Max Keiser & me & the UK’s 950% Debt to GDP Level
Dec23
on December 23, 2011
at 12:14 am
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.
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.
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.
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.
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.
@ 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.
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.
“until we can present some hard facts.”
As opposed to just ordinary facts?
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.
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.
Ending the Fed would surely destroy the US economy. And the world economy with it.
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.
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?