The true extent of Britain's debt

Prodicus

Seen this?
http://machiavellitheprince.blogspot.com/2008/12/new-developments-imminent-on-damian.html

John

The graphs don't seem to dispaly - can this be fixed

Ian C

Your conclusion here Fraser only relates to the short term. The long-term prospects are what international investors will look at - and they won't likw what they see.

We need a re-bablanced economy - meaning what exactly. Manufacturing at less than 20% of GDP would have to grow at one helluva rate just to get above this figure. And why would anyone wnat to manufacture in the UK now? Well, because £ is cheap is part of the answer but who's got maoney to invest anyway?

As this washes through the financial markets, UK Treasuries will be seen to be a very bad deal.

As others have said, its Armageddon for the UK. But Germany is well placed - a reversal of 10 years ago. Well done Gordon and his team...!

Prodicus

Graphs?

Prodicus

As you were. They're up.

Lance Grundy

Fraser, you'll have an excellent opportunity to get the terrifying reality of these figures out into the public domain when you appear on 'Any Questions' on Friday night.
You'll need to give some thought how best to get the message across in a clear and concise way - better get your thinking cap on sunshine!

Ivy Eileen

Thud !

Cassandra

Why aren't Cameron and Osborne shouting this sort of thing from the rooftops? They should be organising an opposition chorus of "debt,debt, debt" with all the true figures, until the media and the dumb public start to take in exactly what has happened/is happening.

Ian C

These are facts that the Tories should have been on top of before now. Basic management of the economy requires the debt cycles of Gov't and the private sector not to be running concurrently - something the Wilson/Callaghan gov't singularly failed to achieve, and, surpise surprise, so has their successor.

The consequences of a Labour gov't are always the same - because they want to spend our money on things that they think are more important than we want to spend it on. Simple as that - and why we need, as a nation, to find a Constitutional means of preventing this happening ever again.

Anoneumouse

"I believe that an IMF bailout is highly unlikely"

The IMF is broken too. The IMF Total quotas at end-August 2008 were SDR 217.4 billion (about $341 billion).

That will only bail out 21 countries = to that required by Ukrain.

Never mind Hungery and Iceland, Greece will be next followd by Ireland.

The current injection of capital to the banks is the 21st Century equivalence to French Assignats

We are now on the road to hyperinflation

If we can learn anything from history, it is that a government cannot be trusted to manage money. When currency is not redeemable in gold, its value depends entirely on the judgment of politicians and unfortunately, that is now the situation we find ourselves in today.

Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market. Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power. In an inflationary environment, when prices are kept high by excess liquidity, money wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys paper money wealth.

Trumpeter Lanfried

Would an IMF bail out be such a bad thing? It might have two beneficial results:

(a) Demonstrate that all Labour governments screw up the economy and that this government is no exception;

b) Secure a drastic reduction in government spending as a condition of any loan.

chris

Would it not be better if official interest rates were around 7.5%p.a.?
This would attract savers, encourage banks to lend at realistic rates to companies, the banks could respond to government pressure more positively, and would help to sustain the currency.
Would the experts out there explain what good the current low bank rate is? How will the government be able to sell £150 billion in bonds in each of the next 3 years?

Short the UK

There are two important factors that have transpired recently:

1. The NAPF have written to the Treasury asking for more long-dated Gilt issuance.

2. The Treasury are mandating that the Banking sector almost double their holdings of Gilts.

3. The BoE will move to Quantitative Easing next year, meaning they will probably buy Gilts to drive down the cost of money.

So demand for Gilts should not be a problem. In fact the long-end should now come in as the depression bites harder and we got to ZIRP & QE.

The banks should be able to roll-over their debts in the money markets, that is why they need decent margins in the UK.

Next year as the Eurozone starts cracking GBP could strengthen but I expect it to get weaker against the might Dollar.

Still, the country is going to the dogs.

Short the UK

Sourced from Green Faucet.com:

'Now that UK base rates are back down to levels last seen during the Festival of Britain, it is becoming increasingly difficult to shelter in cash, as the government’s War on Savers moves into full throttle. Gilt yields, similarly, are starting to look eye-wateringly slender; but they could easily become even flimsier. As James Ferguson, Chief Strategist at Pali International, has observed:

“..all things are not equal.. the experience of systemic banking crises and their attendant recessions suggest that bond demand, from both non-bank investors but especially from the banks, could explode beyond anything seen for decades, completely swamping new supply. Meanwhile, the banks’ de-risking of assets will pump powerful deflationary pressures into the real economy.”

The idea that banks could comfortably absorb the colossal supply of “new” Gilts is, at first sight, somewhat counter-intuitive – but James makes a convincing case for Gilt bulls. Increased demand for UK government debt will likely come from two specific areas:

“First, a normal rebalancing of portfolio preferences in favour of a heavier weighting in government bonds, as is quite usual in recessions and at other times of increased investor liquidity preference.

“Second, and less obvious, it is a feature of systemic banking crises that banks, once recapitalised by state funds and whilst working to shrink their risk assets, concentrate their efforts particularly on de-risking the profile of their remaining assets.”

It is certainly becoming acutely obvious that banks remain unwilling to lend, both to individuals and to corporations. Instead, they may simply elect to park capital in the Gilt market and earn the essentially riskless spread of longer dated Gilt yields over shorter ones. And as James points out, the potential for banks to absorb Gilt supply is startling:

“..a big bank like, say, RBS could potentially soak up this massive excess supply all on its own. RBS has £1.95trn in total assets, of which £728bn is loans.. If we take a muted version of the Indonesian [banking crisis] scenario, within five years it’s possible that loans could shrink 20% to £585bn (30% of assets) whilst if Gilt holdings increased to just 15% of total assets (they reached 45% in Indonesia), that would imply demand of £300bn, just from RBS alone: enough to soak up our assumed five-year excess supply of Gilts in its entirety.”

