My publication of a chart on UK government debt ratios seems to have started some debate.
One of the myths is that it is private debt that is the problem in the UK. I turn to Steve Keen for clarification. This is from his blog, with sources noted:
Let's be clear in that case, the problem is not government debt. Nor is it especially household debt because we have high levels of very long household debt in this country diue to mortgages which distorts ratios. The problem is our finance system.
And that's why we need to tackle that issue as a priority.
We could start with a financial transaction tax.
We should also be tackling tax havens - which act as the UK's agent for peddling this debt.
And we need to split banks.
And then increase capital ratios.
And then we might make some progress in containing o0ur debt issue. But we won't unless we do all those things.
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To get from 1936 to 1945, from considerable unemployment since the 1920s to full employment 1945 up to stagflation and Thatcherisation, took increased public spending and an increase in inflation to burn off that private sector debt.
I like to think about T B Macauley who in 1855 called the national debt of the UK a symbol of ‘civilisation, liberty, order, and virtue’. In 1855 UK debt to GDP was just over 100%, but it had come down from over 250% since the Napoleonic wars. The moral? Debt is a problem to the worriers when it goes up, but not when it comes down. And if anyone thinks they’re the first to believe that the UK government will default on its debt, David Hume got there before you – and he was also skeptical that the Sun will rise tomorrow.
Just a note of thanks – I do appreciate your comments – always
“Nor is it especially household debt because we have high levels of very long household debt in this country diue to mortgages which distorts ratios.”
You can’t ignore mortgage debt! For heaven’s sake….that’s the whole point.
Why?
It’s not repayable now
Keep some perspective on the issue
The Guardian has a silly little poll today asking something like “which country in the Eurozone has the worst financial mess” and, armed with prior knowledge of the chart above and the hidden timebomb of UK debt I was hoping to vote for the UK in the poll – alas the choice was Spain or Greece.
If, as I believe, we are in the early stages of a depression (debt deflation cycle) then one would expect the UK to suffer great hardship in the coming decade.
I fear that the public (simple folk like MPs and Cabinet Ministers) will never really “get” national income accounting. It was thus in Keynes’s day and it remains so. The desire for instant understanding (it is, after all, a very boring topic) leads us all into folly and rote response. Pessimism leads us into confusion and self-destructive hoarding. Your chart and explanation do a very good job of making a simple rejoinder to the panicked that has a reassuring authority.
Sam and Richard – I repeat an earlier point, that this is EXACTLY the simple graphical information that needs wide publicity.
I suggest following 38 Degrees lead, and plaster every billboard used by Cameron in the General Election for his asinine “We can’t go on like this”, with this simple chart, with a crisp slogan. perhaps amending Cameron’s slogan to “We can’t go on like this – let’s deal with the real wreckers of the economy”.
Or “Who’s really to blame for the mess?” Or any other suggestion.
But let Joe Public see the real facts, and stop blaming the victims of the biggest distraction burglary in decades.
So basically the UK is up to its armpits in debt, at over twice the top 10 average. Any rise in interest rates could send us over the edge.
The graph basically confirms what anyone with even a vague knowledge of economics knows: that the boom of the late 90s/early 00s was built on unsustainable consumption and debt.
When was the last time UK had debt of 1,000% of GDP? I mean not just government debt, but the whole caboodle.
Alistair, I think the point of our tribulation is that the Governement are focussing on a Budget Deficit, not on private debt. How would reducing benefits and public sector employment reduce private debt? If high non-Governement debt is the danger, then other procedures might be more appropriate.
Or are you pointing out that the banks have borrowed huge amounts from HM Treasury? I think that wold suggest another analaysis again. Without accurate diagnosis we are unlikely to restore normal levels of activity or growth.
How can banks have all this debt if they just create new money to make a loan?
Because loans make deposits and that’s debt – depending on your perspective
The loans are balanced by assets – supposedly
We should never ignore that fact that loans are only a problem when the asset securing the debt is in doubt
That’s the current problem
That makes no sense as including deposits would result in all bank lonas being double counted, once as the loan to a non-financial company/fousehold and once as the bank deposit. The above graph must only be non-deposit debt and reflect the massive shift in the UK of funding from deposits to wholesale funding. Because in the UK loans significantly exceed deposits which kind of destroys the all loans create deposits theory
It’s the asset backing which lies at the heart of the problem because most of it is based on land values. Real capital land values are still in bubble mode and have some way to fall towards trend (which tracks real GDP). And land is part of the real economy which affects ordinary people, especially in relation to housing costs.
There is a serious incentive for companies to acquire (the right amount of) debt because their interest payments on debt are tax-deductible. Having the right amount of leverage increases share value, managers’ bonuses etc. above that of a non-leveraged company doing exactly the same business. Without a cap on the tax deductibility of interest payments on debt, companies will continue to use leverage to help achieve a tax-efficent structure. This tax shield also incourages investments banks, hedge funds and other financial corporations to use high levels of debt to finance their gambles. Why should it continue to be a special allowable expense for companies beyond a reasonable amount for working capital when neither households nor (by definition) governments are able to deduct their interest payments on debt from their earnings?
Because it enables the can to be kicked along the road just a while longer?
Umm. Steve Keen queried the scale of the indebtedness shown on this chart and produced two other charts both of which show much lower figures. I suspect this chart of grossing up interbank balances.
However, the fact is that private debt in the UK dwarfs public debt and I do wonder why everyone goes on about public debt so much – it clearly isn’t our major issue.
It would be helpful to separate out cross-border financial sector debt from domestic. The real risk to the UK economy arises from the overseas exposures of the financial sector, not the domestic exposure. It’s worth remembering that domestic financial sector debt is pretty much balanced by UK household and corporate savings and investments.
Point taken – and I could have stolen his whole blog I guess – and suspect he’s have forgiven me
BUT – scale is the issue – and this graph shows scale
Re cross border – that’s kind of hard – I’ll see what I can find…
The point of the given chart would be that GOVERNMENT debt is not unsustainable by a very long way.
The financial debt aspect is of more interest [to me] because it would its make-up is harder to understand. Is it manufactured debt, as personal loans that had no substance from the start ?
No. Personal loans are financial sector assets, not debt. A reasonably large proportion of financial sector debt is corporate and household savings and investments (deposit accounts, ISAs, other forms of long-term savings). The financial sector also holds quite a lot of government debt, much of which it is required to hold under regulatory rules designed to reduce the risk to smaller investors (Government debt is regarded as risk-free). And the UK financial sector also has significant deposits (debt) from overseas activities.
The controversial bit as far as this chart is concerned is interbank borrowings, which is money that the banks owe to each other. These interbank borrowings “churn” many times through the financial sector both here and overseas, so care needs to be taken that the same money isn’t counted more than once in a chart that is adding together all the interbank borrowings of all UK financial sector institutions (not just banks). This is the mistake that I suspect the creators of this chart have made, as I commented to Richard above.
Bank lending does create deposits, as others have noted above, and these “created” deposits are included in figures for financial sector debt. They are real money which when spent into the economy comes to rest in another bank deposit account or long-term investments somewhere, so it is reasonable to include them in financial sector debt even though they are created through lending.
This financial sector figure is worrying in the graph. I first saw it in the context of the French downgrade being used as evidence that it was the UK that should be downgraded not France.
But I would like to see a breakdown of the Financial debt figure – otherwise I suspect it of being created for political reasons.