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Dominic Raab reveals Britain’s true debt burden

14 May 2013

With the Conservative Party continuing to bang on relentlessly about Europe, Boris Johnson issued a timely reminder yesterday that ‘most of our problems are not caused by “Bwussels”’. (Something that should, of course, go without saying.) In the Telegraph today, Dominic Raab follows up the Mayor of London’s comments by outlining some of our ‘immediate, home-grown, failings’. At the top of the list: ‘the scale of our debts’.

Surprisingly, Raab quotes the discredited claim of Carmen Reinhart and Kenneth Rogoff that government debt crossing ‘the notorious tipping point’ of 90 per cent of GDP ‘leads to seriously stunted growth’. On top of a basic Excel error that missed out five countries, Reinhart & Rogoff’s 2010 study was undermined by fundamental methodological problems. They have since admitted to and corrected some of the mistakes, but still point to their more recent paper which also suggests that debt above 90 per cent of GDP is associated with lower growth — but which is still susceptible to some of the criticisms levelled at their previous one.

But Raab does produce some startling figures to show that Britian’s debt burden is by no means confined to government debt. He says:

‘Between 1997 and 2009, household debt as a share of GDP rose by a third. It has started to fall back since 2010, but remains at 98 per cent of GDP — leaving many families acutely vulnerable to any increase in interest rates. And government and household debt is dwarfed by the liabilities of the banking sector, which have reached a stunning 427 per cent of GDP. British banks are also massively exposed to the eurozone crisis, far more than most Continental ones. Add these three components together, and Britain’s liabilities are the largest in the EU’.

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Raab’s figures — reproduced in graph form below — show that our banks’ £6.7 trillion in liabilities accounts for about 70 per cent of our total debt. When he claims that ‘Britain’s liabilities are the largest in the EU’, Raab is talking about debt in pounds rather than as a percentage of GDP — on the latter measure, Ireland outstrips us.

Raab debt

We also have historical figures from Citi Research, and though they don’t quite match Raab’s they tell a very similar story. Household debt rose from 69 per cent of GDP in 1997 to 100 per cent in 2006 — even before the recession hit — before peaking at 110 per cent in 2009 and falling back slightly to 99 per cent now. There was also an even more drastic rise in debt owed by non-financial companies — from 58 per cent of GDP in 1997 to 121 per cent at the end of 2008 and 109 per cent now.

Citi debt

As Raab said, banking sector debt dwarfs the rest, and so needs its own graph. As you can see, it doubled as a percentage of GDP between 1997 and 2007 — reaching 500 per cent before the banking crisis hit. It peaked at 586 per cent in early 2010 and has since dropped back to around 500 per cent.

Citi bank debt

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Show comments
  • Pip B

    Jonathan; I’m not sure I fully understand this. The focus seems to be about external debt, though a bit confusingly selective. There’s no mention of our assets. Given our services sector and world finacial centre you’d expect our external debt to be huge at any one time, but so too is the money owed to us and other overseas assets. Our problems like many of our competitors arise from a huge public sector debt to GDP. However, while other leading economies are showing more positive growth, ours is marginal. If this or another government succeeds in dealing with the former and UK plc can improve our overseas assets to debts we’ll all notice the effects at home. What we need is an 80’s style North Sea Oil windfall – can’t see windfarms stepping in!

  • foxoles

    The solution is to adopt the Bradbury Pound, as we did in 1914.

    • Terry Field

      Will that make chocolate biscuits more or less available. And how will it improve the hobnob multiplyer effect?

  • Terry Field

    Does it ever occur to you people reading here that just as amazing human beings – full of wonderful integrity and talent – labour their whole lives quietly in their chosen fields of expertise, to make their world and that of their children better than they found it, their achievements are so often ruined and nullified by the actions of politicians – many of whom can only be described as the true scum of the earth?

    • Tom Tom

      Exactly. There will always be a snake oil salesmen to steals the crowd from the author reading his poetry aloud. Humans are as Circe discovered prone to turn into swine

      • Terry Field

        NOW I recognise mother-in-law!

  • Daniel Maris

    Are banking liabilities really debts? Surely the banking sector has always practised this legerdemain, of taking other people’s money and pretending it’s their own. They will normally have the liabilities covered by assets (loans). So it’s really a question of what quality the loans are.

    But when the government borrows money to subsidise revenue, that’s real debt.

    Our personal debt seems to be a mix of the two. Most of it will be wrapped up in mortgages and the vast majority of people will be in positive equity, so these debts are really covered.

    The focus has to be primarily on government debt.

    • Abhay

      Daniel, you have over-simplified the rot.

      First banks,
      1. Banks hold govt bonds in vast amounts that can tank e.g. greek govt bonds. Banks then book losses and their capital suffers erosion.
      2. Banks hold vast amounts of loans given to other banks. That too may turn bad e.g. loans to Irish banks, Cypriot banks, Greek banks.
      3. Banks loans to customers have been going bad at enormous pace over 2008 – 2012.

