Max Keiser & me & the UK’s 950% Debt to GDP Level

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It’s always a plea­sure to talk with Max, and in this inter­view he drops a bomb­shell that I still have a hard time even con­tem­plat­ing: the claim that the UK’s pri­vate debt to GDP ratio is 950%, and the finance sec­tor alone has a debt ratio of 600% of GDP. Our dis­cus­sion starts at the 14 minute mark.

I still have to see the data for myself, and until then I’ll remain skep­ti­cal, but here’s a chart allegedly sourced from Mor­gan Stan­ley that makes that claim.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • RJ

    Cliffy
    “This is always a con­fus­ing debate because state­ments don’t always spec­ify whether or not the state­ment”

    True. The state­ment about Govt spend­ing does not apply to Euro coun­tries. But for any mon­e­tary sov­er­eign coun­try I believe it does regard­less of the reg­u­la­tions.

    Sec­ondly the account­ing rules and clas­si­fi­ca­tions, and the def­i­n­i­tions of tech­ni­cal def­i­n­i­tions of debt and money, can vary.”

    Agree on debt. Re money. I guess it is pos­si­ble to call com­pany sales on account non bank money. And many call cen­tral bank reserves money (see below). By money I was refer­ring to bank deposits. In effect there is money that increases as noted above. There are alter­na­tives that will decrease bank deposits like term bank deposits. Or notes and coins. And then there is another types like finan­cial com­pa­nys or money mar­ket funds that does not impact on the amount of bank held money. It just trans­fers money from one bank account to another one. I believe these two cat­e­gories should be treated dif­fer­ently.

    Money then equals bank dep­soits and bank term deposits and cash and coins
    Cen­tral bank reserves equals bank money not our money.

    Then the banks don’t have to hand over any money.”

    It may be a minor point but I pre­fer to dis­tin­guish between bank money (cen­tral bank reserves) and our money (bank deposits).

    Money-mar­ket deposit accounts

  • RJ

    Cliffy
    “This is always a con­fus­ing debate because state­ments don’t always spec­ify whether or not the state­ment”

    True. The state­ment about Govt spend­ing does not apply to Euro coun­tries. But for any mon­e­tary sov­er­eign coun­try I believe it does regard­less of the reg­u­la­tions.

    Sec­ondly the account­ing rules and clas­si­fi­ca­tions, and the def­i­n­i­tions of tech­ni­cal def­i­n­i­tions of debt and money, can vary.”

    Agree on debt. Re money. I guess it is pos­si­ble to call com­pany sales on account non bank money. And many call cen­tral bank reserves money (see below). By money I was refer­ring to bank deposits. In effect there is money that increases as noted above. There are alter­na­tives that will decrease bank deposits like term bank deposits. Or notes and coins. And then there is another types like finan­cial com­pa­nys or money mar­ket funds that does not impact on the amount of bank held money. It just trans­fers money from one bank account to another one. I believe these two cat­e­gories should be treated dif­fer­ently.

    Money then equals bank dep­soits and bank term deposits and cash and coins

    Cen­tral bank reserves equals bank money not our money.

    Money-mar­ket deposit accounts in say a finance com­pany is just a trans­fer of our bank money and should be viewed dif­fer­ently to bank cre­ated money. 

    Then the banks don’t have to hand over any money.”

    It may be a minor point but I pre­fer to dis­tin­guish between the banks money (cen­tral bank reserves) and our money (bank deposits).

  • RJ

    Lyon­wise

    It is the shadow bank­ing sys­tem which allows the sys­tem to escape credit growth restaint from reg­u­la­tion. It would be untrue to say that reg­u­la­tors did not know about the shadow bank­ing sys­tem.”

    But does it (allow credit growth). I have read this on Ellen’s browns web­site for exam­ple and can not see how.

    Surely this shadow bank­ing sys­tem can only oper­ate if our money (a bank deposit) has been cre­ated out of thin air (a jour­nal entry) by a com­mer­cial bank first

    Either from

    Bank loans (or over­drafts) or
    Gov­ern­ment spend­ing

    This must ALWAYS come first.

  • Steve,

    I apol­o­gise on behalf of the UK for the state of the ONS web­site and its data access. This is the new improved ver­sion. The pre­vi­ous ver­sion was worse. A lot worse.

    And as you are no doubt aware ‘Yes Min­is­ter’ is a sub­ver­sive doc­u­men­tary dressed up as a com­edy show. I can vouch for it accu­racy. I’ve had quite a few meet­ings with British civil ser­vants and I’ve never been ignored so politely in my life. The tea and bis­cuits were first rate how­ever.

