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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