Basing an investment thesis on presumptions, albeit well-founded ones, of future buying by third parties is obviously somewhat fraught. Investors seeking quasi-cash alternatives and considering Gilts can comfort themselves that in Japan, a major economy that underwent a property and banking crisis throughout the 1990s, government bond yields fell further than the wildest expectations of the most expectant bulls: 10 year Japanese Government bonds ended up in 2003 yielding just 0.44%.

The world, of course, is not necessarily like Japan. We must at least hope not. But it certainly looks less than wonderful at present. An already astonishing investment environment can be counted upon to throw a few more surprises our way.'

mitch

If the IMF do have to step in gordon would have to resign in disgrace and would get his rightful place in the history books as our worst PM ever,seems almost worth it.

Simon Stephenson

Fraser

Can you confirm whether these figures are for nett debt or gross debt?

I think they must be for gross debt, since the rise from approx 260% of GDP in 2003 to approx 410% of GDP in 2008 implies an increase in debt of approx £2,800 billion, or about half total GDP for this 5 year period. Surely this can't be the nett figure?

Obviously, gross debt can itself be a significant problem for a nation, particularly if the maturity dates are out of synch with those of its gross financial assets. But, to have any point, the assessment should be with the figures for nett debt. After all, if debt has gone up by 2.8 trillion, it's less of a worry if financial assets have also gone up by a similar amount than it would be if they've gone up by a significantly lesser amount.

dodgyreception

Truly frightening.

You need to get this out more in the public domain, the truly horrific level of debt we're in is almost certainly going to lead to the IMF, the debt auctions aren't covered already and we still have another £500bn or so to go

TrevorsDen

"when you appear on 'Any Questions' on Friday night" ... it occurs to me that one statistic that should be looked at is the govts claims re debt as % of GDP, at the end of the recession, c2012. Is this % based on current GDP? Or the lower GDP following 12months+ of recession.

I suppose the great economic brains in the press would have spotted that though - wouldn't they?

skooch

Am adding to the previous posts - our debt level, and the consequences of it, must be shouted from the rooftops by the opposition.

oldtimer

Your debt tables prompted me to look again at the CIA World Factbook for the UK on their estimate of UK public debt as % of GDP at end 2007. When I posted this on your thread about Japan on 4dec08 they stated it was 43.7% vs Japan at 170% (see my post).

I have checked the same source again tonight to discover they they have raised their estimate of UK debt as a % of GDP to 170% at end 2007!!!! This update was also made on 4dec08 - obviously later on the same day as my earlier post.

So if you are looking for another external source of opinion on the level of UK public debt then you need look no further. None of this, of course, takes any account of the headlong plunge into even greater debt predicted in the PBR - and those predictions are thought by many to be optimistic.

I fear that Short the UK`s prediction of "Armageddon" may turn out to be all too true.

Doug

Always educational to read your contributions Fraser. More please.

oldtimer

A further thought on Brown`s gaffe today about saving the world. He went on to say:
'We not only worked with other countries to save the world's banking system but not one depositor actually lost any money in Britain.'

If you were a foreign holder of sterling, sitting on a major devaluation of the £ sterling, you are unlikely to share that view.

TGF UKIP

A couple of thoughts on this.

First of all I am beginning to scent a big smelly rat. It is increasingly obvious that Gordon cannot go to 2010 without things getting very decidedly worse and publication of figures like this are inevitably going to compound the difficulty of selling gilts to international investors.

What Gordon needs as other Coffee Housers and myself have been posting is to pick a fight on a major substantive issue with the Tories and use it to go to the country in early 09.

Could it be that the selected issue is going to be bank nationalisation?

Consider, he advances capital at 12.5%, gets them to jack up their ratios via stuffing them with gilts and then wages a media war to get them to lend at rates based on 2%. Further he has Dave joining in saying on a daily basis that the bank bailout has failed and the banks aren't lending.

Moreover, who could be more salivating than all those lefty Treasury senior civil servants at the thought of at last really getting hold of the "commanding heights" of the British economy. Remember this is now the most political civil service Britain has ever seen - witness O'Donnell's role in the arrest of Damian Green.

So early 2009, Gordon declares no alternative to bank nationalisation knowing full well that the Tories must oppose and then declares a GE on the issue. Result almost certainly a handsome Gordon victory - you try explaining preference shares, capital ratios and gilt issues to the man with the Sun, quite apart from the fact that most people firmly believe that the whole mess is largely due to cowboy bankers in the first instance and now loath banks and bankers.

Second thought is that a number of Coffee Housers implore the Tories to make hay with these figures and use them to really sock it to Gordon. Pointless I'm afraid. The Cameron Tories are absolutely useless at this. In fact they are now almost A-political. No matter what ammunition they are given they are incapable of using it unless against themselves.

What doesn't help of course is that their primary economic spokesman, Fraser's client Osborne, is now deader than Cleese's parrot but Dave is apparently precluded by Bullingdon Club rules from replacing him.

Lucky, lucky, lucky Gordon!

Fraser Nelson

oldtimer, the CIA data is only government debt. Only one leg of the tripod.

