Okay, maybe saving isn’t that good, but Brits are waking up to the joy of seeing their money grow through the magic of compound interest. Or to be more accurate, thanks to rock bottom interest rates, gaining pleasure from saving has a hint of masochism about it. There isn’t much magic in compound interest, when the official bank rate is 0.5 per cent.

Why, getting fun from saving when rates are that low is positively kinky.

In truth, it is not so much that Brits are enjoying saving, but they have woken up to the fun of seeing their debts reduce.

And in a nut shell, savings and debt tell us what is really going. And what is rather good, is that we have got some good gen for you on this topic

Take this comment:

“In the third quarter of 2009,” said the National Institute of Economics and Social Research (NIESR) earlier this week, “the household saving ratio rose to 8.6 per cent as households continued to repair their balance sheets. Gross personal sector saving in the year to date is already over three times that seen in 2008, and we expect the figure to rise further in 2010.”

Apparently, Brit’s debts peaked in the third quarter of 2008. And have been declining since.  “In total,” says NIESR “households have reduced their outstanding debt by £26.5 billion. The reduction in outstanding household debt while incomes continue to rise has lowered the debt to income ratio of households.” Then we get a hint of optimism from NIESR, “We expect the ratio to fall further through this year,” it said. But then came the killer: “however, as it only returns the ratio to 1.5,which is the same level as in 2005, UK households will continue to have the highest debt to income ratio in the G7.”

And that in a nut shell is the problem. The UK is in debt. It is not just public debt, that’s bad, but there is no shortage of other G7 economies where the problem is just as dire, if not worse. But in the UK, unlike say Germany and Japan, consumers are in debt too.

Apparently, from 2000 your average Brit paid out more money in interest payments than he or she received. But here is a rare bit of good news. The fall in interest rates has changed it all. Both interest payments and interest receipts have fallen, but interest payments have fallen faster than receipts. NIESR says “net receipts have surged upwards, boosting income growth through the recession.”  In other words, the change in this interest payments come receipts equation is boosting income growth. In fact, says NIESR “ in the third quarter of 2009, this contributed 25 percentage points to the annual rate of income growth.”

Real wages have been falling, that is to say inflation has been outstripping wage inflation. This has hit our affordability hard. But the effect of falling internet rates seems to have outweighed this. According to NIESR “real disposable income is estimated to have grown by almost 4 per cent in 2009. “ And that’s the most robust growth rate since 2001.

Alas, NISER doesn’t see this continuing. It says that the expected rise in price inflation this year will hit real disposable income, and knock around 1 ½ per cent of that. Tax increases are expected to knock another 1 ½ per cent of real disposable income.   All in all, that leaves a growth rate in 2010 of real disposable income of just 1 per cent.

But it seems that 2009 will be characterized by a new form of insolvency too, with KPMG predicting 50,000 people turning to a kind of bankruptcy-light option made available by the government.

The introduction of Debt Relief Orders (DROs) on Monday will allow consumers with debts of less than £15,000, and minimal assets or surplus income, to write off their debts without entering into a full blown bankruptcy.

So how many insolvencies will there be, and are these DROs in danger of making it too easy for debtors, and in the process making things worse?

KPMG predicts there will be a series of quarterly increases in insolvency over the course of 2009, as the economic downturn gathers pace, leading to record levels in 2009 despite the historic low level of base rates. Potentially, more than 150,000 people are expected to enter into an Individual Voluntary Arrangement (IVA), be declared bankrupt or enter into a Debt Relief Order during 2009.

Mark Sands, Director of Personal Insolvency at KPMG said: “Falling house prices, the general downturn and the associated increases in unemployment are starting to have an impact. Whilst consumers will fight to keep their jobs and their family homes, for those who lose both there is often little reason for someone with debts not to declare themselves bankrupt.

“From Monday, many will have the alternative of entering into a DRO. We expect bankruptcies and DROs to form an increasing proportion of personal insolvencies as Individual Voluntary Arrangements, where the consumer usually commits to a five year payment plan, become increasingly unattractive to those who have lost their job or their home.”

Data prepared by KPMG showed that the average debt owed by someone entering an IVA in the last quarter of 2008 was £47,800, and that in the same period more than 500 people entered into an IVA with debts in excess of £100,000. Mark Sands commented: “Whilst high debt levels have become usual for those entering into an IVA, bankruptcy is typically used by those with lower debts and minimal assets; many people who previously would have gone bankrupt will instead seek a DRO. Further, many people previously excluded from the personal insolvency system will seek a DRO, swelling the overall numbers of personal insolvencies to record levels.”

But how does a DRO score over bankruptcy for an individual?

Two advantages of DROs over bankruptcy are the use of intermediaries (such as Citizens Advice) to make the application rather than presenting papers to the court; and a cost of £90, which is less than one-fifth of the cost of making yourself bankrupt. Mark Sands welcomed these advantages, commenting: “Many people in debt suffer stress and anxiety; resolving their debt problems without the need to go to Court and at a lower cost will be a great relief, and will make personal insolvency accessible to many people who were previously unable to access bankruptcy due to the cost and were put off by the complexity and stigma of the process. As a result, we expect to see many more DROs in their first year than we will in a typical year in the future.”

