Debt doesn't matter anymore!
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March 11, 2013 at 11:53 pm #7099gurusidParticipant
Interesting article that explores why UK debt is not that bad and that its not ‘our’ fault for running up huge debts, in part because households are indebted but asset rich:
The truth about UK debt
Stephanie Flanders Economics editor BBC Business News.
Households’ total wealth, including housing, was worth eight-times annual disposable income at the end of 2010. That’s above the 25-year average, despite everything that happened in 2008-10.
It goes on to say how debt might not be a problem at all, but then she is talking about Ben Broadbent, a former Goldman Sachs economist now member of the Monetary Policy Committee:
First, it leaves out the other side of the balance sheet entirely. The suggestion is that British households and firms are massively in hock to the rest of the world. They’re not.
All told, foreign investments in the UK are worth more than UK investments overseas. But our net overseas debt, as a nation, is not enormously greater than other countries’. In any event, it is no larger now than it was in the mid-1990s.
The second problem with the usual story is that it seems to imply that all increases in debt are equally problematic – and equally likely to cause a crisis. He says they’re not.
It’s true that losses in the UK financial system played a big part in the UK’s crisis.
But Broadbent (a former economist for Goldman Sachs, we might remember) reckons only around a quarter of those losses were on UK investments.
Here’s the most striking statistic: UK-owned banks have lost 15 times more on foreign mortgages, since the crisis started, than on mortgages in the UK.
Third, and related, the morality tale suggests that all debt is equally likely to retard the recovery.
There is some, fairly weak, evidence that countries with credit booms are more likely to have crises. But, allowing for all the other factors that typically affect growth, a study by the Bank of International Settlements finds no evidence that the level of household debt has any growth effect whatsoever.
The same study finds that government and corporate sector debt, above a certain threshold, may hurt growth. But having a lot of indebted households doesn’t seem to make any difference at all.
Not everyone will buy these arguments.
Of course they won’t and they didn’t – the comments section is extremely erudite and telling, not least the potential for asset deflation. What it does point towards is that the economists haven’t got a clue as to what is going on; but then as Steve Keen has pointed out, they’re models just don’t work and never have done.
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