Tuesday, August 26, 2008
A Look at Insolvencies
In most proper recessions, there are a large amount of insolvencies, as businesses fold due to lack of demand, or the banks withdrawing their credit lines. In 1992, a record 55,000 businesses went bust.
So given the hysteria, how do things look at present? The graph at the top shows the number of Company Liquidations in England and Wales. The Insolvency Service says that total for the second quarter of 2008 was 3560 (1324 compulsory liquidations, and 2236 voluntary liquidations). The other thing to notice from the graph is that liquidations are lower than in 2002, when the after-math of the global dot-com crash was felt. Current company liquidations are in line with the creative destruction that you find in any healthy capitalist economy. They are nowhere near the alarming rates that you find in a true recession.
What about individual insolvencies? The press has been going on and on about personal debt. Individual insolvencies were 24,553 in the second quarter of 2008 - a fall of 2.0% on the previous quarter and a decrease of 8.3% on the same period a year ago. UK bankruptcy law was changed effective 2004, and as you can see from the graph, loads of people who were labouring under debt for years took the opportunity to sort their situation out. However that backlog is cleared, and since the Northern Rock scare last year, it appears that members of the public are taking care not to accumulate too much debt and to be defensive about their finances. It's not surprising really - sites such as Moneysavingexpert sprung up two years ago precisely to help people get out of debt and financial difficulties. Perhaps the drop in personal insolvencies is because the press has been going on about the problem for so long - there can hardly be anyone in the country who hasn't taken some defensive action as a result. The population has never been better informed - which in turn makes them more resilient.