      Now personal debt,
      4. Mortgages also can turn negative equity, and have.
      5. includes enormous levels of unsecured credit card borrowing, source of losses for banks in economic downturns

      • Daniel Maris

        About 10% are in negative equity – but of course most of that 10% will eventually move into positive equity within a few years.

        You say “enormous” levels of credit card debt. I think for most people that’s not the case.

        On banks, haven’t we seen that in a recession the government can simply use QE to keep banks balance sheets positive?

        I think the core problem is government debt.

        • Tom Tom

          Daniel stop being naive. The total value of Debt is known you say you don’t hold it so what ? For people who bought after 2007 to eradicate negative equity needs higher house prices which needs more credit.

          • Daniel Maris

            I’m not being naive. 90% of mortgage holders are not in negative equity and of the 10% who are, most will find it perfectly manageable if personally a little demoralising.

            We need to focus on the real economy and do what we can. One of the big things we can do is end welfare dependency: by bringing in a proper universal benefit, by raising the minimum wage, by providing a job guarantee for young people and by disincentivising pregancy as a lifestyle option for women under 25. Doing all that would cut the welfare budget, reduce concomitant costs in criminal justice and social services system, raise tax revenues and encourage a mood of consumer confidence.

        • Abhay

          This is not the place where we can have detailed discussions on finance. You need to come up the learning curve. Finance does not run on what ‘you think’ and your ‘but of course’.

          The economic downturn gathered pace in 2008 and it is still around in 2013! That should inform you how serious things are.

          Many countries have been down-rated by and many banks bailed out using public money (otherwise they would have gone into bankruptcy proceedings). That’s because these banks did not have sufficient assets to cover their liabilities, i.e. they were sitting on piles of losses.

          You don’t have to say silly things about UK household debt. The problem of its size is given in the article above. Any increase in interest rate from here would see bankruptcies increase because of debt servicing problems.

          • Daniel Maris

            It does run on facts – like the fact that 90% of people are in positive equity, which you seem to be conveniently avoiding.

            I agree our debt position is serious but it is mostly serious in respect to government I think.

            The real problem is the lack of profitability in the economy, reflected in low productivity. It’s all to do with labour value. Essentially we are not engaged enough in profitable pursuits. The finance, service and welfare sectors are like a dead weight on the economy.

    • Mike Godfrey

      Agreed as I’d also argue that personal debt can be balanced by the asset purchase that created that debt. For example, mortgages for properties taken over the country as a whole, has its debt pretty much matched by the asset value. In other words its neutral as one cancels out the other. In retirement I have no debt to pay off or mortgage to repay like many in my situation. My income currently exceeds my outgoings but over 50 years, my earlier debts like a mortgage was always less than the asset worth.

      However, banks with their leveraging scams, have lent out 10 or more times in the form of loans compared to the assets they hold as collateral. Similarly, government debt is much larger than assets (taxation) and is still growing.

      Its the ‘usual’ suspects once again that got us into this mess and not for the most part, the electorate.

      • Daniel Maris

        So you’re saying essentially banks have created credit with no backing.

    • Robert Mason

      The trouble is that they lend 100 times deposits; Lehman had loans out of of 160 times deposit at one time in 2008. So, if the collateral for the loans collapse in value they are left insolvent, That is what happened and it will be a long time – if at all – before the assets underlying their loans, Greek bonds, etc .recover. Of course, we would not take such risks but banks could because they knew that good old Brownie [and Greenspan] would always print them some more.

  • Abhay

    Along with the sad, staggering debt levels that UK has, the current account deficit has also swollen up to record highs in 2012 (roughly, how much more you are spending on importing goods and services than receiving on exporting goods and services).

  • Abhay

    The whole ‘feel good’ culture of 1st half of New Labour’s time in office was built on excesses – funded by borrowing at all levels – government, banks, households. It was as if a society was drunk on leveraged ‘good times’.

    Hence, people cared less as culture diluted, national identity suffered from PC attacks and a cheap, visceral celeb culture was thrust upon the nation.

    Countrymen beware – many of those politicians and vacuous celebs are still around!

    • Terry Field

      The entire socialist fantasy world was built on excess, and the absurdity began in 1945, continuing pretty much uninterrupted by all governments whatever the marketers called them, until and then after the quite wonderful Mrs Thatcher.

      • Abhay

        I agree Terry. I think something quite sinister happened in the New Labour years which was really the corruption of the national culture, its expressions etc. But the debt binge covered it all up. It lulled people into thinking all was well and forever.

        • Terry Field

          Unfortunately the crisis, and possible collapse, is only now beginning.

        • Terry Field

          Morality has a clear financial dimension. Destroy the moral heart of a nation, and its economic future is ruined.

