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. Farnorth5 says:

    RE: Debt Britannia:

    Steve -Another home run for you .

    Being in Canada and watching your blog and reading both books and looking at your various interviews etc.its easy to see if you had the same access to stats in the above for Canada
    based on my own history of experience in both Municipal/State
    finance as well as private sector here,you would end up with a Canada set of statistics very similar to what you have for Australia.

    We rely on US consumption of raw materials the way you rely on China to keep
    unemployment down and the economy generally humming along,

    Although overall we did not commit credit suicide the way the Americans did on real estate,we still have credit issues to address and at this time,notwithstanding the good observations of our Bank of Canada head about Minsky,
    our foolish federal politicans still think we should be “Balancing the Federal Books ” , before the Debt Management Recession is over .(The lack of private sector debt management between 1998 and 2008 being the real issue)

    People have tried to tell the Feds, you exercise financial discipline and adopt balanced federal budgets when the country is NOT in recession.allowing space to run the federal debt to gdp from 30% to 60% during a recession to provide extra UIC / Welfare /Retirement boosts but to no avail.

    The other half of Keynes observations and what our then Finance Minister Paul Martin did in 1994 to 2006 (Lowered the National Debt from 556B to 456B and most important lowered the Federal Debt to GDP Ratio from 72.5% to 23 % in 12 years ,when the country was not in recession.)

    As you may have guessed, this current state of affairs really burns my butt ,as it is/was all technically unnecessary .

    I expect Canada to go into further recession over the next two years and
    stay there until the American housing debt is eventually sorted out .
    (Ten to 15 years at the current rate of deleveraging)

    Unfortunately Bernanky and Geithner are doing their best to slow the deleveraging as much as possible.

    We all look on with disgust as we see them copying the Japanese 25 year kick the can down the road exercise, instead of dealing with the
    defective debt on the Finance Companies books.

    BTW A Happy New Year from Canada to yourself and other contributors to the dialogue over this past year,it’s made interesting reading.

    May you have good luck and good management in getting your basic message across in the New Year ,that private debt management not only matters,
    but with a ten to one ratio to public debt, is the corner stone of the worlds financial system we all take for granted and is the critical component in the system…..

  2. mahaish 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

    repo 105 , and lehman brothers, rj,

    and when the fed found out , it was too late

    it comes down to whether there is adequate or infact any meaningfull supervision of the derivates market by the central bank,

    history does not provide any encouragement on this matter.

  3. Steve Keen says:

    Brilliant detective work as always Andrew, thanks! I’ll tweet it more widely.

  4. mahaish 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”

    hi alainton

    yes, ultimate;y it depends on which banking jurisdiction the deposit is ultimately held,

    there can be net outflows and inflows.

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

    well i dont know how we come to this conclusion,

    admittedly an accounting entry is a reflection of a particular time slice.

    are you refering to the fact that the collatoralised value of the underlying assett may not be reflected in double entry book keeping, at any instance that post dates the transaction

  5. RickW says:

    Centerline
    January 1, 2012 at 4:27 am | #
    …. I would wager there is a high probability the next crisis will originate from London.”

    That will be no different to the last one. Joseph Cassano ran the AIG FP group from London. He is regarded as patient zero in the 2008 meltdown:
    http://en.wikipedia.org/wiki/Joseph_Cassano

    He was the dumb sucker that Goldman Sachs took for a ride but he can still laugh because he is a multi-millionaire and will never need to work again.

  6. RickW says:

    Alainton
    December 31, 2011 at 9:36 pm | #
    ……
    richard.barwell@rbs.com
    (now at RBS) &
    oliver.burrows@bankofengland.co.uk
    Here is their very detailed paper from April http://www.bankofengland.co.uk/publications/fsr/fs_paper10.pdf

    That link only gave me the front page. I was able to download the paper from here:
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1815000

    Minsky is listed in the references but no Steve Keen.

  7. RickW says:

    Andrew
    I have emailed the link to Steve’s Youtube lecture series to Barwell and Burrows. Wonder if they will have the curiosity to view the lectures.

  8. Dannyb2b says:

    RJ

    “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)”

    Yes I understand that. My point is that you need to separate the executive government from the central bank. The current system needs to be changed.

