When rates finally rise, things are set to get nasty

Nothing turns a dry economic story into a turbo-charged political one quite like fear of losing the

A good recession followed by a bad recovery. Trite lines like this are often wide of the mark, but this one bears some truth. The fallout of the economic downturn over the last few years -- though harsh -- was less gruesome than first feared in terms of overall unemployment, bankruptcies and repossessions. The risk is that far more misery than might have been expected lies ahead.

Everyone knows that sooner or later (and it will probably be later) interest rates will have to go up, and when they do it's going to hurt a lot of people who are already sore from the effort of keeping up with a rising cost of living. After stagnant wages, reduced working hours, cuts to tax-credits, higher inflation and escalating energy prices, the next chapter of Britain's living standards squeeze is set to be climbing interest rates.

The immediate threat of a rate rise has receded due to pitiful growth figures over the last two quarters, which leading forecasters say are set to continue (in case you were distracted by other news, the NIESR have predicted growth of 0.1 per cent in the second quarter of 2011), and, thankfully, a slight dip in inflation. But make no mistake -- unless the economy goes into freefall, in 2012 we can expect to see steadily climbing interest rates.

We don't have a clear sense yet of what the impact will be. One reason for this, rather surprisingly, is that we don't really know exactly how many people are already struggling in some way with their mortgage. There are, of course, statistics about levels of home repossessions -- and they have remained very low. In part, this is because this recession, far more than previous ones, has been characterised by people avoiding the horror of losing their home by striking some sort of agreement (known as "forbearance") with their bank, which allows them to reschedule their repayments, often by shifting from a "repayment" to an "interest only" mortgage for a period. Forbearance has been helpful to many people. But it buys time; it doesn't solving the underlying problem.

What is becoming clear is that the number of households covered by forbearance is very large -- and this is now starting to spook our economic authorities. The FSA highlighted this earlier in the spring, and the Bank of England has just chosen to do so in its recent Financial Stability Report.

The first line of support to households who get pushed over the edge is often those who provide debt advice. So it is telling that the Consumer Credit Counselling Service, a charity that helps those in financial distress, has issued a stark new report on financial fragility in Britain. It estimates that over 750,000 mortgages are in some form of forbearance, and when this is added to the number of mortgages in arrears, the authors get a grand total of 1.2 million mortgages under pressure -- that's more than one in ten of all outstanding mortgages. If correct, this is scary. It points to a potentially far bigger problem for households in the years ahead then you would think simply by looking at the Council of Mortgage Lenders projections for repossessions.

This warning shot from CCCS also helps to focus attention on a little appreciated but wider problem: the rising burden of debt repayment for low-to-middle income families, which has grown over recent years, reaching the levels of the early 1990s when interest rates were dramatically higher (see the chart). How can that be right, you might ask, given interest rates have been on the floor for some time?

gavin kelly graph

Source: Source: Growth without gain?, Resolution Foundation, May 2011

Part of the answer is the larger mortgages that people took out over the last decade due to rising house prices, and the easy availability of 100 per cent mortgages (for instance almost one in three first time buyers on a low-to-middle income in the years running up to the financial crisis used one). It also reflects the fact that lower interest rates often didn't get passed on to borrowers - particularly lower income ones. And let's not forget that household incomes have actually been falling recently, making it harder to service debts. So perhaps we shouldn't be too shocked by alarming Shelter research which finds that over two million people used credit cards to pay their mortgage or rent in 2010 -- an increase of almost 50 per cent in a year.

Given this backdrop, if the cost of debt repayment shoots up alongside higher interest rates, at the same time as living standards continue to be squeezed -- as is expected throughout 2012, with inflation continuing to outpace wages, and government cuts to tax-credits and benefits ratcheting up -- then we can expect the consequences to be dire. Debt advice charities are already starting to think about the need to scale up their operation to meet higher demand. Indeed, it is the severity of the this risk to household budgets (and to the banks that have lent to them) that will be one of the key factors restraining the Bank of England, who will otherwise be itching to return interest rates to a more normal level as soon as is feasible.

At the moment, all this is under the radar. Issues like forbearance struggle to make it onto the money pages of the papers. That's sure to change. Nothing turns a dry economic story into a turbo-charged political one quite like fear of losing the family home. This could get nasty.

Gavin Kelly is chief executive of the Resolution Foundation.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Hillary Clinton can take down the Donald Trump bogeyman - but she's up against the real thing

Donald Trump still has time to transform. 

Eight years later than hoped, Hillary Clinton finally ascended to the stage at the Democratic National Convention and accepted the nomination for President. 

Like her cheerleaders, the Obamas, she was strongest when addressing the invisible bogeyman - her rival for President, Donald Trump. 

Clinton looked the commander in chief when she dissed The Donald's claims to expertise on terrorism. 

Now Donald Trump says, and this is a quote, "I know more about ISIS than the generals do"

No, Donald, you don't.

He thinks that he knows more than our military because he claimed our armed forces are "a disaster."

Well, I've had the privilege to work closely with our troops and our veterans for many years.

Trump boasted that he alone could fix America. "Isn't he forgetting?" she asked:

Troops on the front lines. Police officers and fire fighters who run toward danger. Doctors and nurses who care for us. Teachers who change lives. Entrepreneurs who see possibilities in every problem.

Clinton's message was clear: I'm a team player. She praised supporters of her former rival for the nomination, Bernie Sanders, and concluded her takedown of Trump's ability as a fixer by declaring: "Americans don't say: 'I alone can fix it.' We say: 'We'll fix it together.'"

Being the opposite of Trump suits Clinton. As she acknowledged in her speech, she is not a natural public performer. But her cool, policy-packed speech served as a rebuke to Trump. She is most convincing when serious, and luckily that sets her apart from her rival. 

The Trump in the room with her at the convention was a boorish caricature, a man who describes women as pigs. "There is no other Donald Trump," she said. "This is it."

Clinton and her supporters are right to focus on personality. When it comes to the nuclear button, most fair-minded people on both left and right would prefer to give the decision to a rational, experienced character over one who enjoys a good explosion. 

But the fact is, outside of the convention arena, Trump still controls the narrative on Trump.

Trump has previously stated clearly his aim to "pivot" to the centre. He has declared that he can change "to anything I want to change to".  In his own speech, Trump forewent his usual diatribe for statistics about African-American children in poverty. He talked about embracing "crying mothers", "laid-off factory workers" and making sure "all of our kids are treated equally". His wife Melania opted for a speech so mainstream it was said to be borrowed from Michelle Obama. 

His personal attacks have also narrowed. Where once his Twitter feed was spattered with references to "lying Ted Cruz" and "little Marco Rubio", now the bile is focused on one person: "crooked Hillary Clinton". Just as Clinton defines herself against a caricature of him, so Trump is defining himself against one of her. 

Trump may not be able to maintain a more moderate image - at a press conference after his speech, he lashed out at his former rival, Ted Cruz. But if he can tone down his rhetoric until November, he will no longer be the bogeyman Clinton can shine so brilliantly against.