TrevorsDen, as far as I'm aware this figure has never been made public before - not on a G7 level. Only because Michael Saunders is a genius do we have this figure now, so the press cant comment on data they wont have seen. I mention it in my political column in tomorrow's magazine.

Simon Stephenson, it's gross. In every sense of the word. It is External Debt as defined by the IMF: "The outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy."

Nick Kaplan

The real disaster will come when the long-run effects of the government's profliacy manifest themseleves. The huge levels of public sector borrowing will ulitmately lead to inflation. Inflationary pressure will mean future increases in interest rates, and interest payments on what is now 400% of GDP, and will soon enough be far more than that,are going to be very painful. It's a shame the public are not interested in this truth, they are too preoccupied with Brown's lie that he is our saviour from the evils of the market...

TGF UKIP

Coffee Housers, Guido has a fascinating post at order-order.com on German Finance Minister Steinbruck's rubbishing of Gordon's World Master Plan. Guido links to Steinbruck's interview with "Newsweek" and it really is unmissable particularly his answer to Newsweeks question "What's wrong with stimulus proposals"

If only, if only we had an opposition and an opposition spokesman that could make use of such ammunition.

Lucky, lucky, lucky Gordon to have an "opposition" such as this.

Tankus

@mitch
"If the IMF do have to step in gordon would have to resign in disgrace "
I doubt that there is anything that would give him reason to resign ...
I would not be surprised if bailiffs would have to be called in to remove him from number 10 after loosing the next elections

J H Holloway

TGF

What is the point of wishing another 5 years of Brown on the country 'cos you hate Dave?

Do you think anybody enjoys - or is educated by - your 'guess-what-this-is-going-to-do-for-dave jottings?

Nothing, not even the well-born and well-educated people that make you feel so small, could be worse for this country than Brown.

(incidentally, if you can't explain 'reference shares, capital ratios and gilt issues to the man with the Sun' what does it matter that Osborne is still in the saddle? Clown.)

Herbert Thornton

So, extrapolating from this that the currency cannot do anything but collapse - what will this do to the U.K.'s standards of living?

And more important, how will the immigrants - especially the illegal ones - manage?

Will there be an exodus of them? Will there be an exodus of indigenous British people too? Where will they go?

For that matter will any country be willing to take anybody from Britain?

Despairing

Canada Mr Thornton. Look at their ratios. And singularly they have improved over the 5 years. Maybe they didn't blow their oil price windfall on

AlexM

Sorry, Fraser. Far be it from me to defend the worst Prime Minister and (by a country mile) worst Chancellor of the Exchequer this country has ever had, but you're slightly wide of the mark here.

For a start, there is nothing remotely new or original about these data. They are a standard derivation from the International Investment Position (IIP) published quarterly by most countries according to IMF-defined standards. These ratios may not be widely known by the public (or journalists) but are common knowledge in the markets and should already be fully reflected in prices and exchange rates. I'm sure Michael Saunders will be flattered by your praise but this is very elementary stuff for a credit analyst.

Secondly, it is the net external debt ratio that is important. Quite a few developed countries have much larger external debt/GDP ratios than the UK but these liabilities are matched by liquid external assets. All countries with large international banking sectors *by definition* have outsized gross external liabilities (e,g, Switzerland, Luxembourg, Hong Kong, Singapore, Aruba, Cayman Islands, Malta, Cyprus, to name a few) but, of course, banks (however imperfectly) have to balance their liabilities with assets. In most cases, these countries are net external creditors. Some external assets will be dodgy US securities but, in the greater scheme of things, these are unlikely to be enough to affect national-level ratios.

As I am on holiday at the moment, I cannot furnish you with the detailed numbers but, off the top of my head, I believe the UK's net external debt is nearer 30% of GDP. Certainly it is not out of line with other G7 countries.

Indeed, Moody's and Standard & Poor's consider that external debt ratios are irrelevant from a credit perspective for countries with fully convertible reserve currencies and do not even quote them (Fitch Ratings do).

The main story remains the government's exploding debt levels (especially once off-balance sheet items are included) and Brown's criminal fiscal incompetence. Nearly all countries with large international banking sectors have no or minimal government debt.

I confidently predict that by the end of this dismal regime, the UK government will have lost its AAA credit rating.

John Miller

Lots of comments here seem to indicate Brown has a plan, based on increasing public expenditure. Having listened to Tessa Jowell yesterday,talking about the massive savings in expenditure on the Olympic Games and waking up this morning to hear that the Government are postponing two aircraft carriers, you have to beleive that they're making it up as they go along.

Fraser

Does your concluding "whatever" signal final capitulation in the face of quite how scary this has become? I used to think Gordon was a moron, now I think he is a prime dunce. He has so believed his own hype and Keynisian doctrine after the Dotcom boom that he has lost touch with the fundamental principle that markets will only lend in the expectation of getting something back.

Desperate Dan

I wish someone would be more specific about all these debts and who's responsible for them. We're constantly being told about everyone having debts but we've learned recently that savers outnumbers debtors by 7 to 1. Savers deeply resent being told every five minutes that they've incurred huge debts when they haven't.
Gordon Brown is so insistent on offloading the blame that I'm beginning to wonder if the nation's greatest debtor is him.

oldtimer

Fraser, I am well aware that the data I quoted referred only to government debt. Its significance was the reassessment from 43.7% to 170% of GDP. Someone has been rechecking the data and has started to agree with you. You should be pleased.

disgusted

What currencies is the debt denominated in?

mark c

surely the man with the sun can understand that he'll be paying the first month or two of the years tax bill (tax free day is looking positively autumnal) just to cover the interest and then after that feeding Gordons monstrous machinery. Nice big pie chart on the front page should do it.

