The world economy is in an unstable state. Here are some data
and thoughts to add to your own and hopefully cast a little light on what is happening to our global financial system. I’ve concentrated on the
world’s biggest economies to try to keep things relatively simple
EUROPE
Debt levels of the 4 largest economies in Europe
as % of GDP (2009 figures) + GDP growth rate
Country
|
Total debt
|
Financial
Institutions
|
Houehold
debt
|
Commercial
debt
|
Government
debt
|
GDP growth rate 2010
% p.a.
|
UK
|
466
|
194
|
103
|
110
|
59
|
1.25
|
France
|
323
|
84
|
44
|
114
|
80
|
1.50
|
Italy
|
315
|
82
|
41
|
41
|
109
|
1.3
|
Germany
|
285
|
80
|
64
|
69
|
73
|
3.5
|
So the UK is overall much more indebted than the next three largest
European economies. Its household and financial institutions have collective
debt of 3x the GDP, much more even than Italy or France, and its GDP growth in
2010 was the lowest of the big four . It is not surprising that the UK is
unable to integrate with them. The figures will have changed since 2009 and
2010, but not substantially.
Why did it contribute so much to the EU funds in recent years? Possibly to give it
bargaining power to prevent European-led regulation of its financial
services. I have no evidence for this
but I can’t think of anything else. If this is true it would have been good for
the city economy and, of course, the tax revenue would have been good for the
UK citizen in the short term. Nevertheless deregulation plus bad behaviour by
powerful individuals in the city, together with reckless borrowing by house buyers, has put the UK in a dire situation.
Why is the UK not in more immediate trouble than the
Eurozone? I can only conclude (please correct me if you have reasons to suppose
I’m wrong) that the answer lies in the willingness of the Bank of England to
conjure fictional money into its bank account (quantitative easing), something
the German-led European central banks have been unwilling to do. This virtual
money is then used to help swell the apparent assets of the financial
institutions. This is done by buying various bonds with the fictional money to force up the price of
the bonds.Since the banks hold huge reserves of such bonds
the value of these reserves is artificially increased, which allows the banks
to lend more to businesses and house buyers as well as reduce the chance of the
banks folding. Hardly a sound long term solution but what other option is available?
Why is GDP growth important? Because it is a measure of the
economic activity which in turn is a measure of the tax revenue generated. The
more tax that is collected the less strain there is on government finances.
USA, JAPAN and CHINA
Debt levels as %
of GDP (2009 figures) + GDP growth rate
Country
|
Total debt
|
Financial
Institutions debt
|
Household
debt
|
Commercial
debt
|
Government
debt
|
GDP growth rate 2010
% p.a.
|
USA
|
296
|
53
|
97
|
79
|
67
|
3.0
|
Japan
|
471
|
110
|
69
|
95
|
197
|
4.0
|
China
|
159
|
18
|
12
|
96
|
32
|
10.4
|
Japan’s total debt (4.71 x GDP) is even worse than the UK’s overall
debt (4.66 x GDP) largely due to government spending through a prolonged period
of stagnation from which it is only just emerging and a financial sector debt
second only to the UK’s. China is the only large economy with a healthy balance
and a high growth rate. Most of its debt is where it should be – money lent to
a rapidly growing commercial sector. Its financial services account for only
18% of GDP. What the above data doesn’t show is that there is a strong property
bubble in China. If the price of property suddeny dropped all the debt levels
in China would go up, as would some of the debt in other countries with
investment in Chinese property. Growing social unrest in China may make it difficult for its government to rescue reckless spenders and gamblers in the west with the money of Chinese savers.
None of these countries look as though they could lead the
others out of debt.
Russia, Brazil and India are all relatively healthy
financially and each is comparable in economic size to any of the major
European economies listed, and collectively they have a GDP about equal to
Japan’s. But even these have some of their own debt problems and even if they could
pool resources this is unlikely to solve the overall problem..
Looking at various data on the web I can’t find one nation
that is in overall credit. To whom or to what is all this money owed? The answer seems
to be the tax payers of the future. As soon as a government builds up its
financial reserves it is under political pressure to spend them on public
services or, more recently, rescuing the financial institutions. In practice, the people of the next
generation will not be able or willing to pay off the debt in real money and
their governments will no doubt be forced to pay it off in the way the UK and
US governments have already started to: by using unearned, virtual money
(quantitative easing is being used now but there are other possibilities). This
causes inflation to outstrip interest rates. One can only hope this will be
done in a gradual and controlled way, without causing the social chaos,
Nitzchian fascism and, indirectly, totalitarian communism which blighted the first half of
the 20th century.
Or maybe I’ve overlooked something and you can see an
alternative route to secular salvation. If so, please let me know and I will
pass it on to the readers!
See also Reforming the world economy
See also the interactive chart http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-8
John
Author, 2077 AD
cosmik.jo@gmail.com