          • Daniel Maris

            So which country on the planet is doing it right?

            • Terry Field

              You can answer that as well as I can. They are very easy to identify, I am sure will (dis)agree!

      • Daniel Maris

        Making love to a cold corpse has few attractions.

  • Hookeslaw

    Rising debt should stunt growth to the extent that when we have low interest rates people take the opportunity to pay off the debt that fuelled the boom before the bust.

    To say as Labour laughably pretend to, that because we have low rates created by a debt fulled boom followed by a bust we should go out and borrow more is crass and of course disingenuous.

    • the viceroy’s gin

      Your buddy Dave isn’t just saying that, he’s doing it, laddie.

    • LB

      It’s rising taxes that’s the problem

      • Terry Field

        What a ludicrous observation.

    • Terry Field

      Quite a number of opposition politicians who say this lie over this and other key matters. Can these people be described in any other terms than that of the criminal??

    • Tom Tom

      That requires them to have CASH and that is in short supply when transactions are low. If the ratio of DEBT to CASH increases there are fewer and fewer people with access to CASH to eradicate DEBT. Interest Rates have no bearing because they are the Price not the Currency

  • Tom Tom

    What really matters is Bank Loan to deposit ratios and guess which banks have a big big problem ?

    • Abhay

      That ratio is very important – many banks went overboard.

      Equally important – the quality of the loan and pricing the loans to reflect the underlying risk otherwise moral hazards creep in quick.

    • Terry Field

      This was not only allowed by the Labour government. The explosion MUST have been orchestrated by that government, even by the policy of looking the other way, then levying the taxes on utterly unreliable ‘profits’

  • Terry Field

    The curve hides the even worse reality, that the debt was always there- it is the shortfall in asset values that exposes the debt. Those asset values are overstated in British banks. The debt is, in reality, much worse.
    And Mr Gordon Brown, an intelligent and talented economist, though a dreadful politician was and is perfectly well aware of this as he taxed known non-existant bank products to create the welfare nightmare that had the effect – intentional? – of causing many state income recipients to vote for – lets guess shall we – LABOUR.

    • Tom Tom

      Brown was an historian with a thesis on Jimmy Maxton and totally devoid on economic knowledge.

      • Terry Field

        Thank you; I must be thinking of someone else.
        In a dreamscape I seemed to see a thoroughly disagreeable person sporting a Scottish accent, but then again, I may have been dreaming.

        • Nicholas chuzzlewit

          Gordon Brown has no formal qualifications in economics and absolutely no experience of business, finance or accounting. Thus he was impeccably qualified to destroy the British economy and duly did so. He has a History degree and while doubtless he would have ruined the education of many students, it would have been better for most of us had he become a teacher. By the way, the SNP must be delighted that this imbecile is campaigning for the pro-union cause. His involvement probably heralds a 20% swing to the Yes vote.

          • the viceroy’s gin

            The unqualified Osborn is the perfect replacement for Brown, then.

            • Tom Tom

              So true. It is the fate of the First World to have lawyers and historians as Economics MInisters and to leave PhD Economists to places like Brazil or Argentina. I personally feel we should have some Economists from these countries in our Treasury for breadth of experience

              • Terry Field

                Yes. I wasted my time studying the subject.
                The FT ran an article that said that to run a modern state as the EU is run, it is a requirement to know nothing of economics.
                I am truly amazed that the wisdom of all the years since 1929 has been totally ignored by all states and politicians. And to blame bankers, rather than central banks and political actions is cynical diversionary tactics.
                The lamp-posts, if they support any bodies, should not support bankers, but rather…………………
                Interestingly, whilst the US has monetised the debt like there is no tomorrow since 2007, the governments of the supposedly benighted 1929 – 1939 period paid down debt aggressively, whilst generating massive public works in the USA, and in Germany after 1933 with the roadbuilding schemes and the TVA etc to soak up labour (and, of course, military expansion)Economics is a dead subject now. State directed capitalism is the order of the day.
                In the words – nearly – of Mr MacMillan, ‘We are all National Socialists now’

          • Tom Tom

            He was actually a TV producer in Scotland and had a terrible reputation at the BBC for running up self-indulgent expenses like having taxis waiting interminably for his arrival

          • Terry Field

            You have been far too reasonable in your observations concerning Brown.
            But please do not forget the quite delectable ‘Blair’

          • justejudexultionis

            Let’s hope that it does herald a 20 per cent swing towards ‘yes’ campaign.

            Scotland desperate needs to be shot of the dead weight that is England.

      • FrenchNewsonlin

        Devoid? You are far too generous.

        • Tom Tom

          Today i am considered “generous”. I shall treasure these kind words

      • Abhay

        Brown was an historian? You are in a nice mood Tom. In his historical lessons he of course forgot the key lessons of nations going bankrupt !

