FT/McKinsey - Total UK debt 2nd Highest

Generali

My understanding is that UK GDP growth in the 2000s has been the lowest since the 1940s.

Masomnia

449% of GDP? Surely not? Isn't that like $10 trillion?

Generali

Masomnia wrote: »

449% of GDP? Surely not? Isn't that like $10 trillion?

Almost 12 actually.

It breaks down as follows (page 58 of the report):

Financial Institutions 197% of GDP
Households 101% of GDP
Non-financial businesses 117% of GDP
Government debt 52% of GDP

Of course the debts of the financial institutions may end up on the Government's debt but that's another story.

Of the household debt, outstanding mortgage debt makes up about 85% of GDP.

This is why I've been banging on about M4 being such an important indicator right now. There's an awful lot of debt out there. Deleveraging would cause big falls in the money supply potentially leading to deflation.

Radiantsoul

Generali wrote: »

My understanding is that UK GDP growth in the 2000s has been the lowest since the 1940s.

There was a column in the FT that showed that growth since 1990ish in the UK was far higher than our competititors in Europe. I think it was a Martin Woolfe column, but I can't find it. I suspect that growth is low in the 2000s, but that is measuring from the top of one cycle to the bottom of another.

tomterm8

I wonder what Britains net external debt is? That's one of the more important aspects of deleveraging, I would have thought. A lot of the debt is somewhat notional. Just adding it up, and saying the national debt is 400% of GDP seems quite strange. For example, financial institutions lend 85% of GDP to households for mortgages, but the households must lend a significant proportion of GDP to the financial institutions... add it up, and you get 170% of GDP as debt... but net debt is much smaller, surely.

The debt ascribed to financial institutions is rather odd. I wonder how much of it is hot air; financial institutions borrow low, and lend high... and "British" financial institutions actually deal worldwide.So, yes, they have huge debts, but they also have lending worldwide, and on net it if they are fairly competant it makes them a profit every year.

It's like that with corporate debt, too, you have huge multinationals borrowing money worldwide, and somehow it makes it onto the UK balance sheet because they are 'british'. And yet, in many cases, it doesn't really relate very much to UK interests.

All in all, I wonder how big a deal this is... it's an apple cart scenario, huge notional debt figures must make us more suceptible to crisis, and worsen recessions, but it only really bites when something upsets the apple cart.

It seems to me, the big threat of having such a high debt/GDP ratio is debt-deflation, caused by a disorderly deleveraging, which causes M4 to fall and causes further deflation and deleveraging. Once that kind of thing sets in, it is very hard to cure. Which is the reason Japans nominal GDP is lower now than it was in 1990. So far, avoided through QE, but if they stop QE too early, still a distinct possibility.

Generali

tomterm8 wrote: »

I wonder what Britains net external debt is? That's one of the more important aspects of deleveraging, I would have thought. A lot of the debt is somewhat notional. Just adding it up, and saying the national debt is 400% of GDP seems quite strange. For example, financial institutions lend 85% of GDP to households for mortgages, but the households must lend a significant proportion of GDP to the financial institutions... add it up, and you get 170% of GDP as debt... but net debt is much smaller, surely.

The debt ascribed to financial institutions is rather odd. I wonder how much of it is hot air; financial institutions borrow low, and lend high... and "British" financial institutions actually deal worldwide.So, yes, they have huge debts, but they also have lending worldwide, and on net it if they are fairly competant it makes them a profit every year.

If you read the actual report rather than the FT's version of it they discuss how they try to overcome some of the methodological problems you talk about.

I'm sure there is some double counting in there and some overcounting too (for example, credit card balances that are cleared at month end aren't really debt IMO but will be a part of the household debt).

When looking in comparative terms I would imagine that these problems would be much the same for most industrialised countries and so would 'net off'. Also, when looking at the change in debt over time, I can see no reason why the methodology would have significantly increasing errors over time and so it seems fair to say that the overall level of debt has changed by an order roughly that shown by the researchers.

I think some posters to this forum would have problems taking bank competancy at face value! More seriously, again the researchers try to account for this by treating the UK branch of a US bank as British and the US branch of a UK bank as non-British. IME, most often the British branch of an international bank lends to British firms, the French branch to French ones and so on. It makes compliance simpler, not having cross border contracts. There are exceptions (eg doing business with Russia from Cypriot branches) but they are few IME.

Radiantsoul

tomterm8 wrote: »

I wonder what Britains net external debt is? That's one of the more important aspects of deleveraging, I would have thought. A lot of the debt is somewhat notional. Just adding it up, and saying the national debt is 400% of GDP seems quite strange. For example, financial institutions lend 85% of GDP to households for mortgages, but the households must lend a significant proportion of GDP to the financial institutions... add it up, and you get 170% of GDP as debt... but net debt is much smaller, surely.

The methodology also seems to show that all nations are debtors which seems suspect.

I don't think UK net external debt can be that large as the UK is a debtor reciver of income on investments which would seem to imply we have more assets than liabilites. Government debt is relatively small, but probably held mostly domestically too.

Generali

Radiantsoul wrote: »

I don't think UK net external debt can be that large as the UK is a debtor reciver of income on investments which would seem to imply we have more assets than liabilites.

I seem to recall an Economist piece on this a few years back.

IIRC, the UK is a net debtor but lends at a higher rate than that at which she borrows.

I guess it makes sense: unless you have a reason to want to have your money offshore you will want a higher return by taking a currency risk than if you invested locally. Similarly, why take the risk of borrowing from abroad unless it's cheaper?

tomterm8

Interestingly, one thing the report says slightly differently to your OP is that delevaging starts on average two years after a financial crises, and that there is on average two to three years of negative growth after delevaraging starts. In other words, if the report is correct, we are in for another recession quite soon, which will last two to three years, and after which GDP will grow slower than trend.

(Generali might want a translation for this post: "Oh !!!!!!." )

Generali

tomterm8 wrote: »

Interestingly, one thing the report says slightly differently to your OP is that delevaging starts on average two years after a financial crises, and that there is on average two to three years of negative growth after delevaraging starts. In other words, if the report is correct, we are in for another recession quite soon, which will last two to three years, and after which GDP will grow slower than trend.

I missed that subtlety.

tomterm8 wrote: »

(Generali might want a translation for this post: "Oh !!!!!!." )

Having given up over 5% of GDP so far I think the more reasonable translation would be:


aaaaaargggh! !!!! !!!! !!!!ing !!!! !!!!ing Socialist !!!! Who the !!!! !!!! !!!! ever voted !!!!? I mean for !!!! sake, don't you know about the !!!!ing !!!!ing !!!! Winter of !!!!ing Dis-!!!!-con-!!!!ing-tent?