Private Debt

A private debt story: Republic of Turkey (un-)hires McKinsey

Turkey and Argentina are non-identical twins; both countries suffered from almost simultaneous financial crises both in 2001 and 2018. Both are currently suffering from currency crises with potential spill-over to the rest of the emerging markets, and there are those who argue that these twins may have triggered a crisis in the emerging markets in 2018.

But this time Turkey, resisting too many internal and external calls for asking for help from the IMF, hired McKinsey & Company instead.

Turkey is business-as-usual for the globalised financial system

After the BRICs came the MINTs – Mexico, Indonesia, Nigeria and Turkey.

In a series of January 2014 BBC programmes, Jim O’Neill – then the Goldman Sachs economist who had coined the term BRICs – celebrated the new acronym. On a blog under the title ‘The Mint countries: Next economic giants?’ he raved about the potential of his new discoveries:

I returned from my travels thinking it won't be so difficult for Nigeria and Turkey to positively surprise people, as many put far too much weight on the negative issues that are well-known – crime and corruption in Nigeria, for example, or heavy-handed government in Turkey…

Protecting us from the worst? The Bank of England on private debt and financial ‘stability’

For policymakers, the importance of private debt was the key take home from the financial crisis. Private debt is also a central theme in the Bank of England’s latest commentary around financial stability, with particular emphasis on the position in China and the US.

But there is a sense of this being only a partial account, with only very limited attention to the more generalised inflation of debt across a very large number of countries.

The Bank of England and the growing credit bubble - a piecemeal response to a systemic problem

In June, the Bank of England dictated to the banks in its jurisdiction that they must hold more capital - £11.4 billion more – in reserve in preparation for the anticipated bursting of the growing consumer credit bubble that is undoubtedly forming. In light of this, this post seeks to answer a question posed in the British media recently – can the Bank get Britain to kick its cheap credit habit? – by discussing the societal issues that are affecting the expansion of the bubble.

The gaping contradictions in EU bank bail-out law and policy

The EU’s hugely complex banking resolution framework is generally supposed to have one key goal – to ensure that failing banks are ‘resolved’ without recourse to public bail-outs, thereby breaking the link between banks and sovereigns…  The reality, we have seen today, is quite different – and, it seems, legal. 

The EU can just about argue that technically, the rules have not been broken - but overall, the appearance is of a policy in logical disarray once again.

Noflation, disinflation and “good deflation”

Jittery stock markets are now skeptical of the Chancellor’s earlier complacency as UK prices continued to fall at the end of 2015. This is worrying for firms, SMEs and households, as both debt and debt servicing costs rise in real terms as general falls in the prices of goods and services occur, and as average real wages remain almost 8% below pre-crisis level.

The fall in prices (actual and in trajectory) must be considered in the context of Britain’s excessive private household debt, as well as recent movements in rates by US monetary authorities.

It is wrong to blame China for the global economy’s woes

The year 2015 began with the Chancellor, George Osborne ‘welcoming’ the news that inflation had fallen in December 2014 to 0.5% - more than 1% below the official target. The FT declared that “this is almost certainly 'good deflation'". 

In his subsequent letter to the Chancellor the governor of the Bank of England attributed the fall to “unusually low contributions from movements in energy, food and other goods prices.”  In other words he described the symptoms - falling prices - and neglected to analyse or explain the cause of such falls. 

In our view the cause of deflationary pressures lies with the ongoing Global Financial Crisis (GFC), which has not as yet been resolved. 

2015: Private Debt and the UK Housing Market

In this contribution to "Cracks Begin to show: a Review of the UK Economy in 2015", published by Economists for Rational Economic Policies, Jo Michell examines the impact of private debt on the government’s economic policy. The OBR predicts that the household sector will run a deficit of around 2% per year for the next five years. Most new mortgage lending since 2008 has been to buy-to-let landlords, who now face the prospect of rising interest rates and adverse tax changes.  Many other borrowers are badly exposed: a sixth of mortgage debt is held by those who have less than £200 a month left after spending on essentials.  

Underlying all this is an unprecedented housing crisis. Instead of tackling this crisis, Osborne is using the housing market as a casino in the hope of keeping economic growth on track during 5 more years of austerity.

Scroogeonomics & Tiny Tim’s Ten Point Plan for a Better British Economy

Seasonal memories of Charles Dickens’ London lifted from A Christmas Carol somehow let us feel better about our selves. We look back on less enlightened times and see how far we’ve come. We know the redemptive moral journey to be taken by Ebeneezer Scrooge and how it will resolve itself. The story scares with tragic threat but is ultimately safe, because there’s nothing in modern Britain seriously to compare, is there?

Scrooge was, after all, just a zero hours contract employer who paid less than a living wage, peddled consumer debt, and believed that benefits should be cut regardless of the impact on a person’s life chances (some were better off dead he said).

In modern Britain The High Pay Centre says we are on course for Victorian levels of inequality while school teachers report the return of Victorian conditions in some parts of Britain.

Vicious loop: rising private debt merging with falling wages, productivity & inflation

The Bank of England’s Andy Haldane is a fine economist. He occupies an ideology-free zone. This is highly unusual in central bank circles. He has just made a particularly skilful, and nuanced speech. Many gushed over it. Gillian Tett of the Financial Times suggested that it was good enough to qualify Haldane as a journalist.

Secular stagnation is the outcome of deliberate policy; it can (still) be reversed

Martin Wolf in the FT  today strikes a  different direction from those secular stagnaters shepherded by Larry Summers towards the cliff-edge of endless doom.  (Larry Summers devised and popularised the term, “secular stagnation”. He has a lot to answer for. His misjudgements, poor advice to the Obama administration, and flawed analysis have been catastrophic for the global economy. Given his record, he should be silenced or ignored, and barred from shepherding anyone, including economists and other naifs, in any direction.  For more on his grave weaknesses see this Forbes article.

Britain in 2013: an Alice in Wongaland economy

Ann was on the BBC’s Today programme where she was asked to comment on today’s retail sales numbers – due out this morning. We thought we would share with our readers some of the data that underpins the “Alice in Wongaland” theory of the economy. But first that quote she used from the Chancellor about the need for “A New Economic Model” delivered before the election, on the 24th February, 2010. We chose it because it chimes with our analysis that it is the overhang of private debt that continually chokes off the ‘green shoots’ the ‘confidence fairy’ and ‘recovery’