    • Andy

      Gordon Brown ‘an intelligent and talented economist’ ???!!!! You jest with us.

      • Terry Field

        I simply state he knew sufficient to understand what he did, and the consequences of his actions.

        Do not misinterpret my comments for any kind of respect or regard or regard for him.

        My poor country. To be preyed on like that.

  • the viceroy’s gin

    “Raab’s figures — reproduced in graph form below — show that our banks’
    £6.7 trillion in liabilities accounts for about 70 per cent of our total
    debt. When he claims that ‘Britain’s liabilities are the largest in the
    EU’, Raab is talking about debt in pounds rather than as a percentage
    of GDP — on the latter measure, Ireland outstrips us.”


    Yes, Ireland outstrips the UK as a percentage of GDP, but the UK is well ahead of everybody else. And if you calculate that debt in terms of debt repayable in foreign currency, the UK’s GDP share is about double anybody else in Europe save Eire.

    In fact, the UK’s share is about double anybody else in the world, and is about 8 times worse than Japan, which owes most of its debt to itself, in its own currency.

    The story is much worse than the Speccie teenager is making out here, in other words.

    And that brings up a real dangerous question, as regards QE. Since so much of this UK debt is denominated in foreign currency, it can’t readily be inflated away, as per the QE policy. Japan can do that, and the US can, and France and Germany and even most of the PIIGS can, but the UK really can’t directly “benefit” from QE, can it?

    • Archimedes

      The UKs external assets are much the same size as it’s external liabilities.

      • Tom Tom

        That suggests a major problem then in view of the huge devaluation

        • Archimedes

          No it doesn’t.

          • Tom Tom

            I remain convinced it does and I suspect there are lots of CFOs who share my concern

            • Archimedes


        • Terry Field

          What does this mean for the supply of chocolate Biscuits?

          • Andy

            Does not apply – you’re on a diet.

            • the viceroy’s gin

              Well, I’m a Keynesian, and we can eat all the chocolate we want.

              • Terry Field

                But you will have to return it to depositors in the future, as required by Keynes.

                • the viceroy’s gin

                  Well, unless you’re a charismatic and striking German banker, then you can get off scot free, I understand.

          • Archimedes

            We have a huge chocolate-biscuit account deficit: we’re consuming more chocolate biscuits than we can produce.

            You can expect the BoE to intervene in the chocolate biscuit market, increasing the supply of chocolate biscuits, which will no doubt lead to a reduction in the size of the chocolate biscuit: you may have to eat far more chocolate biscuits in the future to maintain your nutritious diet.

            • Terry Field

              This is serious. I have recently become aware of a government scheme to assist young people under the age of 92 in the purchase of chocolate biscuits.
              The scheme requires the consumer to pay a deposit of 10% to the retailer, and the Treasury ‘chips in’ (chocolate chips, of course) with a further 30%.
              I have been led to believe that Nick Clegg is against the scheme, since the European Union Biscuit Finance Initiative has been hobbled by the Belgian chocolate supply lobby.
              If this goes ahead, the government’s 30% will be as secured by underlying chocolate is are all other current banking liabilities.
              Mr Clegg suggested the surplus chocolate could be made into teapots.

      • the viceroy’s gin

        …why wouldn’t every other country be saying the same thing, then? The fact remains that the UK is double everybody else in the world.

        And I’d have to see your supporting data for the external assets status, in any event. Do you have a link(s)?

        • Archimedes
          • the viceroy’s gin

            No, that doesn’t quite do it, as it doesn’t break out holdings in terms of foreign vs. domestic currency, which is the essence of the UK’s disastrous external debt situation, as mentioned above.

            And it also begs the question, why should external assets be addressed as part of this discussion, as they’re of no value until they’re sold at some (unknown) value? If we include them in the discussion, we must also include the pension liabilities on the books domestically, as well, particularly as much of that external investment is co-mingled with foreign pension funds, yes?

            No, I’d guess the most accurate manner to review this is to address external debt as per the classic method I used in my first post. That debt must be paid, in foreign currency, and it’s double that of everybody else in the world.

            • Archimedes

              Yes it does. For a UK resident to buy an asset in a foreign country requires a currency exchange — someone abroad that wants to buy sterling from that UK resident. What matters is what you decide to do with that currency.

              You can either use it for consumption, or use it for investment, deferring consumption. If you use it for consumption, and the person that bought sterling from you uses that sterling for investment, then they have a claim on some future unit of UK output.

              The difference between the UKs net assets and net liabilities is the cumulative current account deficit, which is the same as the total foreign currency debt, because the exchange always has to happen.

              • the viceroy’s gin

                You’re sort of talking in circles, and spitting out some definitions and such, but you’re not supporting your statement above.

