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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  • Vogon Poet

    Hey guys I have a ques­tion I apol­o­gise that it has noth­ing to do with this post. I was just won­der­ing what do you think of the econ­o­mist Amartya Sen? He seems to be some­what out of step with the neo­clas­si­cals but also accepted (rather like Stiglitz)? Just won­der­ing what peo­ple think of him, I am try­ing to work out his eco­nom­ics. Thanks!

  • Vogon Poet

    By the way love the blog I do read it I just don’t com­ment much!

  • Sorry Mugs, there must be a has­sle in your email account then. I’ll check.

  • For some rea­son you were still listed as a Free Sub­scriber, even though you’ve joined at the Keen level. What may have hap­pened is that you “re-joined” rather than upgrad­ing, leav­ing your old user­name as a Free still, but with­out acti­vat­ing a new one.

    Try again now and let me know what hap­pens.

  • mugs

    All fixed Steve, thanks.

  • Vogon Poet

    I’m guess­ing an econ­o­mist or some­one inter­ested in the topic will know some­thing about him.

  • Pingback: Debt Britannia | OzHouse Alt News()

  • Lyon­wiss

    @ Jason webb Jan­u­ary 2, 2012 at 3:44 am

    Take the case of MF Global. A client who pur­chases a deriv­a­tive of face value
    $100,000 through the firm, has to deposit an ini­tial mar­gin of $10,000 (say) as
    col­lat­eral (hypoth­e­ca­tion). MF Global then takes the $10,000 to JP Mor­gan as
    col­lat­eral (re-hypoth­e­ca­tion) to bor­row another $100,000 (say) to spec­u­late with other deriv­a­tives (unknown expo­sure).

    The $10,000 deposit and the loan at JP Mor­gan (a bank) would be on the bal­ance sheet of the finan­cial sec­tor, but ulti­mate size of deriv­a­tive expo­sures are not off­i­cally recorded or reg­u­lated. In a pre­vi­ous post, I guess the UK finan­cial sec­tor assets must be about the same as US finan­cial sec­tor assets, totalling about $30 tril­lion com­bined. Much of this amount is hypoth­e­ca­tion and re-hypoth­e­ca­tion for the $600 tril­lion or more of global deriv­a­tives expo­sure, an aver­age lever­age ratio of more than 20. 

    Many down play the risk of $600 tril­lion of gross expo­sure. If you put down $10,000 to buy $100,000 of stock, your risk is not $10,000, but $100,000. You are wiped out by a 10 per­cent fall in stock prices. Things can get very messy for you and your stock­bro­ker if the stock­mar­ket fell 15 per­cent (say) very quickly. You may not be able meet the mar­gin call, you may try to leave town, there may be lit­i­ga­tion etc.

    In the above exam­ple where MF Global went bankcrupt due to unsuc­cess­ful spec­u­la­tion, the mess is due to the legal uncer­tainty about who has the pri­or­ity claim on the $10,000 col­lat­eral, JP Mor­gan or MF Global clients? The main prob­lem for macro­eco­nom­ics is not so much who gains and who loses (as it nets out, usu­ally favour­ing the vil­lains), but the mar­ket becomes dys­func­tional, because cap­i­tal becomes risk-adverse due to increased uncer­tainty.

    The higher the debt level or lever­age, through deriv­a­tives or out­right bor­row­ing, the higher the risk that the process of lend­ing fails or comes to a grind­ing halt and reverses into delever­ag­ing. (We ain’t seen nothin’ yet, as deriv­a­tives are still untamed.)

  • RickW

    @Lyonwiss
    Jan­u­ary 2, 2012 at 1:12 pm | #
    .…..
    In the above exam­ple where MF Global went bankcrupt due to unsuc­cess­ful spec­u­la­tion, the mess is due to the legal uncer­tainty about who has the pri­or­ity claim on the $10,000 col­lat­eral, JP Mor­gan or MF Global clients? The main prob­lem for macro­eco­nom­ics is not so much who gains and who loses (as it nets out, usu­ally favour­ing the vil­lains), but the mar­ket becomes dys­func­tional, because cap­i­tal becomes risk-adverse due to increased uncer­tainty.”

    There is no uncer­tainty. JP Mor­gan is not far behind Gold­man Sachs as far as pri­or­ity goes. Here are 808,799 good rea­sons why JP Mor­gan will keep the money:
    http://www.opensecrets.org/pres08/contrib.php?cid=N00009638

  • RickW

    I take the view that the cur­rent account is a good indi­ca­tor of a coun­ties abil­ity to ser­vice its debt. On this basis the UK is in rea­son­able shape:
    http://www.indexmundi.com/g/g.aspx?c=uk&v=145

    How­ever the cur­rent account was worst on record in Q3 2011 so might be a sign that the qual­ity of the debt is impaired. There is so much folly with finan­cial prod­ucts that it is impos­si­ble to know all the link­ages and how they will respond in a cri­sis.

