property also comes the debt. Given the rise in house prices over the past 15 years, the turnover of a property will almost always result in an increase in household debt as my mortgage will almost always be larger than that of the vendor. The upshot is that I intend to contribute to raising the level of UK household debt relative to income. For the good of the country, should I be stopped? The answer depends on what changes when I purchase a property at current house prices. UK physical assets remain unchanged: a second-hand house merely changes hands. UK financial liabilities rise as I have to use debt to purchase the home. But the purchase price goes to the vendor so UK financial assets also rise. In effect, I end up owing the vendor money and this debt is intermediated through the banking system. For the UK as a whole, the transaction raises both household debt and financial assets. Moralising about the level of debt is therefore equivalent to getting into a tizzy about high levels of financial assets. It would be absurd to stop the transaction so long as I and my bank are not making a daft mistake about my ability to handle my debts. More importantly, my increased debt tells you nothing about the likely level of my consumption in the future. I might spend more because I no longer have to save so much to buy the property or I might spend less because I want to reduce my liabilities faster than I used to be saving. The same applies to the vendor. You do not know. What applies to me applies to the UK as a whole. Mortgage debt accounts for more than 85 per cent of total lending to individuals and as household debt has risen, financial assets have grown even faster. In 1995 household debt accounted for 104 per cent of household income, a figure that rose strongly to peak at 173 per cent at the start of 2008. Over that same period, household financial assets rose faster, from 360 per cent of income to 442 per cent. But if you are still worrying about the level of household debt, think also about how its reduction might play out. First, we could retain the current sclerotic housing market with historically low housing turnover. This results in monthly mortgage principal repayments exceeding the tendency of housing turnover to increase debt. That is what has happened since 2008 as credit has become severely rationed. It is hard to say that this feature of the British economy over the past four years has improved welfare. Second, house prices could sink far enough that housing turnover no longer naturally increased household debt. That would increase my welfare as I want to trade up. But it would come at the expense of those trading down, whether they are the elderly or those inheriting property. This might improve UK welfare but risks another banking crisis, which we've learnt over the past four years is worth avoiding. Third, we could scrap all proposals for necessary planning reform and serious housebuilding projects, which inevitably come with an increase in household debt. Or fourth, households with debts could consume less out of their incomes than is currently expected, so depressing growth and impeding the recovery. This might happen - we don't know - and it constitutes one of the largest risks to the UK's prospects of recovery. For all the preaching, none of these ways of reducing household debt is unambiguously good for households or the British economy. Most are bad. So we should stop maligning the heavily indebted UK household. For the vast bulk of debt, the reality is a million miles from the stereotype of impoverished saps in hock to Dickensian pawnbrokers. Instead, we should encourage those who are willing and able to help increase UK household debt for the purchase of assets to do so without any moralising. Their debt implies very little for consumption or for the recovery.