Debt Britannia

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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. NeilW says:


    Thank you for that. I’ve been looking forward to your view on the UK since you started your analysis.

    It is as I suspected. Grim.

  2. Michael Power says:

    Thanks very much Steve for this.

    I recently looked for this analysis, first on the website of the UK’s Office of Budget Responsibility (where I failed to find a clear description of the Treasury’s income, expenditure, and debt), and then the Office of National Statistics (where I rapidly got bogged down).

  3. myopia says:

    Thanks for the much needed (“Well done bernard”, “Four Yorkshiremen”) light relief!

    My take on MMT is why do they concentrate so much on government spending.. but hey ho!

    BTW – this whole page is one big url link?

  4. Lyonwiss says:


    UK economic data show that few people actually use the data, because the database is virtutally unuseable. The design show a total lack of understanding of the basic principles of database design.

    I downloaded a database of more than 20MB and found the data table was full of
    holes (blanks). There is no evidence of database normalisation (elimination of
    data redundancy).

    I suspect that the data are prone to errors. The more data are used, the more
    users help in detecting errors, as unused data are normally full of errors. May
    be the UK power-in-charge doesn’t want people to know what’s going on.

    Enormous UK finance sector debt is entirely possible. Remember Iceland had
    financial sector debt ten times of its GDP. As I’m not confident about UK data, I
    can only make consistency checks. As London is the financial centre of Europe and other parts of the world it’s entirely possible that it is comparable to New York in size and scale.

    As I said in a previous post, a $14 trillion UK financial sector debt (six times
    GDP) is quite possible, implying UK and US financial sectors (London and New York) are about the same size. Your Figure 7 implies London finance is only about one third the size of New York finance (US is six times UK GDP). This seems low, because, among other things, according to Max Keiser most of the multi-billion scams (eg Madoff) went through London. UK appears to be a hybrid of US and Iceland, in financial leverage terms.

  5. Dannyb2b says:

    “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. ”

    You can create enough demand through monetary stimulus to offset government and private sector deleveraging. You just need to circumvent the monetary transmission mechanism so the central bank deals directly with the public and not commercial banks.

  6. mahaish says:

    uk derivatives liabilities according to the data indicates,

    5.7 trillion in outstanding liabilities,

    3.9 trillion held by entities other than uk banks

    this would be on balance sheet, i would assume

    whats going on off balance sheet on a different set of books, is anyones guess,

    the greater worry is that sir humphrey and the authorities dont know whats going on .

    and they wont find out until someone doesnt get paid

  7. RJ says:

    “I expect that Sir Humphrey’s descendants are now busy putting out this brush fire with claims of double-counting,”

    Surely their must be double counting. As financial debt is higher than non financial debt

    And why include financial debt anyway. Surely these companies are only intermediaries. So why not simple exclude this figure

    The key surely is the amount of non financial debt. Commercial banks can either loan to non financial companies or people. Or to financial companies that then loan to non financial companies or people.

  8. RJ says:

    I would also exclude UK Govt debt. Except when looking at savings.

    It is meaningless as a (Govt) debt liability but very important for financial savings.

  9. RJ says:

    “and they wont find out until someone doesnt get paid”

    This will never happen for economic reasons if the Uk retains their central bank

  10. Lyonwiss says:

    Bad financial sector debts get converted to public sector debt through bailouts, which are paid for by taxpayers via austerity.

  11. alainton says:


    There is a small group of Stock flow consistency economists at the Bank of England who have been trying to reconstruct flow of funds data for the UK – they have done the hard work in aggregating and revaluing the ONS data
    (now at RBS) &

    Here is their very detailed paper from April

    Page 21 of the paper is classic Minsky

    Page 19 very interesting describing the peak of the housing bubble – when older households selling properties cashed in and spent rather than redepositing the receipts in bank deposits – leaving banks with a funding gap they had to finance through securitisation – the receipts from asset sales giving a short term (and phantom) boost to aggregate demand, and with a perception of higher wealth savings rates fell.

  12. RJ says:


    “You just need to circumvent the monetary transmission mechanism so the central bank deals directly with the public and not commercial banks”

    This comment is completely wrong.

    Whenever the UK Govt spends a series of journal entries are processed (by the treasury BOE commercial banks and receiver of the money) which releases new money into the economy.

    The commercial bank journal entry is

    DEBITS BoE Reserves (BoE debt/bank asset)
    CREDIT Customer bank account (bank liability/ receivers asset)

    Some on here criticise MMT but MMT does understand money and banking. And many on this site do not.