    Lon­don finances a large por­tion of min­ing activ­ity around the globe. If China con­tin­ues to decline then min­ing prof­its will soon be non-exis­tent and highly geared oper­a­tions will be at risk — as will the cash streams of their lenders.

    Not good prospects for work in Lon­don:
    http://www.telegraph.co.uk/finance/jobs/8978239/UK-jobs-outlook-is-the-worst-for-20-years.html

    Any­one here close to what is hap­pen­ing in the UK? Max Keiser made a pre­dic­tion for 2012 yes­ter­day that the UK would fall over before Europe and US — what is he look­ing at other than this blog!!

    He also pre­dicted Aus­tralia would jump in the cri­sis stakes if China con­tin­ues to decline — noth­ing new but some inevitabil­ity in his com­ments.

  • RickW

    I have some ques­tions for Steve or any­one else will­ing to answer.

    I under­stand QE funds go to selected finan­cial insti­tu­tions. Is the cur­rent rate on these funds zero in the US?

    I gather a good pro­por­tion of these funds are used by the selected few to cur­rently pur­chas­ing US Trea­sury bonds at the going rate rang­ing from zero to 3%, risk free. Is this cor­rect?

    Surely this gift to the favoured few from gov­ern­ment con­tra­venes anit-com­pe­ti­tion law in the US. What laws?

  • koonyeow

    Title: Thanks for The Pri­vate Reply, Steve

    Await­ing those punches.

  • RJ

    RickW

    Any­one here close to what is hap­pen­ing in the UK? Max Keiser made a pre­dic­tion for 2012 yes­ter­day that the UK would fall over before Europe and US – what is he look­ing at other than this blog!!”

    I like Max. But don’t take his com­ments (not his guests that can be very good at times) too seri­ously.

    The UK and US Gov­ern­ments have their own cen­tral bank and a float­ing cur­rency so can always ser­vice their debt. This is an eas­ily prov­able fact. This should pro­tect the Uk and US no mat­ter what.

    The ECB will I believe oper­ate water the plant just before it dies oper­a­tions dur­ing 2012. In other words the ECB will step in to buy bonds (using jour­nal entries NOT Ger­man money) as a last resort to stop the Euro col­laps­ing. But this will only delay the inevitable.

  • RJ

    I under­stand QE funds go to selected finan­cial insti­tu­tions. Is the cur­rent rate on these funds zero in the US?”

    Slightly above zero but so what

    QE is an asset swap. The Fed does NOT just give banks Fed reserves as a gift. The bank must front up with secu­rity and MUST pay the reserves back. So as I see it a lot of the com­ments on the Fed is just non­sense. The Fed (or any cen­tral bank) is the peo­ple friend though. Espe­cially the Fed. (with­out the Fed the world would be in a ter­ri­ble state now).

    With­out a cen­tral bank we can not all save and will likely return to a few hav­ing all the money and the rest being buried in debt. Be aware of this when ‘friends of the peo­ple’ crit­i­cise cen­tral banks. Look at Euro coun­tries for clear evi­dence of the dan­gers of a coun­try giv­ing up their cen­tral bank.

  • RickW

    @RJ
    Jan­u­ary 2, 2012 at 9:15 pm | #
    .……
    Slightly above zero but so what
    QE is an asset swap. The Fed does NOT just give banks Fed reserves as a gift. The bank must front up with secu­rity and MUST pay the reserves back. So as I see it a lot of the com­ments on the Fed is just non­sense. The Fed (or any cen­tral bank) is the peo­ple friend though. Espe­cially the Fed. (with­out the Fed the world would be in a ter­ri­ble state now).”

    The cur­rent sys­tem of favoured insti­tu­tions is bleed­ing pub­lic funds into the bank cof­fers. Why not pro­vide zero inter­est loans direct to the pub­lic so they can play the same game as the favoured banks and buy gov­ern­ment bonds as well?

  • RickW

    @RJ
    .….
    The UK and US Gov­ern­ments have their own cen­tral bank and a float­ing cur­rency so can always ser­vice their debt. This is an eas­ily prov­able fact. This should pro­tect the Uk and US no mat­ter what.”

