The hangover - America is recovering from the debt bust faster than European countries. Why?

ALMOST half a decade after the onset of the rich world’s credit bust, depressing evidence of its after-effects is visible in everything from feeble output figures to swollen jobless rolls. But for a truly grim picture, read a new report on deleveraging by the McKinsey Global Institute. It points out that in many rich countries the process of debt reduction hasn’t even started. America has begun to pare its debt burden, although the drop is small compared with the build-up in 2000-08 (see chart). But many European countries are more, not less, in hock than they were in 2008. There the hangover could last another decade or more.
These transatlantic differences stem from the trajectory of private debt. Government borrowing soared everywhere after 2008 as government deficits ballooned. But in America the swelling of the public balance-sheet has mirrored a shrinking of private ones. Every category of private debt—financial, corporate and household—has fallen as a share of GDP since 2008. The financial sector’s debt is now at its 2000 level. Corporate indebtedness, never very high, has shrunk. So, more importantly, has household debt. America’s ratio of household debt to income is down by 15 percentage points from its peak in 2008, after rising by over 30 percentage points in the eight preceding years. McKinsey reckons America’s households are between a third and halfway through their debt-reduction process. They think the household-debt hangover could end by mid-2013.
In Europe private debt has fallen much less and in some cases even risen. In Britain the financial sector’s debts have grown since 2008. In Spain corporate debt, far higher as a share of GDP than in most rich countries, has barely budged. But the biggest difference is among households. Even countries which saw the biggest surges in household debt during the bubble era, such as Britain and Spain, have scarcely seen a dent since 2008. McKinsey’s analysts reckon it will take British households up to a decade to work off their debt burdens.
It’s not that American households have been more frugal or disciplined. Household debt has fallen largely thanks to defaults, particularly on mortgages. America had a bigger housing bust; in some states non-recourse lending rules make default easier (people can walk away from home loans without fear of losing other assets). Some two-thirds of America’s $600 billion decline in household debt is due to defaults. With another $250 billion of mortgages in the process of foreclosure, further reduction is likely.
Europe’s post-bubble economies, in contrast, have seen smaller drops in house prices, lower mortgage costs thanks to variable interest-rate mortgages, and gentler treatment from banks. The Bank of England suggests that around 12% of British mortgages receive some kind of forbearance. Fewer people are turfed out of their homes, but the millstone of debt weighs for longer.
America’s private-sector debt reduction has also taken place against the backdrop of loose fiscal policy. Although state and local governments have been cutting back, the federal government has (at least until now) put off most fiscal tightening. In Europe, however, the sovereign-debt crisis means governments have been forced, or chosen, to undertake swingeing budget cuts long before the private sector’s deleveraging is done.

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Personal Debt set to grow £566bn under the Tories (OBR)



George Osborne, you are a glorified loan shark. You know that as long as national growth continues to grow that national debt is manageable. You know that as long as we have growth and that debt will shrink as a proportion of our GDP. But you don't care do you? You insist on stringent austerity measures. You insist on 20% VAT that adds 0.7% to inflation. You insist on wage restraint while inflation straddles 4.0-4.5%. You don't care do you?

The graph above clearly shows that while Osborne obsesses over the national deficit he willfully ignores the personal debt problem facing the UK. During his watch UK Households will accrue £566bn more debt in the next five years. That is an increase of 36% of our entire UK personal debt but in just 5 years.  What is the point in focusing so heavily on National Debt if personal debt is so out of control. Personal debt is growing much faster than GDP and is much much much less sustainable than national debt. Why? Because while the state can rely on rising GDP, we as individuals will have less total assets as a percentage of national income. (see below)

This unsustainable personal debt bubble is a shambles waiting to explode. Personal debt is growing while ability to pay our debts is shrinking.  The solution is of kindergarten difficulty to grasp.  Decent wages, job growth, government spending and affordable houses can reverse this freaking nightmare and it is about time someone woke that shyster in No. 11 Downing Street up to this fact.

