Saturday, 24 December 2011

The UK's 950% debt-to-GDP

An interesting perspective from Tyler Durden at ZeroHedge (H/T Andy Duncan):
While certainly humorous, entertaining and very, very childish, the recent war of words between France and Britain has the potential to become the worst thing to ever happen to Europe. Actually, make that the world and modern civilization. Why? Because while we sympathize with England, and are stunned by the immature petulant response from France and its head banker Christian Noyer to the threat of an imminent S&P downgrade of its overblown AAA rating, the truth is that France is actually 100% correct in telling the world to shift its attention from France and to Britain. So why is this bad. Because as the chart below shows, if there is anything the global financial system needs, is for the rating agencies, bond vigilantes, and lastly, general public itself, to realize that the UK's consolidated debt (non-financial, financial, government and household) to GDP is... just under 1000%. That's right: the UK debt, when one adds to its more tenable sovereign debt tranche all the other debt carried on UK books (and thus making the transfer of private debt to the public balance sheet impossible), is nearly ten times greater than the country's GDP
The figure apparently comes from Morgan Stanley Research:

Our official public debt is understated, and I'm not sure what assumptions go into the figures above, but even the BBC's Robert Peston [1] recently declared that the UK's debts are the biggest in the world:
At the beginning of 2010, I highlighted a fascinating analysis by the consultants McKinsey called Debt and Deleveraging, which showed quite how indebted the economies of the developed west had become.

McKinsey said that the UK had by 2008 become the most indebted of all the big, rich economies, more indebted even than debt-engulfed Japan.

It has now become widely recognised that perhaps the greatest economic policy failure in the UK, US and eurozone during the 16 boom years before the crash of 2008 was the explosion of borrowing by banks, households, businesses and governments - or, to use the jargon, the unprecedented and massive leveraging up of entire economies
Peston highlights the findings of a more recent McKinsey report:
According to the consulting firm, by the end of March this year, the aggregate indebtedness of the UK - that's the sum of household debts, company debts, government debts and bank debts - had risen to 492% of GDP, or almost five times the value of everything we produce in a single year.

That compares with 481% at the end of 2008.

So the UK's total indebtedness has increased, and is still the biggest relative to GDP of any of the big economies. That said, Japanese indebtedness is pretty much the same size - at the end of 2010, as opposed to the end of March 2011, Mckinsey says Japan's debts were also 492% of GDP.
Whether you believe the McKinsey figures, or the Morgan Stanley ones, things are looking very bad for the UK.

Durden concludes:
To call that "game over" is an insult to game overs everywhere. So here's the bottom line: France should quietly and happily accept a downgrade, because the worst that could happen would be a few big French banks collapsing, and that's it. If, on the other hand, the UK becomes the center of attention (recall this is the same UK that allows unlimited rehypothecation of worthless assets, and the same UK that unleashed the juggernaut known as AIG-FP's Joe Cassano - after all there is a reason why the UK has 600% its GDP in financial liabilities - financial innovation always goes there where it is least regulated), then this island, which far more so than the US is the true center of the global banking ponzi scheme, will suddenly find itself at the mercy of the market. At that point the only question is whether the vigilantes will dare to take down the UK, as said take down will result in an implosion in the very fabric of modern finance, much more so than what even a full collapse of France could ever achieve, or if due to the certain Mutual Assured Destruction that would follow a coordinated UK onslaught, the market will simply very quietly proceed to ignore the elephant in the room.

I couldn't say whether Durden is right about the UK's supreme position in the "global banking ponzi scheme" (it seems more likely that the Americans pull the strings), but the global monetary and banking system certainly is rotten, and our financial services sector is disproportionately large.

Our best bet is to embrace default. Our politicians may push us to hyperinflation instead.

Let us hope we see more sanity in 2012 than 2011.

[1] Peston sometimes highlights the right issues, but he's far too corrupted by Keynesian thinking. That same BBC article includes the following gem: "To be clear, if governments had not continued to spend, our recession might well have become something much worse, a 1930s-style depression."

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