Simon Stephenson

Fraser

Thanks for the clarification.

I think you should be concerned that the figures, as presented, will lead to a lot of false concern. Not that there should be no concern, mind you, but I think there will be many who will be drawn to interpret the figures in your graphs as the equivalent of a national credit card balance, or a personal loan, that has been spent on consumables.

The truth, I suspect, is that the vast majority of the expansion of UK financial liability is offset by a similar expansion in UK financial assets. It's not been borrowed from abroad to finance a blow-out at home; it's been borrowed from one country, lent to another, re-borrowed by another institution and lent again. It's the inevitable corollary of London's growth as a financial centre.

As I wrote in my original comment, this major increase in the nation's gearing - the ratio of gross debt to nett worth - is not without it's concerns. But, I'd suggest, these are not helpfully addressed by manufacturing sentiment behind a parallel concern that, although more emotionally volatile, in reality doesn't exist.

I'm concerned that intellectual honesty is no longer seen to represent a higher level of morality than the manufacture of amenable public mood by whatever means will work. And, in practical terms, is it really a good thing for the future when the tale of the boy who cried wolf becomes the standard approach to responding to the announcements of authority?

Mark

TGF UKIP serves an excellent purpose in that his postings nicely underline what a sad bunch of marginal no nothings inhabit the UKIP world. Change the record old chap.

Ian C

TGF

You may have something on the bank nationalisation theme if you think that GB is now suddenly that sort of risk taker.

While the presence of Mandy has undoubtedly stiffened GB's spine, and the scenario you paint is a Mandelsonian one, I have more faith in Sun readers that they can understand someone telling the country that "Brown has gone mad, trying to make Banks lend at 2% when the Gov't is lending to them at 12%" - as Cameron stated yesterday at PMQ's (although he understated it by tellling the truth and used 6%).

I still think that you are not giving Cameron enough credit for the cool that he has shown in a very difficult situation - while he undoubtedly could be alot sharper he cannot appear nasty or gloating over the Gov'ts blatant wrigling over the state of economy. And he has to keep alot of powder dry, but that is a very delicate judgement.

Your booming voice could still make you look very stupid after the election. I would still bet on it.

Cocidius

Fraser

Whilst Simon Stephenson's comments are reassuring, I think I shall buy a few dozens cases of baked beans and a gross of candles, just in case you are totally correct.

Fraser Nelson

Simon, point taken - I'll put up a PS. Are you aware of a 'net external debt' metric? The IMF and World Bank seem only to express this as gross debt...

Simon Stephenson

AlexM

I'd be really appreciative if you could point me in the direction of where to find these national nett debt figures. As you quite rightly say, high gross debt/GDP ratios are part and parcel of being a centre of international finance, and in themselves have little bearing on the creditworthiness, or financial health, of the nation concerned.

If you are correct with your estimate of 30% of GDP as the level of UK net external debt, we are looking at the aggregate of the consumer/corporate sectors being approximately 5% - 10% in surplus, aren't we? With public-sector nett debt, including only nett liabilities of Northern Rock, at about 37%?

Is this about right?

Simon Stephenson

Fraser

Nett External Debt metric - see my request to AlexM

AlexM

Did you mean to write:-

"Nearly all countries with large international banking sectors have no or minimal government debt."

I thought just about all advanced countries had huge levels of national debt, built up to finance the building of their infrastructure, amongst other things. Could it be that you were meaning that most countries had found ways to nett-finance this internally, rather than borrow it from abroad?

fraser Nelson

Simon, I could read a whole piece from AlexM about this. If you're there, Alex, would you be up for doing a post about your take on government debt - any why losing the AAA rating is significant? Email me if so - firstname at spectator.co.uk

Simon Stephenson

Fraser

I'm sorry if it may seem that I'm nitpicking, but this second sentence of your postscript doesn't make a lot of sense.

"One must take into account that Britain is likely to have proportionately greater net assets whose value would be amplified by sterling's plunge."

Eh?

I know that you're trying to get over the message that the UK is heading down a route that will leave us dangerously over-exposed to the judgement of the rest of the world over whether or not to lend to us, and, if so, on what terms. Particularly as this funding requirement appears to be for little more than to allow us to pay for the excess of our consumption over our value created. I'm in total agreement with you that this is the most pressing problem we as a country have to deal with in the near-to-medium term.

Unlike the mental juggling that has to go on when looking at the implications of financial/economic policy internal to a country, the assessment of a country's well-being from an external viewpoint is actually much more straightforward and intuitive. Other than the US, which is so big that internal policy affects the whole world, adjustments within each country can broadly be looked at in isolation from the world economy. So if the UK, for example, is deemed to require remedial action, the effect this specifically will have on the rest of the world economy can largely be ignored. The "world" effect of the policy is incidental to the purpose of bringing the UK back to equilibrium.

So in world terms the UK can be looked at in the way we'd look at an individual business, or family even. There's a level of debt in proportion to income that the world will accept as manageable, and there's a level of short-term nett borrowing that will be acceptable through a temporary period of difficulty. It's assessing where we are on these measures, vis-a-vis everyone else, that's the key to judging our health.

My thinking, I'm afraid, is that if there really wasn't going to be much of a problem funding the public-sector deficits set out in the PBR, then Brown/Darling would have explained in words of one syllable why this was so. But, to the contrary, their evident desire to obfuscate rather than clarify means that they know that the funding of these deficits is likely to be far from plain-sailing.

