The Unending British Deleveraging Cycle

Current estimates of what is known in the UK as the M4 money supply — cash outside banks, plus private-sector retail bank and building society deposits, plus private-sector wholesale bank and building society deposits and certificates of deposit — show a serious contrast between Britain and the United States:

UKvsUSM4

Could this divergence explain the strong divergence between UK and US real GDP?

RealGDP

I doubt it. It’s a chicken and egg question — does a prolonged deleveraging cycle explain real GDP weakness, or does real GDP weakness explain the prolonged deleveraging cycle? It may in fact be a self-reinforcing spiral effect where the first leads to the second and the second leads to more of the first, and so on. But there are a lot of other factors all of which may be contributing to the worsening situation — protracted weakness in business confidence, tax hikes, spending cuts, weak growth in the Eurozone, elevated youth unemployment, and uncertainty. All these factors are probably contributing to some degree to the weak GDP growth, and the prolonged deleveraging, and thus Britain’s depressionary economic condition.

But we can say that the difference cannot be that Britain’s monetary policy has not been aggressive enough. Britain’s monetary policy has been far more aggressive than that of the United States:

CB assets

How can we break the cycle? Well, as the above graph shows, more quantitative easing is unlikely to have a beneficial effect. The transmission mechanism is broken. What good is new money if it’s just sitting unused on bank balance sheets? What new productive or useful output can be summoned simply by stuffing the banks full of money if they won’t lend it?

The sad truth is that a huge part of the financial sector has failed. Its inefficiencies and fragilities were exposed in 2008, as a default cascade washed it into a liquidity crisis. And yet we have bailed it out, stuffed it full of money in the hope that this will bring us a new prosperity, in the delusional hope that by repeating the mistakes of the past, we can have a prosperous future.

The sad truth is that the broken, sclerotic parts of the financial sector must fail or be dismantled before the banks will start lending again, start putting monies into the hands of people who can create, innovate and produce our way to growth.

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20 thoughts on “The Unending British Deleveraging Cycle

  1. “But we can say that the difference cannot be that Britain’s monetary policy has not been aggressive enough. Britain’s monetary policy has been far more aggressive than that of the United States:”

    But our credit binge was significantly more aggressive as well.
    US Subprime was in many cases less risky than standard UK lending.

    I still stand by my 07 claim that the UK would need to monetise several times GDP, not several percent of GDP.

  2. Pingback: The Unending British Deleveraging Cycle | Fifth Estate

  3. Export of horse meat burgers to Mongolia? At least the Mongolians will appreciate the protein, instead of it winding up in landfill.

    The UK should have allowed the processing of all those redundant Romanian horses.

    What a wasted opportunity. Bureaucrats! Those poor horses. What a waste of life.

  4. As a matter of speculation, I have always assumed that REAL [(actual) inflation adjusted, debt backed-out] per capita GDP peaked sometime in the 60′s [1960's U.S, 1860's GB]. :)

      • “Real” GDP is the actual goods and services produced in the economy minus debt taken on, similar to calculating net worth.

        What does x units of GDP mean if you have to borrow 3x to get there? It would be like counting the bank loan you just received as income.

      • Gold fluctuates in price just like any other commodity. I don’t think gold is a good measure of inflation; quite frankly, it’s a horrible measure of inflation. I think CPI is a pretty bad measure, but using gold is even worse in my eyes. This is because the price of gold depends on the expectations of the future. The price of gold is moved by shifts in sentiment just like anything else; it’s real value varies over time and different time periods.

        Yes, gold has historically been used as money. However, so have things like salt, tobacco, and many other things. All money is debt; all money came from debt. There is nothing that I find great about gold. I do agree that it has historically been an alternative form of cash, but I find gold, in and of itself, useless.

        If you’re worried about inflation, buy productive assets that can provide a sustainable cash flow. Things like farmland, oil wells, apartment buildings, etc. Honestly, if you’re worried about inflation, I think real estate is an even better hedge than gold(primarily because real estate is actually productive); however, real estate prices have fallen over the past 5 years while gold prices have shot up.

        • I don’t think food commodities are heavily manipulated. They spoil if stored in bunkers to manipulate the price.

          If the rudest form of economy is the production of food, perhaps we should measure GDP in a weighted basket of grains. The most common staple diet, and the one which allows disposable income to expand if the masses have cheaper food costs.

          I always firmly believe that fluctuations in world wide economy is related agricultural production and the natural rhythms of nature cause the ripple effect of boom bust economies. As food becomes cheaper, demand for other goods rises, investment chases consumer demand etc.

        • “I think there could be something to the idea of measuring economic output in joules…”

          Interesting. The only problem is that a fair amount of output is worthless.

          What’s really interesting is that, who cares anyway? Measuring the overall economy means nothing to individuals, especially these days.

          This would be like saying that the health factor of Great Britain is 3.75 out of 5.0. What the hell would that mean to John Aziz?

          Economics is about the relationship between a single producer and a single consumer. Complicate this relationship and all of a sudden the alchemists come out of woodwork to dazzle us with their clever nostrums [theories, formulas, money, etc.].

        • This would be like saying that the health factor of Great Britain is 3.75 out of 5.0. What the hell would that mean to John Aziz?

          Economics is about the relationship between a single producer and a single consumer. Complicate this relationship and all of a sudden the alchemists come out of woodwork to dazzle us with their clever nostrums [theories, formulas, money, etc.].

          Good points.

  5. Pingback: The Unending British Deleveraging Cycle | Liberty Hall

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