Concerns have been raised that DROs will be abused. Mark Sands reassured stakeholders: “The new approach involves checks and balances; if a debtor lies about their circumstances then the DRO may be revoked, and the debts pursued once more, if at any time it becomes clear that they did not meet all the criteria for entering into a DRO. For the honest debtor, the restrictions of a DRO while they wait one year before the debts are written off are a proportionate response to their need for debt forgiveness.”

The data shows it was the third quarter in succession to see a negative change in equity withdrawal. But before 2008, there hadn’t been a quarter of falling equity withdrawal for ten years. The record for the highest level of withdrawal occurred in the final quarter of 2003, when total withdrawals were worth over £17bn.

Commenting, Simon Rubinsohn, RICS chief economist said: the Bank of England data “demonstrates just how damaging the collapse in the housing market has been for the wider economy.”

But in a way, there is more to it than the numbers signify.

Many economists had previously said falling house prices would not lead to that significant a fall in consumer spending. They argued that during the boom, mortgage withdrawals only accounted for a small percentage of consumer spending, therefore, a fall in prices would only have a small impact.

But they missed the point.

There were plenty of home-owners who saw their home rise in value, and who didn’t tap into the extra wealth created, but felt wealthier, nonetheless. As a result, they saved less, they put less away for their pension, and they put more on their credit card. They said: “If the worst comes to the worst, we can always use the extra wealth in our property.”

But when the worst came to the worst, they found credit had been crunched, and that option had been removed.

This is perhaps the single biggest reason why economists failed to call the seriousness of this crisis. They just didn’t get the relationship between rising house prices and consumer confidence, leading to spending.

You can almost smell the panic over the ether.

Yesterday, the British Bankers’ Association added more grist to the woe mill when it revealed data showing that £11.2bn worth of mortgages were approved in October, that is 31 per cent down on a year earlier. More to the point, there were just 21,000 loans for house purchases in the month, less than half the level seen the year before.

James Crosby, who by an amazing coincidence shares the same name as the report he penned, wants to see the government back mortgages with a kind of Fannie Mae–Freddie Mac type scheme in which £100bn is available to provide government mortgage bonds.

That should do it rather nicely. If banks won’t lend money when it is backed by the government, then nothing can do it.

It is just that Mervyn King has doubts. He is worried about seeing a “form of lending that for rather good reason has fallen out of fashion.”

And that, in a nutshell, is the problem. Any attempt by the government to kick-start the housing market, or get prices moving again, will be enormously damaging. House prices are too high, and no amount of papering over cracks can stop this from being true.

But Mr King expressed an even more serious concern yesterday. He is worried that the Crosby scheme could “be a big mistake” if it leads to generating “lending for the mortgage market at the expense of crowding out lending to business.”

Never has a nail’s head been hit so well.

The real economic recovery will come via innovative, risk taking, pioneering, entrepreneurial businesses.

What the economy really needs, right now, is not some kind of stimulus to get spending up, when it had reached a level that was too high in the first place. What is required is for us to get out of this economic mess through getting entrepreneurialism up.

It was good that the chancellor earmarked some money to be lent directly to business. But if he had really wanted to go down in history as the chancellor who created triumph from disaster, he should have used the opportunity this crisis afforded him to lend all the money he is giving away via the cut in VAT, for lending and investing into business instead. That is, all businesses; from one-man-band window cleaning outfits to companies that hope they can become the next Microsoft.

According to Credit Action, personal debt at the end of July 2008 stood at £1,449bn. This has increased 6.9 per cent in the last 12 months, which equates to an increase of ~ £93bn. According to the latest data, GDP currently stands at £1,410bn, having increased by 5.1 per cent over the past year. In short, we owe more than we earn.

Total secured lending on dwellings at the end of July 2008 stood at £1,218bn, up 6.9 per cent in the last year, and total consumer credit lending to individuals hit £231bn, up 6.8 per cent in the last 12 months.

Here are some more statistics to make you think:

In the days when the Department for Business, Enterprise and Regulatory Reform Guidelines (BERR) was more snappily called the DTI, it estimated that the threshold for becoming over indebted was an individual spending over 25 per cent of their gross monthly income on unsecured repayments.

The proportion of people spending over 30 per cent of their monthly income on unsecured debt repayments has doubled over the past year to 14 per cent, according to research commissioned by Callcredit.

If you want to understand the key problem faced by the UK, it is summed up in that data above. For years we were told that the soaring level of debt in the UK was affordable, that it was matched by the value of our asset holdings, and that we had no reason to fear.

The truth was quite different. The belief that debt is justified if house prices are rising may make sense for an individual, but for the country as a whole this is a fatal error. It is an error that is now being corrected, and it is very painful.