Wednesday, December 09, 2009

Debt: UK economy worse off than USA's

This article from Credit Writedowns looks at the development of debt over a long time, in both the US and UK economies.

Two things stand out (see charts 1a and 1b):

1. US debt (as a proportion of national income) is a worse problem now than in the Great Depression of the 1930s.
2. The UK's debt burden is signficantly worse than America's.

Consumer indebtedness exploded in the early 1980s - see the the first chart on this site. Up to then, it had pretty much kept pace with the growth of the economy generally. This is a major part of how our economic problems have developed - a deliberate loosening of credit to restimulate the stagnant economy of c. 1982. The banks grew fat on the loan-financed consumer boom, and on the inflation of property prices.

Now, our governments are looking for a way out. Mass unemployment and bankruptcies will turn the voters against them, so they have tried to keep the banking system going with loans that future generations must pay off. Insiders will tell you that they don't really know what they are doing, but they are in a panic to do something.

Technically, we are experiencing deflation - the total amount of money plus credit in the economy is shrinking, as lenders and spenders have become more cautious. But just as with Dubai recently, foreign investors are losing confidence in our ability to repay debt, and the dollar and pound have become worth less on the currency exchanges.

In the UK, as in the US, we spend a lot on things that come from outside our economy, and some of them are hard to cut out - energy, for example. So while house and car prices may be coming down, other costs are still rising, in pound terms. And as economic problems continue, it is possible that the pound may have further to fall.

So a combination of a slowed-down economy with price inflation - "stagflation" - is a potential threat to the UK.

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