    The system needs the government to be constrained in terms raising funds from taxation, borrowing or selling assets. This way it can be run transparently and in an accountable manner. Instead of just pushing policies on the economy which for whatever reason arent in the national interest. Financial limitations along with other measures force the government to become efficient. No entity should have a blank check not even the government.

    The central bank should not deal with the executive for monetary policy. Monetary policy doesnt need to use government debt to affect the money supply.

  9. alainton says:

    Mahaish/RJ

    The double entry bookkeeping system requires two entries to be made to balance – even in those cases where as by the flicking of a switch money is created instanteously and not through a flow – in the case of horizontal money not created through securities however the liability entry is deceptive as it is not debt based money – there is no future flow – Warren Mostlers brother sister analogy is a good one – it is using the analogy of goodwill to say – you owe me nothing, as of course their is no contract or promise to pay – it is an important point as we need to be able to reconcile the credit theory of money with horizontal money.

  10. RJ says:

    Alianton

    Monetary sovereign Govts can create money as req

  11. RJ says:

    Alainton

    Monetary sovereign Govts can create money as required and without restriction.

    The point Warren Mosler was making here (I think) is :

    US Govt debt is largely meaningless (it is not only because the bond asset is very important to the asset holder) because it can be created when required as required by a series of journal entries.

    There are however issues from monetary sovereign Govt debt. But not being able to pay is not one of them.

    -Monetary inflation caused by too much Govt debt. I do not think this will ever be an issue if Govt bonds are issued at the required interest rate when required. (Others including MMT supporters do not agree).

    – Currency value. If Govt spend recklessly the currency value may depreciate.

    -Resource allocation may be inefficient etc

    In my opinion the solution to the current problem is simple. More Govt debt (a lot more) by tax cuts (higher deficits and then higher debt) NOT more Govt spending (Govts spend too much already) EXCEPT for increased pensions and unemployment benefits.

    But unbelievably ignorance of money and banking (especially economists) especially the difference between Govt debt and non Govt debt stops this occurring.

    People seem to want to believe money is special. Not just the result of a series of journal entries. That Govts with a central bank can create as required when required.

  12. RJ says:

    “The system needs the government to be constrained in terms raising funds from taxation, borrowing or selling assets. This way it can be run transparently and in an accountable manner. Instead of just pushing policies on the economy which for whatever reason arent in the national interest. Financial limitations along with other measures force the government to become efficient. No entity should have a blank check not even the government.”

    Democracy and sovereignty means the people and Govt have this power without the agreed framework for Government. Not an unelected ruling elite.

    Lets see how the Euro countries go. They are now constrained and have in effect lost their sovereignty to bankers, EU bureaucrats, an unelected ruling elite and / or foreign rulers.

    I believe the Euro and EU route will be a complete and utter disaster for the people of these countries. They have in effect done what you want. Lets see how it works out.

  13. RJ says:

    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”

    I believe all it means is foreigners will own a greater percentage of the financial assets in a country.

    The net financial assets (bonds or bank deposits) will NOT change from trade surpluses or deficits. So this is not correct if it refers to financial assets:-

    “there can be net outflows and inflows. “

  14. Dannyb2b says:

    RJ

    “Democracy and sovereignty means the people and Govt have this power without the agreed framework for Government. Not an unelected ruling elite.”

    Im an advocate of monetary reform I think the monetary system as it is currently is ineffective. The head of the central bank should be elected by the public not appointed by the president or whatever. The current democratic system doesnt have enough checks and balances, it is very important to impose a monetary constraint on the government not just give it a blank check.

    Yes I agree the Euro countries are now contrained after being able to rack up massive debts in the first place. There should of already been binding restraints in place to stop the gov debts from going out of hand instead of some loose agreement that did nothing. The problem with Europe is that they cannot offset the private and government deleveraging because of the monetary policy transmission mechanism which depends on commercial banks. This needs to be circumvented like I said before so the central bank deals directly with the public to expand money directly to the economy.

  15. RJ says:

    Yes I agree the Euro countries are now contrained after being able to rack up massive debts in the first place

    What massive debt?

    Govt debt is the only way people can save non Govt net financial assets for their retirement. We need a lot more Govt debt not less.

    “There should of already been binding restraints in place to stop the gov debts”

    And who are you to decide this. I support democracy and the right of people to decide for themselves.