Source: OBR, LINK

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Public and private debt

Miliband must show rather than tell people what he believes

Politicians like dressing up: it is one of the many things they have in common with children. Prime ministers wear flak jackets on visits to military bases to exude strength. For chancellors, the costume of choice is Bob the Builder. Nothing says "getting the job done" like a hard hat and high-visibility jacket. In the days before last November's autumn statement on the economy, George Osborne - usually sparing in his TV appearances - kept showing up on construction sites looking as if he had leapt from the cabin of a JCB to share some thoughts on infrastructure investment.
Nick Clegg also likes to get his overalls on for the camera, admiring the craftsmanship of industrious youths freshly redeemed from the dole by a government-funded apprenticeship.
The logic is simple. Most people, most of the time, pay no attention to politics. When they do, they forget what is said. Promises are presumed worthless. Voters do not want to hear boastful claims about what politicians think they have achieved. The attitude, as one Downing Street strategist puts it, is "show me, don't tell me".
That adage, borrowed from the world of marketing, is well understood by David Cameron, whose only job outside politics was in public relations. His campaign to "decontaminate" the Tory brand in opposition generated the most famous fancy-dress outing in recent political history: the Conservative leader as polar explorer, fretting about climate change with sympathetic huskies.
Toxic stew
Now Cameron probably wishes he could dress up as a doctor and be filmed performing life-saving surgery. He urgently needs to look like someone who cares about the NHS. Before the election, he promised to protect the health service from painful budget squeezes and disruptive bureaucratic reconfigurations. He is inflicting both, thus reinforcing a lingering suspicion that the Conservative Party's instinct is to vandalise a treasured national institution.
This is an extraordinary lapse for a Prime Minister who is respected even by his enemies as a deft manager of public opinion. The failure is twofold. First, Cameron did not pay adequate attention to the toxic stew that Andrew Lansley was cooking up at the Department of Health. Then, as a rancid stench filled the air, the Prime Minister, reluctant to perform a U-turn and confident in his powers of persuasion, thought he could sell it to the public anyway. He can't.
The painful truth about voters' trust in Cameron where the NHS is concerned is that it rested not so much on what the Conservative leader had said but on the way his message was made personal by the experience of caring for a severely disabled son and by the agony of losing him.

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May statistics

...on debt in the UK

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Hoesehold debt

Some studies suggest that many economies’ total gross debt levels are excessive and need to decline.1 For example, two influential reports by McKinsey (2010, 2012) emphasize that to “clear the way” for economic growth, advanced economies need to reverse the recent surge in total gross debt. Yet others suggest that the recent rise in debt is not necessarily a reason for concern. For example, Fatás (2012) argues that the McKinsey reports’ focus on gross debt is “very misleading,” since what matters for countries is net wealth and not gross debt.2 A high level of private sector debt as a share of the economy is also often interpreted as a sign of financial development, which in turn is beneficial for long-term growth (see, for example, Rajan and Zingales, 1998). Similarly, Krugman (2011) notes that because gross debt is “(mostly) money we owe to ourselves,” it is not immediately obvious why it should matter.


However, Krugman also cautions that gross debt can become a problem. Overall, there is no accepted wisdom about whether and how gross debt may restrain economic activity.


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Debt - how bad is Britain's problem?

Official figures today revealed that Britain's debts have hit £1trillion for the first time. We look at how debt is measured and how UK borrowing compares with other countries.
Despite the austerity cuts, Britain's state debts are still growing at a steady pace. The Government is still spending significantly more than it is earning.
But at least the over-spend is improving.
At the start of the sovereign debt crisis, the UK was one of the worst offenders for failing to balance the books. It had one of the worst budget deficit's in the EU in the last fiscal year (to April 2010), at more than 10 per cent of GDP. It was beaten only by Ireland (32.4 per cent) and Greece (10.5 per cent). Basically that means the British government spent more than it earned - to the tune of £146billion.
Enlarge
IOU: The UK now owes more than £1trillion, but the difference of spending above tax is falling to give Chancellor George Osborne a fighting chance of hitting deficit reduction targets.
The last time a surplus was recorded - by the Government spending less than its income - was in the 2001/02 financial year when it made a meagre repayment of £243million. But that period of falling debt is a distant memory.
Labour's big spending saw steady rises in borrowing from 2002 onwards, but it was the financial crisis which created most of the debt. A colossal slide in the economy - it contracted more than 6 per cent between 2008 and 2009 - made a huge dent in tax receipts. And there was also a hit from some initial tax cuts, such as the reduction back then of VAT from 17.5 per cent to 15 per cent (it has since been raised to 20 per cent) .
While the overspend is now being reduced, the UK's debts continue to grow.
Britain owed £1003.9bn in December, a leap from £883bn a year earlier, according to the ONS [read the full release] and nearly double the £534.6billion figure at the end of 2007. The government needs to borrow more than £127bn in the current year, lower than the £142.7bn the previous year.


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UK Debt problem

The facts and figures 

All are here....

Average debt

A reduction of over £2,000 in the UK average debt is certainly a positive step, indicating that more people are getting in control of their finances. However, the figures do not include mortgage commitments, one of the biggest contributors to debt.

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