The opposition should do the simple explanation of the possible options, forcing the government out into the open on this issue. Missing the point by using a load of tangential data is likely to be about as successful as trying to catch old birds with chaff.

William Norton

I'm with AlexM and Simon Stephenson on this one.

Ian C

While you sort out the gross and the net, the situation is still markedly worse than elsewhere. And of course the great "known unknown" is that the value of the assets contering the debts accumulated by the nation's banks are rather busy falling off rather high cliffs at present. Our banking system not only lent far too much in the domestic market but expanded their balance sheets by buying assets from America (sub-prime loans) that have no current value.

This will all contribute to the UK not mainataining its AAA rating as will the UK gov't needing to borrow alot of money over a short period of time while offering zilch % in the way of interest to lenders.

Not a squareable circle.

Fraser Nelson

Simon, I agree with all you wrote. My point is that Britain's history has left us with companies likely to have proportionally more assets abroad (esp banking). If there was a chart showing gross external assets/GDP I suspect Britain would show up pretty well. The sterling plunge means that any company that does have assets in HK Dollars or whatever would find them worth more now in Blighty.

There are several ways of looking at debt: with PFI, without it, including banking liabilities or not. The EU/Maastricht definition is gross debt, Brown looks at net debt, the IMF looks at gross, and yourself and AlexM are right to say that net external debt is very important. It's just that no one seems to publish it.

My point with the gross debt is (I hope) a simple one: that Britain (household, gvt, corporate) has a lot more debt than shows up in the gvt accounts. Some 74% of this debt matures in the next year and therefore its funding requirement for UK PLC, not just the gvt, is far greater - at a time of global credit crunch/liqudity shortages. This is why we are so exposed and why, as you say, funding our deficit is going to be an issue. Especially if we lose the AAA ratings and the risk premiums keep soaring.

AlexM

@ Simon Stephenson

The best source for debt data is the online IMF Balance of Payments database which includes the detailed International Investment Position(subscription only I'm afraid but you can get a 3-day free trial to play around) available at imf.org. This gives assets and liabilities per country broken down by public/private, long-term/short-term, equity/debt, bank/non-bank etc. and all in a standardized, very easy-to-use format which you can download into a spreadsheet. All the various ratios and metrics can then easily be calculated from the raw data.

The same data are also usually available from each country's central bank (which supplies the IMF with the data in the first place) but are often not in the form of a downloadable database and ease-of-use varies considerably from country to country.

Another useful source is the Bank for International Settlements (BIS.org) which provides very detailed data on cross-border financial flows, also in an easy-to-use format and updated quarterly. This is useful not only as a cross-reference to the IIP data (the overall accuracy of which is disputed at the best of times) but also provides data for those countries which do not publish a full IIP (none of the major countries but some important financial centres and tax havens).

Simon Stephenson

AlexM

Thanks for your help.

Chris Cook

It's been clear for a long time that a deficit-based economy is unsustainable.

Perhaps it's about time we took an alternative look at "Equity" instead?

When we talk about Public and Private, we mean "State" and "PLC" respectively: but there are emerging alternatives to the good old Joint Stock Limited Liability Company that have the potential to change the game entirely, with a bit of good old British ingenuity....

http://www.feasta-multimedia.org/2008/Chris_Cook.mov

Kevin Magner

The UK external debt ratio is higher than the others shown because of the size of the UK banking industry is larger relative to the economy than for the other countries shown. Are you seriously suggesting that we shrink the City so that the chart matches the other countries?? or go back to coal mining/ship-building/textile production?? You need to understand the asset side of the economy and banking to form a view as to whether that debt ratio is a problem.

Andy Link

Buy Gold and pray.

hadrian

It strikes me Brown is not unlike Mugabe in his handling a crisis- just point blank deny its existence! Plague- what plague? Long-term debt induced bankruptcy-? Never heard of such a thing!
One has to admire your relentless spade-work, Fraser but my horrible fear is that ordinary punters- even reasonably intelligent ones- simply don't understand the intraces of finanace and it all sounds like technical jargon to blind us with science. The result is, as Diane Abbot pointed out last night, in a crisis people yearn for a reassuring Leader and Broon is doing a damned good job bamboozling them into believeing it is he!! Come on, Tories, you've got to explode their statist myths- starting with hard fact facing. And HARD FACT No1 is the State will ultimately let us all down if we delude ourselves into thinking it has a magic wand and omnipotent powers. Broon's policy is basically 'take, take, take..' which is ok only for so long.

JMN KING

I'm no economist, but it seems to me that we've all but destroyed our farming, & without food nothing else could function. We've then done the same to our industry.
We've been living in the lap of luxury ever since the demise of the aforementioned, thinking work really does take place in the office. It doesn't, & now we'll pay the price!

JMN KING

I'm no economist, but it seems to me that we've all but destroyed our farming, & without food nothing else could function. We've then done the same to our industry.
We've been living in the lap of luxury ever since the demise of the aforementioned, thinking work really does take place in the office. It doesn't, & now we'll pay the price!

hadrian

I'm no economic historian so am not sure if the AD 1775 faced a worse financial crisis than we do but for your amusement, here's what I've just come across by Church of England minister and hymn writer( Rock of Ages etc) wrote satirically about his own day's national debt.