    But you viewpoint is based on ignorance about money and banking anyway. Govt debt = non Govt assets. Govt interest expense = non Govt interest revenue.

    And there are constraints in place. Elections, inflation and the currency value for example.

  16. RJ says:

    “This needs to be circumvented like I said before so the central bank deals directly with the public to expand money directly to the economy.”

    And this is nonsense. Can I suggest you read this book as a starting point.

    http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

  17. Dannyb2b says:

    RJ

    “What massive debt?
    Govt debt is the only way people can save non Govt net financial assets for their retirement. We need a lot more Govt debt not less.”

    The debt of countries like Greece and Italy is massive IMO.

    “Govt debt is the only way people can save non Govt net financial assets for their retirement. We need a lot more Govt debt not less.”

    Govt debt is the only way people can save non govt net financial assets in the current arrangement and this needs to change because it is ass backwards. The money supply can be expanded directly to the public in a non debt based system without the need for any government assets.

    ““There should of already been binding restraints in place to stop the gov debts”

    I support democracy and the right of people to decide for themselves.”

    I think if enough people were aware of the benefits of this limitation of government excess they would be in favour of it.

    “But you viewpoint is based on ignorance about money and banking anyway. Govt debt = non Govt assets. Govt interest expense = non Govt interest revenue.
    And there are constraints in place. Elections, inflation and the currency value for example.”

    I already said I understand your explanation of the current system and I agree that is how it operates at present. I think the system needs to change though. The current constraints are only part of the equation. There needs to be further checks and balances to create a more balanced, stable system to better support growth.

  18. RJ says:

    “The debt of countries like Greece and Italy is massive IMO.”

    Govt debt??. It less than Japan believe.

    But I’m referring to monetary sovereign countries. Italy and Greece have given away their most valuable asset and are now like a company or individual

    US Govt debt is far too low. For example US100,000 saving per head on average = 30 trillion. 200,000 = 60 trillion

    It is not even close to this. The US could easily increase their deficit by $1 trillion a year.

  19. Dannyb2b says:

    RJ

    Why tinker with the existing mediocre monetary arrangement instead of improving it? I dont think we should rely on a semi competent system of government to get us out of the mess it created. The system has to change so that the public have a more direct effect on the economy instead of waiting so much for the government. Government has proved time and time again that it is not really up to it in terms of managing the economy lets try reign in their economic prowess.

  20. jason webb says:

    Please tell me straight away if this comment is missing the point, I’m no financial professional, but is there any chance here that some of this debt figure includes the net exposure to derivative contracts, as opposed to their net value? It’s quite possible to take out, say, a contract for difference, with a relatively small amount of collateral, which allows a net exposure many multiples greater. But this net exposure is very unlikely to ever become a real liability because investors would generally receive margin calls once any losses came near to the amount of collateral.(in the absence of some enormous gap move, of course) Anyway, just wondering, because if this type of contract is included in the books of the financial institutions, then maybe this particular uk debt data is not quite what it seems. And the UK is obviously a centre for this type of activity, of course.

  21. Steve Keen says:

    Hi Jason,

    Since I’m using data that is also used by the Treasury to calculate bank debt, I think derivative exposures are not included. That is certainly the case in Australian and US data. These figures would be for sectoral loans from banks.

  22. Steve Keen says:

    “But you viewpoint is based on ignorance about money and banking anyway”

    RJ, your language is classic “flaming”. Things you can say face to face without annoying people can get tempers flaring here.

  23. mugs says:

    Can’t seem to get the post as pdf? The link takes me to the login page each time, but I’m already logged in. Has always worked before, am I missing something?

  24. Steve Keen says:

    I instituted a “Clayton’s” membership scheme about four months ago Mugs: anyone can read a post here or documents I posted beforehand, but new PDFs are accessible only to Subscribers ($2 a year) or above.

    I’ve recently ported the blog to a new ISP, and something has gone wrong with the “Old members upgrade” link. But you could sign on as a new member using “New Member Registration” on the Home Page.

  25. mugs says:

    Thanks Steve, yep I am a subscriber, and it shows me as logged in. But clicking on the pdf links still just takes me to the register page. And if I do try to use the new member link I still just end up back on the registration page each time I try to access the pdf? I’ve had no problem opening the pdfs for previous blog posts.

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