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.

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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.