Britain's debt and basic economics...

princeofpounds

Sounds like big numbers, but unless you thoroughly understand national balance sheets it's easy to get the wrong impression of things. For example:

Michael Saunders from CitiGroup has calculated ‘external debt’ – ie, what Britain owes the rest of the world. It is not 40% but 400% of GDP, the highest in the G7 by some margin. The next down, France, is 176%. America, flagellating itself for blowing such a debt bubble, is just 100%. Japan is about half America. The below graph shows ‘external debt’ – both in mid-2008, and five years ago.

400% of GDP now. Once again I'm not an economist but that doesn't look very prudent to me.

The problem with looking at this measure is that it considers only one side of the balance sheet, which is kind of meaningless unless you look at the asset side as well. So for instance, this figure will include the sums that our banks borrow from abroad, but will not include the assets that produce income from them abroad. If I buy a Russian bank, and borrow some RUB to do so, then grow the bank so it is worth double what I paid, then that is actually a beneficial transaction, but under this metric it would only seem bad as I took on debt.

Of course, given the credit crunch many of these assets will be worth less, but just be aware that it's only one side of the story.

Note also that external debt includes private debt, so is not a good measure of the government's prudence.

It's also possible to increase external debt in a technical but not a real manner. So for instance if i borrow through my London office from abroad, but then lend on exactly the same terms to my Ghanaian office, with no *net* debt exposure, I still can count as having external debt in London. Given so much finance is routed through London (especially our banks which borrow and lend abroad in the course of normal business) then this can distort the figures severely.

It is the combination that makes us such a credit liability – but no one has ever put together a combination.

Until now.

Well that's a load of rubbish. External debt figures are produced all the time.

So we have expanded the non GDP creating sector whilst allowing the GDP creating manufacturing sector to wither.

Government services can create GDP. Just look up the G in the GDP equation (C+I+G+X-M). The problem is that government services don't 'efficiently' create GDP because they don't maximise profit but pursue policy instead (and are typically very wasteful).

The deficit is still a big problem mind, but I'm just pointing out that many of the statistics and messages you hear thrown around are not quite the full picture.

StevieJ

princeofpounds wrote: »

The deficit is still a big problem mind, but I'm just pointing out that many of the statistics and messages you hear thrown around are not quite the full picture.

I tried to make that point in post 2 but I don't think many of the Tin Hatters are very interested (a notable exclusion being Dopester ).

donaldtramp

Government services can create GDP.

:rotfl::rotfl:

Just look up the G in the GDP equation (C+I+G+X-M).

I don't need to look up equations.
Are you seriously trying to say that the increase in our GDP spending to around 53% on public sector is a good thing?

The problem is that government services don't 'efficiently' create GDP because they don't maximise profit but pursue policy instead (and are typically very wasteful).

I agree with that! Pursuing policy by means of creating "entitlements" and magical pensions for everyone in their big brother care.

Generali

GDP does equal C+G+I+X-M* however:

1. The Government spending part of the equation doesn't include transfer payments (direct welfare payments and intrest on debt) so 'G' is falling
2. Increased taxation to fund Government spending reduces consumption, increased borrowing to fund Government spending reduces investment.




*Consumption + Government spending (excluding transfer payments) + Investment (by businesses and also on purchases of new houses) + Net Exports (a negative figure for most of the last 30 odd years in the UK)

princeofpounds

Are you seriously trying to say that the increase in our GDP spending to around 53% on public sector is a good thing?

No. In fact I specifically state that it is typically an inefficient method. I am not sure how you leap from 'inefficient' to 'good'! Can only presume you didn't actually read it properly. I just wanted to correct the assertion by the OP that government spending cannot create GDP ("the non GDP creating sector"), when it can.

1. The Government spending part of the equation doesn't include transfer payments (direct welfare payments and intrest on debt) so 'G' is falling

Your point is valid in itself but if this was addressed to me, my point was not to defend government spending nor claim that it is creating GDP right now, simply to correct the assertion that it cannot create GDP, which is false.

For the record, I'm very much a capitalist and generally in favour of private rather than public allocation of capital where possible.

Harry_Powell

It's always amusing to see the National Debt equated with personal debt (i.e. credit cards). It's like comparing apples and oranges, but people continue to do so. It shows a complete lack of economic knowledge.

Pete111

Quote:
Government services can create GDP.
:rotfl::rotfl:

To be fair this can be true.

I used to work for Ofcom and they packaged up and sold a shed load of 'spectrum' (basically useable UK radio wave frequencies) for hundreds of millions to private sector mobile phone companies during the 3g roll out a few years back.

ninky_2

Generali wrote: »

Back in the real world, the UK would be highly unlikely to default entirely on her debt. The reason? Virtually all of the debt is in Pounds so if the Government runs out of money to pay her creditors she can just print some more to pay them.

That would even work for Index Linked debt as AIUI at least, they pay a rate of interest being the RPI + x%. Who decides what the RPI is......? The Government!

There's a reason the UK has a AAA credit rating you know.

Now clearly, if the Government routinely prints money to pay back her debts then that will have further consequences: inflation and having to borrow money in foreign currency which they can't print in future are the obvious ones.

quite. the real issue is not money debt but the fact we are using up resources in an unsustainable way. unfortunately none of the major political parties are willing to take this on in any meaningful way. the inventor of gaia economics (now in his 90s) has stated that it is now clear that humans are unable to resolve or face this issue. i tend to agree.

lostinrates

Harry_Powell wrote: »

It's always amusing to see the National Debt equated with personal debt (i.e. credit cards). It's like comparing apples and oranges, but people continue to do so. It shows a complete lack of economic knowledge.

I think acquiring knowledge, or attempting to, is what ML's site is meant to be about. Clearing up mis understandings etc is part of that I should imagine.

nickj_2

there was a letter in my local newspaper the other week from a pensioner saying how she was going to vote for brown because of the winter fuel allowance , she'd had her house insulated and then there were aanother 3 -4 things that she had recieved of of the govt . if you add all the other people claiming benifits , parents claiming child benifit and tax credits , and public sector workers etc + all the other things that drain from the pot then you don't have to be a financial genius to work out that if your expenses are more than your income then one day it will catch up with you and have to be repayed , something i believe that gordon hasn't quite got the hang of .