Debt Britannia

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PDF For­mat: Debt­watch Sub­scribers; CfESI Sub­scribers

Data: Debt­watch Sub­scribers; CfESI Sub­scribers

As much as I crit­i­cize the US of A for its eco­nomic man­age­ment, I can’t fault its sta­tis­ti­cal agen­cies on the col­lec­tion and dis­sem­i­na­tion of data: data is read­ily avail­able and almost always in an eas­ily acces­si­ble for­mat. That, and the fact that it’s the world’s biggest econ­omy, is why most of my analy­sis is of the US. Australia’s ABS deserves sim­i­lar acco­lades for mak­ing data read­ily acces­si­ble and rel­a­tively easy to locate.

The UK data source, the Office of National Sta­tis­tics, is almost impen­e­tra­ble by comparison—it’s the sta­tis­ti­cal sys­tem that Sir Humphrey Appleby would design. It gives the appear­ance of acces­si­bil­ity, yet either drowns you in so much data in response to any query that you give up, or which, when you get to what you think you want, returns rubbish.

For exam­ple, you’d think fol­low­ing the sequence “Economy—UK Sec­tor Accounts—Financial Assets and Lia­bil­i­ties” would actu­ally take you to some­thing resem­bling the USA’s Flow of Funds, wouldn’t you?

Guess again. Fig­ure 1 shows what it returns you: no data, no pub­li­ca­tions, but links to four method­ol­ogy papers on Invest­ment Trusts. “Well done, Bernard!

Fig­ure 1

Given this state of affairs (or these affairs of state?), I haven’t both­ered try­ing to put together a debt pro­file of the UK as I have for Aus­tralia and the USA—which of course shows the suc­cess of the Appleby method. But as so often hap­pens, the method back­fired when Mor­gan Stan­ley, using rather more research resources than I can bring to bear, pub­lished a chart of national indebt­ed­ness in which the UK was right at the top—with a stag­ger­ing 950% pri­vate debt to GDP ratio, and a finan­cial sec­tor debt ratio alone of over 600%.

Fig­ure 2: Mor­gan Stan­ley global debt ratio calculations

I expect that Sir Humphrey’s descen­dants are now busy putting out this brush fire with claims of double-counting, but even the UK Treasury’s Bud­get Report admits to a peak pri­vate sec­tor debt to GDP ratio of over 450 per­cent, with the finance sec­tor ratio alone being 250%:

Over the pre-crisis decade, devel­op­ments in the UK econ­omy were dri­ven by unsus­tain­able lev­els of pri­vate sec­tor debt and ris­ing pub­lic sec­tor debt. Indeed, it has been esti­mated that the UK became the most indebted coun­try in the world.

Chart 1.1 high­lights the rise in pri­vate sec­tor debt in the UK. House­holds took on ris­ing lev­els of mort­gage debt to buy increas­ingly expen­sive hous­ing, while by 2008 the debt of non­fi­nan­cial com­pa­nies reached 110 per cent of GDP. Within the finan­cial sec­tor, the accu­mu­la­tion of debt was even greater. By 2007, the UK finan­cial sys­tem had become the most highly lever­aged of any major econ­omy…” (UK Bud­get Report, 2011)

Fig­ure 3: UK Trea­sury pri­vate debt to GDP figures

To put this into per­spec­tive, the USA’s pri­vate debt to GDP ratio peaked at 303% of GDP, and the rapid decline in this debt to its cur­rent level is what has caused its “Great Reces­sion”. I never thought that another devel­oped econ­omy could make the USA’s debt bub­ble look triv­ial, but clearly I was wrong.

Fig­ure 4: And you thought Amer­ica had a debt bubble…

As well as aggre­gate UK pri­vate debt exceed­ing America’s, the UK also has a higher debt to GDP ratio for every sec­tor. How­ever as usual, gov­ern­ment debt, about which politi­cians and neo­clas­si­cal econ­o­mists obsess, is the small­est com­po­nent of total debt, and has only started to grow after the cri­sis began. To empha­sise one point on which I emphat­i­cally agree with MMT econ­o­mists, pub­lic debt is not the prob­lem, and attempt­ing to reduce pub­lic debt now is the wrong policy—from my per­spec­tive, because it would add pub­lic sec­tor delever­ag­ing to pri­vate sec­tor delever­ag­ing, thus exac­er­bat­ing the under­ly­ing prob­lem of delever­ag­ing. Rather than obsess­ing about pub­lic debt now, politi­cians and econ­o­mists should have been con­cerned about ris­ing pri­vate debt in the pre­vi­ous two decades.

UK house­hold debt grew along sim­i­lar lines to USA house­hold debt, but con­tin­ued grow­ing as US house­hold debt started to taper. It is now falling, but still exceeds even Australia’s house­hold debt ratio—though Aus­tralia holds the dubi­ous record for the fastest rate of growth of house­hold debt since 1990.