    The debt cal­cu­la­tions for each sub-sec­tor are AF.4 + AF.3 — AF.34 for lia­bil­i­ties in the ESA95 struc­ture. Which is ‘Secu­ri­ties other than shares’ + ‘Loans out­stand­ing’ — ‘Deriv­a­tives out­stand­ing’. I repli­cate the bud­get report graph on the Sheet ‘Debt Ratios’ 

    If you look at the sheet ‘Accel­er­a­tor Data’ I derive all the sec­tors for you accord­ing to the method in the Trea­sury doc­u­ment (Columns B to E). Any vari­a­tion from that is due to revi­sion by the ONS in over the last two quar­ters (they are still updat­ing GDP data back to Jan­u­ary 2010).

    Columns B to D from ‘Accel­er­a­tor Data’ should sum to the total pri­vate debt in col­umn R of ‘Base Data’

    The GDP fig­ure on ‘Accel­er­a­tor Data’ (Col­umn F) is the non-sea­son­ally adjusted GDP fig­ure back­filled with the sea­son­ally adjusted fig­ure prior to 1997. The trea­sury report uses the SA GDP fig­ure exclu­sively which I feel is a lit­tle inac­cu­rate.

    The unem­ploy­ment rate is col­umn H on ‘Accel­er­a­tor Data’ if you want the ILO mea­sure (which should cor­re­spond exactly to the offi­cial unem­ploy­ment rate series MGSX at the ONS), or the broader mea­sure includ­ing those clas­si­fied as ‘inac­tive but want a job’. This uses the same cal­cu­la­tion method as MGSX and is shown in col­umn I.

    The sheet ‘Base Data’ is there for you to ver­ify the cal­cu­la­tions on the ‘Accel­er­a­tor Data’ sheet and the ‘Debt ratios’ sheet.

    The data in the work­book is Crown Copy­right. The source accred­i­ta­tion is “Adapted from data from the Office for National Sta­tis­tics licensed under the Open Gov­ern­ment Licence v.1.0.”

    I do this in the hope that together we can find a way out of this mess and since I already have a gov­ern­ment file with my name on it (I’ve seen it) it’s already far too late to attempt anonymity. Feel free to use my details as you con­sider appro­pri­ate. And I won’t get upset if you miss an attri­bu­tion. The data is free for you and any­body else in the world to use accord­ing to the OGL licence.

    HTH and apolo­gies for not explain­ing the sheet in detail yes­ter­day.

  • RJ

    Lyon­wise

    Gov­ern­ment (“we are all Key­ne­sians now”) is exer­cis­ing greater power now than ever to address the GFC with enor­mous gov­ern­ment spend­ing,”

    Don’t con­fuse though irre­spon­si­ble or exces­sive Govt spend­ing with the impor­tance of larger Govt deficits and debt 

    The only way out of this mess is more Govt debt.

    It is the only way to pro­vide the net finan­cial assets needed for retire­ment sav­ings (the desire to save is the main rea­son for the cur­rent money and bank­ing eco­nomic prob­lems).

    We either sup­port more Govt debt. Or accept that it is impos­si­ble for a pop­u­la­tion over­all to save for their retire­ment

    This is a fact not a wild theory.And Govt deficits can be achieved by more Govt spend­ing or less tax. Or both.

    I sup­port less tax. Govts already spend enough.

  • alain­ton

    Im going to be dev­ils advo­cate for Farm­ers paper — not that it is right but it throws up some inter­est­ing points.

    Firstly he does not base his expla­na­tion of labour mar­ket fail­ure on sticky prices, and his cor­rectly bases aggre­gate demand on wealth not income — good start.

    If we cor­rectly define aggre­gate demand as GDP +change in debt + Change in income from asset sales +net depre­ci­a­tion then Steve and Roger have more in com­mon than you think as as a direct injec­tion of high pow­ered money into assets will have a sim­i­lar gross impact on aggre­gate demand as debt for­give­ness.

    It not just a cor­re­la­tion from a com­mon cause either (debt) as asset prices will encour­age firms to invest through issu­ing addi­tional equity and sales of assets by the house­hold sec­tor will have a wealth effect on AD. There is a lot of stock — flow con­sis­tent (SFC) papers in the last cou­ple of years on how this kaleck­ian chan­nel can drive the busi­ness cycle.

    Ignore sec­tions 3 and 4 of the paper — sta­tis­ti­cal non­sense, and you can sus­pend belief at ‘rep­re­sen­ta­tive house­holds who live for­ever’ — but you can make sim­i­lar argu­ments with over­lap­ping gen­er­a­tions. He makes a strong con­nec­tion between asset prices and employ­ment (page 13) — but it could have been made even stronger if he had included money in the equa­tion as asset price falls pre­ceed and do not cause unem­ploy­ment. The cause is the excess demand for money. He recov­ers slightly by set­ting out the keyn­sian posi­tion — with its weak expla­na­tion of ‘ani­mal spir­its’

    Most of the rest of the paper is down­hill — espe­cially some ele­men­tary errors on sec­toral bal­ances ‘When the gov­ern­ment spends more, house­holds spend less’ !!! and as for his fan­tas­ti­cal read­ing of banks on the edge of col­lapse being ‘awash with reserves’ err no the rea­son they are deposit­ing reserves with the Fed because that is the last safe place. 