                I’m asking for the total domestic currency paid external assets. You’re making the claim that somehow those external assets are “much the same” as the external debt owed, but you haven’t supported that assertion.

                So apparently your assertion is unsupportable, and the UK owes double the external debt of any other country in the world.

                • Archimedes

                  I’m not talking in circles. I tried very hard to explain that. The particular bit of data you’re talking about is irrelevant. If I think of a better way to explain that, then I will.

                • the viceroy’s gin

                  Yes, you are talking in circles, but if you’re not, then provide that particular bit of “irrelevant” data.

                  There is nothing for me to explain, as you’re the one making the bald assertion that external assets somehow are “much the same” as external debt, absent any explanation or supporting data for said assertion.

                  Again, the UK owes DOUBLE the external debt of any other country in the world. That we know, because the data tells us.

              • Tom Tom

                You are far too simplistic. You usually borrow in the currency of the asset you acquire and carry both on the books in your local currency. The matching has then an Income Statement and Balance Sheet component which can diverge markedly based upon Accounting Standards with huge exposure problems. The fact that most income then moves through tax mixers reduces the tax shield effect of interest payments but can accentuate balance sheet adjustments without offsetting tax relief.

                It is a huge exposure problem which is hard to hedge. The other issue from history is that Britain had huge overseas assets prior to 1914 with an equivalent dividend flow of c £100 billion annually in modern terms but had to liquidate those US assets for loans in WW1 and sold them very cheaply in WW@ when Churchill needed money for arms and forced private companies to engage in a fire sale.

                So noone knows what may happen. Just a note, Johnson & Johnson just took a $100 million hit on its assets in Venezuela

                • the viceroy’s gin

                  Let’s see how Zimbabwe Ben’s equities bubble holds up, after all those charges start piling up.

                • Archimedes

                  If both the investment and the debt is foreign, then it is not a concern for the UK. Where it concerns the UK is the possibility that losses incurred on foreign investment require transfers from the parent company or, alternatively, where profits from the foreign investment are being repatriated.

                  Secondly, we are not talking about individual companies, we are talking about the whole of the UK, where the risk is much more broadly spread because it relates to all UK foreign debts/investments.

                  Your WWI & WWII scenarios are quite special circumstances.

                • the viceroy’s gin

                  This is just a collection of bald assertions, unsupported by any data whatsoever.

                • Archimedes

                  What isn’t supported? I’m pointing out the logic. It doesn’t need to be supported by data. It’s just the way it is.

                  Where’s your data? What is the charge that you are making, why is it a concern, and how big do you think the concern is?

                • the viceroy’s gin

                  You call it “logic”, and the rest of us call it bald assertions, absolutely unsupported by data. And yes, laddie, your bald assertions mean nothing, no matter that you think they matter somehow.

                  My data is included in the Speccie teenager’s blogpost above, re debt as a percentage of GDP, with the addition that I refined it to include external debt as measured by debt payable in foreign currency, which is double any other country in the world. That isn’t a “charge”, it is a simple data observation.

                  You have provided no data, so we can’t judge anything other than your bald assertions, which are meaningless.

                • Archimedes

                  Ha! I’m afraid I pointed you directly to the data in question. You have produced no data. What you have done is to bandy around some claim that UK debt payable in foreign currency is double that of any other country. Shock! Horror!

                  What matters is the current account deficit (which is large) — nothing more.

                • the viceroy’s gin

                  No, you pointed to a nothingness, which did not support your bald assertion, that external assets are “much the same” as external debt. Therefore, your bald assertion is worthless.

                  What you baldly assert as mattering is worthless. Only an assertion supported by data has value, and you’ve singularly failed to give that.

                  Sorry, laddie. This is the real world, and your blathering doesn’t work out here. Show me the data.

                • Archimedes

                  Go to bed.

                • the viceroy’s gin

                  You socialist authoritarians… always giving orders.

                  I guess when you’re cornered and found out, you have to fall back on something.

                • Archimedes

                  Well: there it is. Now p*ss off.

                • the viceroy’s gin

                  There what is? The nothingness and void that you’ve provided to support your bald assertions?

                  And I see you haven’t shied away from more socialist authoritarian order giving. It’s generally a pattern with you types.

    • Tom Tom

      Much of Ireland’s Debt is actually British Banks working over Dublin and using SIVs

    • Terry Field

      Does it not follow that underlying asset values – if they recover – reduce the otal debt in terms of interest rate burden?

      • the viceroy’s gin

        Maybe, but are the underlying asset values linked to anything, at this point? If the assets go up in value, why should that have an effect on interest rate burden? You have to sell something before you gain the advantages of an increased equity, don’t you?

        I’d agree the total debt might shrink, but then so would everybody else’s, and the UK would still be double everybody else in the world, then.