' Qu.1- Supposing this debt to be only 130 millions of pounds sterling at present( although it's much more) and that ii is to be counted in shillings; and that a man could count at the rate of 100 shillings per minute, for twelve hours each day, how long would it take?
Ans-98 years, 316 days, 14 hours and 40 minutes.
Qu- supposing the interest of this debt to be only 3 1/2 per cent per annum what does the whole annual interest amount to?
Ans-four million 550 thousand pounds sterling.
Qu-How dot the government raise this interest yearly?
Ans- By taxing those who lent the principal, and others.
Qu- When will the government be able to pay the principal?
Ans- When there is more money in the treasury alone than there is at present in all Europe.
Qu- And when will that be?
Ans- Never.'

Sounds horribly familiar, not we can take much comfort from that!!

Mark N

Yep, I'm in the layman-with-a bit-of-common-sense category. OK, I've a science degree and an MBA but I don't for one minute delude myself about how much of all this banking and financial technicality I properly understand. For me, the point is that common sense says you can't borrow, tax and spend your way into a financial crisis and then, er, borrow, tax (soon) and spend your way out. How does that work in practice, Mr Brown? You can't do it as an individual; you can't do it as a business; why can you do it as a government?

A key issue here must surely be the extent to which the government's recovery plans are predicated on economic growth sooner or later. However, as mankind's era of endless cheap energy (and so "infinite" economic growth) comes to an end - perhaps more abruptly than casual observers might expect - how on earth are we going to generate the GDP, profits and taxes to pay back the stupefying levels of debt that Brown has now committed us to?

Good old commom sense is screaming at me to think hard about what self-reliance means in practice, because relying on our political "elite" seems to be turning into an increasingly risky if not downright stupid way to organise one's affairs.

Smart Head

Our Oil and gas is drying up, our Gold has been sold (for a pittance), our currency is collapsing, unemployment is rising, our finacial system is riddled with toxic debt, our industrial strength is withering away. Our debts are now set to spiral higher from already unrecoverable levels. We're all doomed.

John

Debt vs assett/income on personal or national level appears to be key.
Brown repeatedly makes optimistic projections and bases risk or debt on these projections - pensions deficits, borrowing including off book PFI as a proportion of GDP.
Many believed his "end to boom and bust/prudence" sham and overstretched themselves with mortgage/debt.
Unfortunately, there is only one way to learn this lessen - pain.
It is coming - just a matter of how it will be inflicted.
Nationally currency trashed and potentially loss of inward investment.
Individuals - loss of money to spend on holidays/imported goods already occurred and more lean times ahead.
The government would prefer the pain to be spread from those with large individual risk to all - regardless of previous frugality - ultimately this will both reduce incentives and increase resentment.
The risk with his current strategy appears to potentially catastrophic.
We have been through a phase similar to tulip bulb mania with the housing priced beyond the reach of the customers who could only enter the market through greater leverage - we moved past a point when it was obvious that a correction would occur though this was exacerbated by the permeation of subprime mortgage debt through the whole of our economy. These 2 debts are now being realised. There is nothing from Brown that demonstrates that he has any ability to budget for this other than borrow and worry about it after then next election. He is gambling with the economy and the future generation in an attempt to secure himself an election win - to prove that he would be prime minister elected by the people - he has no other interest and cannot be trusted to do what is right.

The worst thing is that to learn something from this.
Those that spent beyond their means or those that overstretched themselves on mortgages have to find out the consequences - society as a whole would then learn a valuable lesson and then become more stable as a result.

Letsgotoswitzerland

OK, this looks high, but are you stating overseas debts as "net"? In other words have you calculated what foreign countries and organisations owe us and taken that away from what we owe to arrive at a net debt figure?

BennyMuller

By now this graph is all over the place and even started to cause a bit of panic on some blogs.

Clicking on CIA Factbook would have produced the same ratio within two minutes by the way because it hasn't changes much over the past year.

What bothers me is that the initial article was strongly suggestive of this being net foreign debt, which would have suggested the UK was the next Iceland.

Not amused.

Adrian Cox

This would be scary, but is NOT TRUE.

If this were true, each Briton of 16 or over would (effectively) owe foreign countries around £200,000 (do the maths - GDP of $2.772 trillion * 4 (400%) / 37,000,000 people over 15yo / 1.5 dollars to the pound = £199,783 PER PERSON!!!). Simply not possible I'm afraid

The interest paid on this would be phenomenal.

If this were true, the UK would be bankrupted - completely.

PLEASE CHECK YOUR FIGURES AS THEY ARE WILDLY OUT! PLEASE REMOVE THIS GRAPH UNTIL IT CAN BE CORRECTED!