    I was con­sid­er­ing the level of pri­vate debt not gov­ern­ment debt. My bet is the qual­ity of the invest­ments is dete­ri­o­rat­ing and likely an increas­ing por­tion is impaired because the cur­rent account is dete­ri­o­rat­ing despite aus­ter­ity mea­sures. Will any UK banks need bailouts to sur­vive in 2012?

  • Lyon­wiss

    Zim­babawe has a fiat cur­rency and can always ser­vice its gov­ern­ment debt in ZWD, except that no one uses the ZWD any more, as for­eign cur­ren­cies have been legal­ized for trans­ac­tions since 2009. The same could hap­pen to the GBP unless UK mends its ways.

  • koonyeow

    Title: An (Evo­lu­tion­ary) Response to Lyon­wiss

    If issu­ing large amount of gov­ern­ment money can solve prob­lems, I can retire now and start chas­ing skirts for the rest of my life (about 27 years left base on cur­rent death table).

  • RJ

    Why not pro­vide zero inter­est loans direct to the pub­lic ”

    Because Govt deficits does even bet­ter. It in effect gives money to the recip­i­ent. From a series of jour­nal entries.

    If tax rates for exam­ple are cut then peo­ple have more money in their bank account. And the Govt does jour­nal entries to fund this tax short­fall.

  • RJ

    Lyon­wise

    Zim­babawe has a fiat cur­rency and can always ser­vice its gov­ern­ment debt in” 

    I hope you are not com­par­ing Zim­babwe to the US or UK.

  • RickW

    @RJ
    Jan­u­ary 2, 2012 at 10:40 pm | #
    .….
    If tax rates for exam­ple are cut then peo­ple have more money in their bank account. And the Govt does jour­nal entries to fund this tax short­fall.”

    So why isn’t US gov­ern­ment mak­ing tax cuts rather than the Fed cre­at­ing money to sup­ply to its favoured insti­tu­tions?

  • Lyon­wiss

    @ RJ Jan­u­ary 2, 2012 at 10:42 pm

    You said: “The UK and US Gov­ern­ments have their own cen­tral bank and a float­ing cur­rency so can always ser­vice their debt.” You also said: “This should pro­tect the Uk and US no mat­ter what.” I was point­ing out that Zim­babawe also has its own cen­tral bank and a float­ing cur­rency so that it can always ser­vice its debt. This did not pro­tect Zim­babwe “no mat­ter what”.

    Your rea­son­ing is absurd. I can­not make it any sim­pler than to say, hav­ing a fiat cur­rency (by itself) does not solve all eco­nomic prob­lems of a sov­er­eign coun­try. Unless the eco­nomic prob­lems, which a fiat cur­rency can­not solve, are addressed in the UK and the US, then the GBP and USD could even­tu­ally be aban­doned like the ZWD, (like cur­rency crashes).

  • Dan­ny­b2b

    Rickw

    Why not pro­vide zero inter­est loans direct to the pub­lic so they can play the same game as the favoured banks and buy gov­ern­ment bonds as well?”

    Money doesnt need to be lent to the pub­lic for the pur­pose of con­duct­ing mon­e­tary pol­icy. It should just be trans­fered to the pub­lic in mea­sured reg­u­lar inter­vals with­out it being repaid when­ever mon­e­tary stim­u­lus is required. The cen­tral bank should not adjust interst rates on lend­ing to banks it should just deal with the pub­lic.

  • RJ

    lyon­wise

    So you are com­par­ing the US and UK to Zim­babwe

    One the dan­gers from excess Govt deficits (or money print­ing) is cur­rency depre­ci­a­tion.

    But a pow­er­ful econ­omy like the UK or US should be eas­ily able to han­dle any cur­rency depre­ci­a­tion result­ing from a eco­nomic shock. Zim­babwe could not.

    They tried to print money to buy US dol­lars and their cur­rency col­lapsed. This will never hap­pen to the US and there is almost no chance of it hap­pen­ing to the UK. The cur­rency value might fall but not seri­ously.

    Your rea­son­ing is absurd”. 

    And what rea­son­ing is absurd. My com­ments are based on facts on money and bank­ing today. Many though are hope­lessly lost. They refuse to accept facts about money and debt. Espe­cially Govt debt and the incred­i­ble power sound Govts with a cen­tral bank have. A power the Euro coun­tries have now given away.

  • RJ

    So why isn’t US gov­ern­ment mak­ing tax cuts rather than the Fed cre­at­ing money to sup­ply to its favoured insti­tu­tions?”

    The US Govt is run­ning a deficit. In my opin­ion though it should be much higher. Say from large tax cuts