        • Terry Field

          Yes, correct.
          What you say would indicate a nation that has suffered from criminally irresponsible government.
          And the criminals have evaded identification, the establishment of their guilt, and the imposition of sanctions – in their case the permanent confiscation of their hobnob biscuits.

      • Tom Tom

        Your Debt is my Asset. I borrow £200 million and my Note is your Asset as collateral for your Loan. I default and you have no collateral

        • Daniel Maris

          Which is why it’s important where the debt is. If a Japanese defaults on a loan from another Japanese, then the economy is essentially no worse off and no better (though it might have confidence effects).

    • Abhay

      There is a ruthless analysis done by Dr Tim Morgan (available on his blog) of the ills that worked along with the debilitating debt levels to wreck the prospects of the economy. Withering production of goods / commodities whilst increasing consumption is the main one. Dr Morgan I think is an economist with Tullet Prebon.

      • Terry Field

        Yes, we all talked about it – I raged at the catastrophe to come. So did others. Only the Golden Ones were listened to, however.

  • OldLb

    Ho hum.

    What about the pensions debt?

    Nothing like leaving that off to make the figures look better.

    • Archimedes

      It’s an obligation, not a debt. People with accrued rights to pensions are also generating income — do you want to calculate GDP on a projection of how much they’ll earn before they become eligible for their pension? You see how abstract and meaningless the figures could become so very quickly?

      • LB

        It’s a debt. People have paid for it. Promises have been made, verbally and in writing.

        Now the argument about saying, yes, lets book future taxes (not future earnings) as an asset is correct. You can.

        However, by the same argument, you have to book future spending to keep the serfs happy down as a liability.

        Taxes 550 bn p/a. Spending 700 bn p/a.

        The average British serf is a liability.

        The debt still there.

        • the viceroy’s gin

          Hey, remember Cyprus?

          Anything can be wiped away. WHOOSH, and it never existed.

          • Abhay

            Correct. And for the bad guys at EU, Cyprus was a test case. They will apply the ‘deposit confiscation’ method in other countries too. There are several, several reasons why we should stay away from that project.

    • Nicholas chuzzlewit

      Pensions are not a debt they are a contingent liability.

  • Tom Tom

    The fact is Default is the only way forward. there is simply no way to discharge Debt of these levels and the fact there is no Collateral backing them simply a daisy-chain of debt means it is best to default. Households should default wholesale to force the banks to default on their “Assets” which are in reality Liabilities. The sooner we RESET the sooner we can rebuild. We have spent 5 years going through this mess to find the Coop Bank still hasn’t come to grips with a black hole it acquired in 2009 – and here in 2013 they may need £1.8 billion in extra Capital. This means we have gone nowhere in 5 years – the Coop has £6.5 billion in Equity and needs another £1.8 billion for its Bank in a Mutual which means it has no means of raising capital apart from seizing deposits from “Members”

    Time to organise a proper Default rather than spend another 25 years going down the tubes

    • FrenchNewsonlin

      Furthermore without the RESET and Grand Default you so rightly propose, highly-educated but unemployed European youth (50% in Spain alone) will up-sticks to the Americas, Asia and Australia for they see no future at home. If that becomes large-scale where are the next generation of European wealth creators, tax payers and social welfare contributors coming from?

      • Tom Tom

        It is exactly what Reinhart & Rogoff proposed but too many people omit the default bit and focus on the 90% stuff

        • OldLb

          The only reason new government debt is cheap is because the only buyer is the bank of England.

          There is no market, so the BoE sets the rate for itself.

      • OldLb

        They will up sticks if they have 50% tax, and get no services because its all going on debt payments.

  • cc_star

    Just ignoring banking & public sector debts for a moment, you can see that in housing debt & non-financial company debt the problem the country faces for a long time to come

    Until people & companies have paid meaningful amounts off their debt the economy will continue to be mainly flat.

    Labour’s answer is to borrow more money (increase public sector debt) in an effort to stimulate spending, but as a whole people can’t really spend even more because of their level of indebtedness.

    And on the business front, all 3 parties want to draw on central banking to practically give money away to banking to inturn to lend more money (increase banking sector debt) to businesses (increase business debt) to get them to invest & expand, but businesses are carrying too much debt as it is, and as a result on the whole their appetite to borrow is pretty low.

    Everyone’s answer to too much debt, is yet more debt.

    In short, nothing can fix the economy apart from the passage of time & with that debt being brought down to levels that people and businesses are comfortable with, so that they can borrow again and things can return to debt lead growth… that got us in this mess in the first place.

    • Tom Tom

      If you don’t have growth you can never generate the funds to pay interest. If you do not have a surplus you cannot pay down debt. If you devalue to apture growth and you don’t grow you have imposed a “devaluation tax” on households by raising food, energy, and goods prices thus exporting what money households do have.