Fig­ure 5

While UK house­holds were rel­a­tive lag­gards in the rate of growth of debt, UK busi­nesses showed how it was done by tripling their indebt­ed­ness in just over 2 decades, from the post-1987 Stock Mar­ket Crash level of 38% of GDP to a whop­ping 118% at the end of 2009.

Fig­ure 6

But “Card­board Box? You were lucky!”. The Four York­shire­man award for dig­ging a hole faster than any­body else goes to the UK finance sec­tor. The USA and UK both began the post-1987 Stock Mar­ket era with roughly com­pa­ra­ble lev­els of finance sec­tor debt—roughly 50% for the UK and 40% for the USA. But two decades later, UK finance sec­tor debt peaked at 261% of GDP, more than twice the US level of 123% (I can’t show Australia’s finance sec­tor debt since the RBA doesn’t sep­a­rately record it, but the Mor­gan Stan­ley data in Fig­ure 2 implies that it’s larger than America’s).

Fig­ure 7

The com­bi­na­tion makes the UK the Pri­vate Debt Cap­i­tal of the G20 world.

Fig­ure 8

All this implies that when a debt slow­down hits the UK, it could do so with even more impact than it did in the USA. As I’ve argued exten­sively else­where, aggre­gate demand in a credit-based econ­omy is income plus the change in debt. This per­spec­tive puts the UK’s stag­ger­ing depen­dence upon pri­vate debt into sharp relief; explains why—as yet—it hasn’t suf­fered as sharp a down­turn as has the USA; and also implies that that day of reck­on­ing may be approach­ing. Take a good look at Fig­ure 9 and Fig­ure 10.

Fig­ure 9: British Aggre­gate Demand

Fig­ure 10: Amer­i­can Aggre­gate Demand

Firstly, note that the peak debt con­tri­bu­tion to aggre­gate demand was far higher in the UK than the USA: in 2008, the UK GDP was roughly 1.4 tril­lion pounds while the increase in debt was 800 bil­lion, yield­ing total pri­vate sec­tor spend­ing (on assets as well as goods and ser­vices) of over 2.2 tril­lion; the US num­bers are roughly 14 tril­lion dol­lars for GDP and 4 tril­lion for the increase in debt.

Sec­ondly, the USA went straight from lever­ag­ing to delever­ag­ing, with the change in debt going from adding $4 tril­lion in 2008 to sub­tract­ing 2.5 tril­lion in 2010. In the UK, there have been 4 dips into delever­ag­ing, but 3 of them have sub­se­quently been reversed, and the worst to date (in 2010) reduced aggre­gate demand by only 100 billion—40% of the impact of the peak decline in the USA.

But thirdly, another period of delever­ag­ing has just begun in the UK, whereas the rate of decline of debt has slowed in the USA. Things aren’t look­ing rosy for 2012 in the USA, but they could be far worse in the UK.

Fig­ure 11 com­pares debt-financed demand in the two coun­tries: the UK’s debt binge has been strik­ingly larger, far more volatile, and is now headed down while the USA—though still deleveraging—is headed up.

Fig­ure 11

The role of debt in dri­ving both employ­ment and asset prices is very appar­ent. The boom years of the UK econ­omy from 1993 till 2008 were in fact its bor­row years.

Fig­ure 12

I pre­fer to cor­re­late the Credit Accel­er­a­tor to change in asset prices, but these next two fig­ures are use­ful in show­ing the level of UK asset prices, as well as their cor­re­la­tion with the change in pri­vate debt.

Fig­ure 13


Fig­ure 14

The UK Credit Accelerator

As explained else­where (“A much more neb­u­lous con­cep­tion“), since the change in pri­vate debt is an impor­tant com­po­nent of aggre­gate demand, and aggre­gate demand is expended on both com­modi­ties and assets, the accel­er­a­tion of pri­vate debt will be cor­re­lated to the change in unem­ploy­ment and the change in asset prices. This is very appar­ent in the UK data, and all 3 measures—unemployment, the FTSE and real house prices—are now under the influ­ence of neg­a­tive credit accelerators.

Fig­ure 15

Fig­ure 16

Fig­ure 17

Add to this pri­vate sec­tor delever­ag­ing a gov­ern­ment com­mit­ted to a deluded pro­gram of “expan­sion­ary fis­cal con­sol­i­da­tion“, and the indi­ca­tions are that the UK will be a leader in the global reces­sion stakes in 2012.

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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91 Responses to Debt Britannia

  1. koonyeow says:

    Title: Cor­rec­tion

    37 years left base on cur­rent death table. Hooray…

  2. Frank says:

    Hello Steve

    Still haven’t got round to send­ing that wire trans­fer, but it is on the todo list. Mean­time — the Upgrade link on the main menu bar and else­where is not functional.

  3. Steve Keen says:

    Yes I know! I am try­ing to find out why. The site was moved to a new server and per­haps this page wasn’t prop­erly ported.

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