    But on page 22 he is back on firm ground
    ’To make the case that a drop in stock mar­ket wealth can cause an increase in the unem­ploy­ment rate, there must a be a plau­si­ble trans­mis­sion
    mech­a­nism from one to the other. In my work, that mech­a­nism oper­ates
    through aggre­gate demand’
    If he had a firmer SFC def­i­n­i­tion of aggre­gate demand he might have dis­cov­ered the true trans­mis­sion mech­a­nism.

  • alain­ton

    Also falling asset prices will reduce the value of col­lat­eral and so will reduce the credit accel­er­a­tor, increase delever­ag­ing, and through debt over­hang decrease growth of credit

    Sud­den Stops’ in an Equi­lib­rium Busi­ness Cycle Model with Credit Con­straints: A Fish­er­ian Defla­tion of Tobin’s q” by Enrique G. Men­doza (2004)
    Kiy­otaki, Nobuhiro and John Moore, 1997, “Credit Cycles,” Jour­nal of
    Polit­i­cal Econ­omy.
    Kobayashi http://ideas.repec.org/p/eti/dpaper/07035.html

    also will reduce scope for firms buy­ing back their own equity, which may increase invest­ment.

    The dis­ad­van­tage is that where assets are used as inputs or reduce real wages (as from higher house prices) can result in ‘credit rever­sal’ — reduced credit growth and demand — but a risk at the top of the cycle not the bot­tom.

  • Lyon­wiss

    @ RJ Decem­ber 27, 2011 at 8:38 pm

    I dis­agree with a lot of what you say about gov­ern­ment spend­ing and money. But let’s agree to dis­agree, until we can present some hard facts.

  • Many thanks Neil,and no need to apol­o­gize for the incom­plete expla­na­tion: I just had a bit of a rough patch in the last few days, oth­er­wise I should have fig­ured it all out for myself.

    I’ll try to post on this tomorrow–might run it past you first of all to make sure I have got it all right.

    And yes, that ONS web­site! 3,000 cheers for the ABS in com­par­i­son.

  • cja

    If this finan­cial sec­tor debt really is inflated this much, why didn’t it all col­lapse dur­ing the GFC?

    Also, what effect, if any, would the dynam­ics of this type of debt have on employ­ment and eco­nomic activ­ity in gen­eral?

    Cheers.

  • RJ

    until we can present some hard facts.”

    As opposed to just ordi­nary facts?

  • RJ

    CJA

    Good ques­tion.

    Has this finan­cial debt fig­ure included a lot of mean­ing­less off­set­ting debt. Or is it entirely bank lend­ing to the finan­cial sec­tor

    In fact this graph makes lit­tle sense if it does not. 

    If the bank loans to the finan­cial sec­tor this equals finan­cial debt. But then surely the finan­cial sec­tor would loan to the non finan­cial sec­tor. So finan­cial sec­tor debt should be exceeded by non finan­cial sec­tor debt. Unless finance com­pa­nies are lend­ing to each other.

    In which case the total above is mean­ing­less

    Or am I con­fused or have I missed the point

  • I mostly agree Andrew–though I wouldn’t bother to dis­tin­guish between RA and OLG mod­els, they’re both crap.

  • Michael Hoex­ter

    More on Ron Paul from today’s NY Times: 

    http://mobile.nytimes.com/article?a=884834&f=21&p=1

    I think you’re doing any econ­o­mist or seri­ous social sci­en­tist, even a neo­clas­si­cal, a seri­ous dis­ser­vice if you line him up with Paul. Also you’re doing the cause of reform­ing the bank­ing sys­tem and the rela­tion­ship of bank­ing to gov­ern­ment a seri­ous dis­ser­vice as well.

  • RJ

    End­ing the Fed would surely destroy the US econ­omy. And the world econ­omy with it.

  • alain­ton

    OLG — Ok was tempted to say truly clas­si­cal mod­els of pop­u­la­tion where peo­ple are born, eat, save, spend and die — but sub­sis­tence and death are too prosiac for neo-clas­si­cal eco­nom­ics to deal with.

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  • peteryo­g­man

    I like Max Keiser’s in your face style. Could some­one please shed light on his con­nec­tion to Iran through PressTV. What­ever their inde­pen­dence or non-inde­pen­dence from the Iran­ian state, this asso­ci­a­tion pretty much under­mines every­thing else. Can’t he find financ­ing and a pul­pit else­where? Unfor­tu­nately, it also tends to under­mine those who asso­ciate with Max. Since I con­sider Steve Keen’s work and mis­sion to be of the great­est impor­tance why risk that asso­ci­a­tion?

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