Jon

The Joint External Debt Hub (JEDH) of the Bank for International Settlements (BIS), developed jointly with the OECD and the World Bank, brings together detailed external debt data that are published individually by countries that subscribe to the IMF’s Special Data Dissemination Standard (SDDS) (see http://www.jedh.org/jedh_instrument.html). The information it provides is even more scary than that given by Fraser Nelson in his article. According to that database the gross external debt position of the UK at the end of the second quarter of 2008 was £11 469 870m which I make £11.46tr, twice the level of debt of the USA. A detailed breakdown is provided by the database.
According to the IMF UK gross external debt at the end of 2007 was £5 675 870m, which I make £5.68tr, but that relates only to Balance of Payments. This information is available in the Pink Book. Go to http://www.statistics.gov.uk/StatBase/TSDTimezone.asp?vlnk=pb&Pos=&ColRank=1&Rank=272 and under ‘Releases’ select Pink Book and then work your way through the various options until you reach the Table that gives UK Gross External Debt IMF BoP IIP. Slightly different BoP figures are supplied by BIS. According to them the debt is £5 085 348m, which I make £5.06tr. Whichever figure you use (IMF or BIS) our BoP debt is equal to the debt of the USA.
I have not found a Table of UK Assets, so put together the Reserves picture from the Pink Book. Alas, the Reserves are a mere £97bn (and some of those reserves are pretty dodgy I might say). Go read through the Tables. Your heart will sink to somewhere lower than your boots when you see what wee Broon has done to us (the figures were not marvellous when he took over as Chancellor but they were a very great deal better than they are now).
Some scribes have loudly trumpeted that ‘real’ Government debt is £500bn+. It is difficult to know where they get these figures. Wee Broon uses sleight of hand to disguise the truth. He tells the country that debt is not yet 3% of GDP and that at this level it is well within the levels allowed by the Maastricht Treaty, and of course he is right, because levels of real debt is so horrendous in Europe that charlatanry is alive and well and the ‘let’s pretend’ is that this year’s debt is all we need look at. Last year is history and next year is ‘another’ year and we start counting from 1 again. The result: debt accumulates from year to year. It is never carried forward as it would be in any respectable accounting system. Hey presto: lying to the people about debt is easy peasy.
As you study the figures you will see a Treasury gripped by the kind of madness that would prompt a family to apply to the High Court for a curatorship order for any father squandering the family assets in this way. He has not merely sold the family silver (or gold, if you prefer) he has sent the family plummeting into irreversible insolvency. We are not merely the sick man of Europe, we are terminally ill, and our end will be no more glorious than that of the Ottoman Empire in the twenties of last century. It seems that prosperity has forever flown from this green and pleasant land.
The Ottoman collapse saw Attaturk establish himself as a dictator. Can democracy survive in this sort of penury? Does it deserve to survive? And if it is the only alternative to wee Broon, come in Oliver!

Peter Norman

It’s sad, I know, but I have read every post here trying to get a feel for the problem being highlighted. I’m not an economist nor an accountant but I’ve directed several companies over the years and I can quickly put together my own balance sheet, rough P&L and cash flow forecast of any trading company simply by asking enough questions of accounting staff. Is the same thing possible for GB (Gordon Brown) Plc? If so, where would one find reliable data and/or truthful Treasury staff to ask?

Is GB Plc solvency the issue we should be discussing?

There also seems to be much confusion in these post about the various effects of government debt, net international corporate debt and total personal UK debt.

The components of the GDP statistic (I believe) are C (Consumption), I (Investment), G (Government spending) and Net Export/Imports. Can somebody explain to me why UK debt (net or gross) measured as a ratio of GDP is helpful in understanding GB plc problems?

Another thing I can’t grasp in the GB solution to the credit crunch is stuffing bank balance sheets with high interest government debenture stock to finance purchase of low yielding gilt. Is this madness or am I stupid? (Before anybody replies it’s the latter, I should add that I sold all my shares, personal and pension fund, two years ago!)

Jon

Norman’s question about the relevance of GDP to a country’s external debt is one that is seldom answered in journals and it deserves some attention.
It is an illusion to think that if we are dealing with a specific company – let us say Alpha Balpha plc – we are dealing with a stand-alone entity. It is not, and it is responsible for many problems. Alpha Balpha plc is actually a cell or unit in a politico-economic body called the domestic economy of XYZ. It is in every way analogous to the cells of a body; collectively they make up the body, and however healthy the cells of the liver may be, for example, if there is a malignant tumour of the brain stem, atherosclerosis, and heart failure, the healthy liver cells will in the end go the way of all flesh. Just as medical science studies pathological states the better to understand normal physiology, so a theoretical economist may use the likes of credit crunches and recessions to discover the proper workings of a politico-economic domestic entity.
When we deal with companies and organisations within a domestic economy, as a matter of course we take the legal, political, credit and tax systems of the economy into account. We take them so much for granted that they are present to us only subliminally and we do not focus on their importance, which blinds us to the reality that we are actually dealing with a cell in a politico-economic body. Things rather change when we are dealing with foreigners. They may want very much to do business with us, but they may know little of our ways and systems and so they will take advice, particularly from credit analysts.
Let us say that Alpha Balpha manufactures winding engines for use in the mining industry. It is an important player in the field and it is an extremely reputable company known for its financial probity and prudence. Its overheads are enormous, because it must maintain a highly educated and trained workforce, whose experience is a vital component of the company’s superb manufacturing ability; to lay off such workers is not possible because re-assembling such a workforce and getting it up to production level could take years. It also has a huge investment in plant and machinery, which it must maintain in peak condition. It is also a profitable company. But, like most companies it is dependent for its existence on the availability of a line of credit. It has never defaulted on its obligations and its credit-worthiness is highly rated. For some years it has been sourcing components from Korea, and it has well-established commercial ties with Korean companies. It is undergoing an expansion phase and it finds it needs loan capital. To its horror there is none available in its domestic economy because of a credit crunch, and it is forced to look to its Korean trading partners for unusually high credit facilities. In Normal times these would have been forthcoming without much fuss but its Korean partners have seen the collapse of the £, the depth of the recession that is forecast for the UK, and have seen the UK FTSE100 decline by more than 30% in a year. They decide it would be prudent to ask the advice of their Bankers, who pass the problem to one of their credit analysts. The analyst makes his investigation and reports as follows:
“Alpha Balpha plc is a well-run and soundly operating company. However, it operates within an economy that has a staggering level of external debt. The central government, local authorities, financial companies and non-financial companies have all raised loans from foreign countries and together they now owe 10 times the country’s GDP. What that means is that if they applied every penny of their GDP to paying foreign creditors, it would take them 10 years to pay everybody off. Since it is impossible for them to do any such thing, the question must be asked as to how long it would in fact take to repay the colossal sums that are owed, and the answer to that is by no means clear. The debt and related GDP problems are exacerbated by a number of factors:
(1) It is likely that companies etc within that economy will need more foreign finance in the near future. With their debt levels as high as they are, that may well not be forthcoming;
(2) Banks within that economy appear to have difficulty in lending money. If they restrict the line of credit of Alpha Balpha plc, or bring it to an end, that could threaten the very existence of the company;
(3) Alpha Balpha plc sells its manufactured goods to foreign countries, many of which have unsustainable levels of debt in relation to their own GDP and look as though they will be forced to cut back because of the recession. That would threaten the viability of Alpha Balpha plc.
(4) The high level of gross external debt owed by the UK means that sooner or later it will either default on its obligations because its level of GDP cannot finance reasonable repayments, or its government will have to introduce swingeing budgetary cuts and raise taxes substantially. If Alpha Balpha plc must pay higher VAT, huge additional national insurance contributions, and higher taxes of other sorts, it may not be in a position to service the loans it now seeks in Korea.
I must therefore say with regret that it would not be prudent to lend any money to Alpha Balpha plc.”
And so we have a situation in which the level of external debt of a country, in relation to its GDP, threatens the existence of even profitable and well-run companies, which proves conclusively that one of the great illusions of economics is to look at a company or authority as a stand-alone entity. It must be regarded as a cell in a politico-economic body.
No doubt others can give additional (or alternative) answers to the question, but this is my take on it.