  13. RJ says:

    “Page 19 very interesting describing the peak of the housing bubble – when older households selling properties cashed in and spent rather than redepositing the receipts in bank deposits – leaving banks with a funding gap”

    Why would it leave banks with a funding gap.

    Spending just transfers money (bank deposits) from the buyer to the seller. So BoE reserves just transfer from one bank to another along with the bank liability transfer


    And in total these movements between banks likely just cancel out.

  14. RJ says:

    The reason a bank can have a so called funding gap is if they loan large amounts of money (more than other banks) which is used by their customers to buy from customers from the other banks.

    The enthusiastic bank loan issuer then has a problem settling with other banks. This is what happened to the likes of Northern Rock. They then had to borrow short term to settle with other banks to fund in effect their irresponsible long term bank lending.

  15. Lyonwiss says:

    @ Alainton December 31, 2011 at 9:36 pm

    The fact that the group had to do hard work to use the ONS data means someone else would have to hard work also to check the results of their paper. It is unlikely to happen and uncertainty remains.

    On page 25, Chart 20.a of their report shows total resident banking assets are 500 percent of GDP and financial sector assets are larger than this figure. Since financial sector leverage is high, financial sector debt must be close to financial assets. This further lends support to the 600 percent estimate of Morgan Stanley research.

    On the Great Moderation of the report, I point out here that in 2002, Greenspan
    justified the technology bubble by saying, “The increased volatility of stock
    prices and the associated quickening of the adjustment process would also have
    been expected to be accompanied by less volatility in real economic variables. And that does appear to have been the case”

    In other words, the official claim to the virtue of the Great Moderation (ignoring
    other things) is mostly based on the chart I have produced below.

  16. Danny says:

    I’ve been wanting to do this analysis on the UK for sometime but you’ve beaten me to it. I totally agree about the ONS site – it is terrible.

    With that in mind can I ask what components you used to form the “debt-financed demand” and any links to data sources?

    Many thanks.

  17. alainton says:

    in England they was a boom in buying property abroad from cashing out domestic house price rises – that is a direct sectoral deletion from domestic bank deposits.

    In the barwell/burrows paper they found a shortfall between domestic asset sales and domestic bank deposits and were seeking to explain it.

  18. alainton says:

    Rj check out warren mostler –

    ‘Reserve accounting uses the standard accounting identities, but the meaning of “liability” is not “debt.” The husband-wife analogy for Central Bank-Treasury accounting relationships is apt. Since a husband and wife are responsible for each others debts, neither can be indebted to the other. That is to say, reserve accounting is a fiction that does not represent real relationships, such as exist between a creditor and debtor in the horizontal system.’

    So you are accusing now Warren of not understanding MMT!

  19. seanbroseley says:

    This is the economy I am trying to bring up two children in.

  20. alan stares says:

    Dear Steve

    Some of us in the UK think the day of reckoning is nigh. Particularly over the size of the debt in the financial sector. It appears from the worried look on Vince Cables face that Armageddon is going to hit The City soon. Bank reform promised by 2019!

    The chances for the Ponzi merchants to score by creating more asset bubbles which the Coalition Govt. thinks will get them out of a hole are fading fast and with it the dreams of our ‘chief tape worm’. Surely the Ponzi merchants will only hasten the crisis. I would like to know on what security they are borrowing at the moment. Or, is it simply each bank gambling in trying to climb out of its ‘black hole’ before the whole lot collapses?

    I dont think you will get the blame for this one!!!

    Happy New Year!

  21. RJ says:

    “in England they was a boom in buying property abroad from cashing out domestic house price rises – that is a direct sectoral deletion from domestic bank deposits.”

    Are you sure

    If a person in the Uk wants say Euro’s then they surely must find someone who holds Euro’s who want £.

    Neither Euro’s or £s increase or decrease

  22. centerline says:

    Keep in mind that UK has the absolute lowest levels of regulation for shadow banking activities. It is one of the main reasons the largest banks maintain operations and concentrate such activities there. I would wager there is a high probability the next crisis will originate from London.

  23. RJ says:


    “Rj check out warren mosler – ”

    I’m unsure why you have posted this. What post of mine are you responding to.

  24. alainton says:

    good point but that only refers to the balance sheets of those who trade in foreign exchange, in banking terms is a domestic debit and a foreign bank account credit – the domestic banking balance sheets have reduced. Its the same reason no country could ever have a 100% negative balance of trade – it would soon drain domestic bank accounts.

    On the second point its the familiar issue of whether horizontal money creation is an asset/liability pair – No.

  25. seanbroseley says:

    When the UK financial sector blows will it blow up the world?

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