Debt & asset/debt ratios 2010

I've been having an extended Twitter debate with a Gordon Brown  acolyte. This person started off by referring to me as an ignoramus in that wonderfully oblique way that the English have of insulting someone. But a few figures have emerged from this that I'll spell out here.

According to government figures private debt peaked in Q1 of 2010 at 475% of GDP.

At the time GDP was about £1500 billion so total debt was £7125 billion.

2010 Networth was is ~ £6000 billion, but government indebtedness reduces this by ~ £600 billion. So our actual net worth is £5200 billion. (ONS Figures)

2010 debt/asset ratio is £7125 bn/£5200bn = 135%

That is to say that in 2010 our borrowing totalled 135% of our assets. The UK was 135% mortgaged. This is known as highly leveraged.

Back in 1990 UK private debt was just ~ 180% of GDP (this is still higher than the peak of the Great Depression in the USA). GDP then was £570 billion so debt was £1026 billion. Total net worth was about £2500 billion. So in 1990 asset/debt ratio was about 55%.

Over the 20 years from 1990 - 2010 GDP increased by about 260%; net worth increased by about 210%; while debt increased by about 700%. This is the legacy of the Blair Government with Brown as Chancellor, and the Brown Govt with Darling as Chancellor. The succumbed to lobbyists from the finance and business sectors who were given free range to mortgage the entire country. Our debts are now about £7 trillion and goodness only knows what the interest payments are on that! But if Travelodge is anything to go by then the interest is about £1.4 trillion or about 90% of GDP.

Is anyone still surprised that we have low demand?

Private Debt Stays Behind Closed Doors

This is a graph from the Government's 2011 Budget Report. It shows their estimates of the scale of private sector debt - about six times the level of public debt. The top lighter band is the financial sector. Black is household which is about 80% mortgages, and dark-green is non-financial business.

Curiously neither the 2011 or the 2012 Government Budget have any measures for dealing with this problem. In the 2012 Budget there is barely any mention of private debt. I fact public debt is talked up as the problem. And recent days have seen government minsters blaming this on Labour. In particular the Government's  Budget is silent on the possibility of this massively over-indebted sector borrowing even more money for investment. I cannot recall any government minister mentioning private debt, and I cannot recall any journalist asking sustained questions about it. Some questions came up during Steve Keen's recent book promotion tour, but have died down again.

Many commentators are now saying that the Govt are using the chaos of the ongoing depression to shrink the state for ideological reasons. For example, in an interview with the Guardian, Dr Gabriel Scally formerly of the Department of Health says:

"At the end of the war this country was hugely indebted but within a couple of years had free healthcare and free education for everyone – what an achievement! This government is putting a huge price on education, especially young people seeking to go to university, and is in the process of dismantling the NHS." 

I think this is very likely to be the case. So not only is the government ignoring the primary cause of the depression, its austerity program is doing long term damage and preventing recovery, but they are dismantling or seriously weakening the social institutions that we need to help us get through this.

If you sat down to right a farce about a myopic and incompetent government, you could not do better than the real thing we have now. The UK will be a long time recovering, and we have not seen the worst of it yet.

Debt and deleveraging

Uneven progress on the path to growth

Report from the McKinsey Global Institute. Puts UK aggregate debt at around 507% of GDP mid 2011. This seems a tad low compared the the ONS figures that put private debt at about 430%, household at 96% and government at about 88%.  Giving us a total of 614% of GDP. Note how much more indebted we are than everyone except Japan. MGI conlude:

At the recent pace of debt reduction, we calculate that the ratio of UK household debt to disposable income would not return to its pre-bubble trend for up to a decade. Overall, the United Kingdom needs to steer a difficult course: reduce government deficits and encourage household debt reduction—without limiting GDP growth. The United Kingdom will need renewed investment by nonfinancial businesses to achieve this. (p.6)

The report is based on a study of a number of historical events comparing "deleveraging" events - where leverage is the ratio of debt to assets.

But the problem is that non-financial business is mortgaged to the hilt. Can we really expect banks to ramp up lending?