Dark Lochnagar

Oil won't run out for another 50+ years and when it does we'll have a large renewables industry to take over. Nice to know that Scotland will look after you the same as it has done for the last 30 years!

Depression Proof

All this talk of demand or lack of for Gilts and debt, the possibility of deflation or conversely hyper inflation worries me. How do I read what is going to happen. I switched 75% of my entire savings into Gilts 6 months ago thinking deflation was going to rule. Now I am worried the government will print money like hteres no tomorrow. So would you guys clear out of gilts now and if so where would you invest the proceeds? Farm land an opportunity?...it has already dropped by a third.

Stephen Price

Whilst the headline debt figures at the very beginning of this thread are not unbelievable to a non resident. Would someone explain in simple terms please two issues that perplexed a number of us Ex pats over the festive period. Do the assets/ liabilities of ABN Amro the bank taken over by RBS almost in mid gasp of its bail out aid or worsen the figures shown.
And why do RBS charge via it's now ABN subsidiary extorniate interest rates in it's non UK operations. Given its new largest share holders policy/funding stream and managerial input. Hardly a policy to ensure it's or London's pre eminence as a financial centre to the emerging markets.

Bill

Adrian Cox (prior comment;

"The interest paid on this would be phenomenal."

It is

"If this were true, the UK would be bankrupted - completely."

It is

Kevin Magner;

"or go back to coal mining/ship-building/textile production??"

Yes, and farming aswell. Banking does not generate any real wealth at all, all real wealth comes from only; farming, manufacturing, energy and raw materials. Service industries (including banking) are a luxury which depend on a strong industrial base, neglect the base and the whole house of cards comes crashing down.

James Vinall

Have a look at http://www.statistics.gov.uk/imf/

As of Dec 2008 the Office for National Statistics have UK gross external debt @ £5.97 trillion, central government debt @ £734.8 billion and most weird they have GDP @ £364.0 billion??? The IMF forecasts at http://www.econstats.com/weo/CGBR.htm have UK GDP for 2008 at £1.444 trillion (US$2.05) which is a bit more like it, but likely to be revised lower anyway.

External debt at £5.97 trillion is still 312% of GDP at £1.444 trillion.

If these are the real figures, Gordon Brown will be putting his final salary pension into a QOPS leaving for New Zealand very soon.

Bennet Cecil

As scary as it is for citizens of the UK to be indebted to the rest of the world it is scarier for those who bought that debt. Purchasers expect payment of interest and principal and could be disappointed. Purchasers of mortgage backed securities regret buying those assets now worth pennies on the dollar.

US, UK, Japan etc will print more paper currency causing stagflation. Governments will continue to smother the private sector. Savers and pensioners will lose purchasing power as inflation heats up. Taxes will be raised helping to soak up the debased currency.

Robert McDowell

This article is duplicitous scaremongering. Two thirds of UK external debt is liabilities backing UK banks' foreign assets (loans) and merely underlines that The City does a lot of international business, more than any other financial centre. removing this aspect plus obligations arising from financial markets transactions, which are also offset by balancing items, leaves UK foreign debt looking relatively normal compared to other countries other than that we have been running a trade deficit for years if not proportionately as great as some other countries, most notably USA or a much smaller country with the highest trade deficit relative to GDP, which is Greece. It is entirely silly to portray national debt, public sector debt or UK foreign debt as something regrettable. There are many positive aspects. It is also silly to only look at gross debt and not consider net debt. Spectator should be more grown up about financial affairs.

Stephen Johnson

I think that the figure are scare scaremongering too. This is a global crisis and international recession. Thatcher destroyed Britain's manufacturing Base in the 1980 and replaced it with banking.

Chimmychanger

This turned out to be scaremongering hyperbole then

georgie

3 years later we realise this article was 100% garbage.