      If you create £100 in Debt you have not created the £25 to pay the interest which requires extra Debt. It is a pyramid scheme once you charge interest, and when interest on unsecured debt reaches 25% it becomes absurd if people can only generate 0.2% on Savings. The system is finished, it is a mathematical absurdity

    • OldLb

      The problem is public sector debt.

      There isn’t a problem with banking debt and there certainly isn’t a problem with private debt.

      Private debt is predominantly mortgages. There isn’t a negative equity problem. On average the debt to assets is way less than 1 as a ratio.

      However, for the state there is a problem. They have debts of over 7,000 bn when you include the unfunded pensions. That’s a net debt. For example, to whom can you sell a nuclear sub to raise some cash? You can’t. It’s an asset you can’t sell so is worthless.

      Even the idea of booking future taxes doesn’t work. If you book future taxes, by the same logic, you have to book the cost of maintaining your serfs. The spending. On average the serfs are liabilities.

      The problem is state debt.

      As for the passage of time, the debts are growing exponentially. Growth doesn’t solve that (even though that is exponential . The reason is the costs are growing exponentially too. Ask yourself this. To stop the borrowing and freeze spending.How much growth do you need to start paying off the debt? Deficit is 30%. How many years of 2% growth do you need? Do you think you can freeze the spending?

      The passage of time doesn’t and can’t solve it.

      That leaves defaulting on the debt, and the big debts are pensions. That’s what’s going on now.

      • Smithersjones2013

        So how does inflation fit into your theory of long term public debt and how does the variability of the number of pensioners as constrained by a fluctuating birth rate and the longevity of people’s lives fit into your theory of pensions liabilities?

        • Hookeslaw

          its a bit much to call it a ‘theory’.

        • LB

          Thanks to Hooke for pointing out that it isn’t a theory, its fact.

          It’s not even my fact either, its the office for national statistics

          There’s about 7,000 bn of debt, pensions included. Now lots of people would have you believe you can print your way out. However, we know from the Weimar Republic and Zimbabwe, the effect is inflation.

          The problem with that 7 trn of debt is that most of it is inflation linked.

          5,300 bn (min, as of now) pension debts are linked to inflation.

          222 bn of the borrowing (gilts) are inflation linked gilts.

          400 bn of PFI debt has inflation kickers. The lenders can force the government to convert to inflation linked payouts.

          100 bn of nuclear decommissioning (paid for up front), is work. That has to be paid at the going rate, and that is effectively linked to inflation.

          Almost all of it bar 500 bn of Gilts is inflation linked.

          So inflation doesn’t work because as fast as you inflate, the debts go up.

          Demographics, the birth rate issue (and migration) as well as the increase in longevity. That’s quite an interesting area.

          Life expectancy is going up 1 year in every 8. Current life expectancy for a 65 year old is about 20 years. So every 8 years you get another 5% added to the pension bill.

          It’s also a little more complicated because of something called rectangularisation of the survival curve.

 for some google images.

          Top end life expectancy isn’t changing much, but more and more people are surviving for a long time. Hard to express but easy to see on the graphs on the link.

          That puts up the debt considerably too.

          You can also see the problem building up from other things. The government says it has a surplus on the NI account. However, that is a really deceiptful choice of words, and its deliberate. What it means is that its making a profit on the payments in, compared to the payments out, and its spending the difference. It does not mean assets greater than liabilities. That surplus is ample proof that going forward there will be more takers out that contributors in, and that is when it goes bust.

          Migration also has an impact. If a 60 year old migrate to the UK, they will get a full state pension (current plans), without having paid in. Similarly if you get a low waged earner, they don’t contribute enough, but accrue the rights to a pension. Average government spend per person in the UK is 11K per year. You need to be on over 40K a year to be a positive financial benefit to the UK. Per migrant! Below that and you are consuming more than you pay in. [On average]

          So its not my theory, its the government’s statement of fact.

          Now, they haven’t factored in increase in longevity from what I’ve been able to find out. They haven’t factored in rectangularisation. Even more alarming, they have used a dodgy discount rate.

          The last bit is important. You can make the 5,300 billion present value looks smaller if you say, look, if we have invested in Apple shares, its really only 500 bn. Equally, if you want to make it larger, just pick the investments that Gordon Brown made, and say, look if it was all invested in RBS, its massive. The problem with this is that they have no assets, so using any rate associated with an asset is wrong. The government mandates AA corporate bonds. It’s a higher rate, they assume no defaults, and hence the 5,300 bn is made to look smaller.

          The correct interest rate is to project the cashflows forward, and then discount at inflation. The cash flows grow at 2.5% minimum. The inflation target is 2%. So a reasonable rate of growth is 0.5% (for accrued cashflows), discounted at 0%. Then its a correct number.

          In practice, its bit like arguing who is more pregnant. You either are or you aren’t. With debts of 7,000 bn plus, taxes of 550 bn a year, and spending of 700, no amount of growth in the money taken from people in taxes (what’s really meant by growth), its going to close that.

          So its going to be default.

          1. raising the retirement age
          2. Means testing it.
          3. Wacking up taxes on the young.
          4. Breaking the link with inflation or freezing it.
          5. Massive cuts to Public sector pensions

          What makes you think that its going to be any different?

          If so, what’s your evidence for any contrary argument?

      • Tom Tom

        Private Debt is predominantly COMMERCIAL Real Estate and LBOs. I think you will find that there is huge Commercial Debt as the Britannia Coop Situation makes clear, as HBOS makes clear, as the gross inability of British Banks to take the writedowns makes clear. I wonder who funded the KKR-Boots Buyout which is under water; I wonder how RBS funded the Kraft buyout of Cadbury, I wonder how various shopping centres and office blocks, warehouses, and retail malls were funded ? I wonder how much BTL lending is actually backed by real assets. I worry far less about residential mortgages

        • OldLb

          Yes, but debt itself isn’t an issue.

          What matters is two things.

          1.Cashflow that can pay the interest
          2. Assets > liabilities. (net debt)

          Private sector doesn’t have net debts. They tend to have assets > liabilities. There is very little negative equity

          The problem is net state debt. That’s teh elephant.

      • Terry Field

        Banking debt is a problem since it is underpinnned by the state in the event of bank failure.

        • Hookeslaw

          Where legally is bank debt underpinned by the state? The deposits of individuals is guaranteed to a certain level.

          • FrenchNewsonlin

            Correction, individual deposits were guaranteed to a 100,000 euro level before the Brussels brigade applied the Cyprus template, in a test of the waters for future banking failures.

          • Tom Tom

            The deposits are guaranteed by a Bank Fund but it can never really pay out so it is a figleaf

          • Terry Field

            Until Cyprus, the deposits were fully protected, but direct sequestration – theft in common parlance – of depositors money would seem to limit the risk of governments. How that changes the maximum debt profile risk will have been calculated by a few treasury beavers , but the dreadful truth will not be divulged to dorks like you and me!

        • Andy

          Banking debt is not underpinned by the State. There is now an assumption that it is because of the last Governments actions re Lloyds and RBS etc. Deposits are covered, but only up to a certain figure. Banks should be allowed to go bankrupt – moral hazard and all that.

          • LB

            Hookeslaw is correct. However banking debt is still not a problem. I do agree, they should be bankrupted in the case of failure. First the shareholders lose all. Then its down to the standard rules of bankuptcy. If the bond holders have secured assets, they get those. Collateral goes back to the people who put up collateral. Then debts and assets are netted.

            However, because of the way banks are run, the typical payout post recovery from a failed bank is 85% from historical cases. That’s for depositors.

            It goes wrong when you have cases like Cyprus, where the creditors (cypriot banks) are forced to take a haircut because Greece defaulted, but the ECB as a Greek bond holder exempts themselves. They tore up the standard rules of bankruptcy to suit themselves.

            Frenchnewsonline is correct to.

            Remember the Europhiles will tell you that the EU is all about the freedom of movement of goods and services, people and capital. Post Cyprus, they imposed capital controls, so that’s another lie from the EU.

            • Andy

              The case of Cyprus is an interesting one. The actions of the EU and the Greek State effectively bankrupted the banks. Perhaps the moral is that the State should not be allowed to default on its debts. Oh and the State should not be allowed to borrow in the first place.

          • Tom Tom

            Lloyds did go bankrupt. It wiped out Shareholder Equity completely by assuming the black hole inside HBOS.

            • Andy

              Indeed. But that was a merger that was encouraged by that idiot Brown and was illegal anyway.

      • Hookeslaw

        Pensions liabilities are not debt.
        Tell us how you lower these liabilities you keep banging on about. Whose pensions have been defaulted?

        • LB

          You’re living in some alternative world to the rest of us.

          1. The accounting standards are abosolutely clear. Pensions are a liability.

          The relevant standards are FRS17 and 19, and GAAP.

          What evidence do you have that they aren’t? You never say.

          2. Accounts are meant to represent the reality of the situation.

          The current situation is that you pay the state via NI, and they pay you a pension in return.

          What evidence do you have that the state does not intend paying the state pension?

          Where I agree with you is that the reality is that they can’t pay. The liabilities are too large to pay.

          3. Who’s pensions have been defaulted? Most people.

          The deal was pay in, and we pay you out linked to RPI. The change to CPI is a default. That has wiped 15% off the value of pensions. In particular for civil servants. They lost.

          Next, the deal was to retire at 60 or 65. That has been defaulted on. Now its going to hit 67/68. That defaults on the deal. You get up 7-8 years less payout, plus there is another whamy, you have to pay in for the same length of time on top. They’ve racked the price up in addition.

          Which bit of defaulting on a deal don’t you understand?

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