Thursday, August 23, 2007
Does personal debt exceed GDP?
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

Grant Thornton has generated some headlines with its calculation that household debt, 1,345 billion, exceeds GDP, 1,330 billion. Is it true? The debt figure, for the end of June, is correct, and based on Bank of England data. GDP in the first quarter was 334.5 billion, equivalent to an annual rate of 1,338 billion. But it will have increased between the first and second quarters - last year it did so by 1.3%.

Applying that to this year's figures gives a GDP number, at an annual rate, of 1,356 billion for the second quarter. So is debt greater than GDP? My conclusion is not quite. It is, in any case, only a bit of statistical fun, comparing a stock - debt - with a flow, GDP.

Comments

As you've said many times before when considering the level of debt the interest rate also has to be taken into account. American monetary policy seems to be driven by this relationship at the moment. Mortgage defaults and bad debts. No problem, just cut interest rates. Problem solved. Who gives a damm about inflation and moral hazard.

Posted by: Nigel Watson at August 23, 2007 05:20 PM

Hi David,

Yes I agree, just a bit of statistical fun.
What do you think GDP growth will be like for qtr 3 & 4 this year?
Judging at the invoked dead cat bounce by the FED ECB and BOE by pumping liquidity I dare say the pennies and GDP will start dropping sooner rather than later. The good news I hear from radio 4 today is that brittain is really better of with all those non domicilled very wealthy non taxpaying well.......longterm visitors!

Joking aside....1.338 trillion pounds in debt! what was the joke again...if you owe the bank 10.000 you have a problem...owe the bank 1,000.000 and the bank has a problem,....put like that the banks may face something of a catastrophy no doubt slowly unfolding....we wouldnt want them to panic now would we!


Best wishes
Arik Schickendantz

Posted by: arik schickendantz at August 24, 2007 12:45 AM

No chance the MPC will just cut interest rates to the level required by debtors to service their debts. The financial sector and its interests will always come before mundane matters such as inflation

Posted by: Nigel Watson at August 24, 2007 08:34 AM

I agree there's no chance the Bank will do that, because it targets inflation, as it has done for the past 10 years. That's why inflation on the RPIX measure was almost exactly on target for the Bank's first 10 years of independence, in fact slightly below it on average. CPI inflation has undershot 2% significantly, on average, over the past 10 years.

Posted by: David Smith at August 24, 2007 11:03 AM

PS We now have the GDP figure for the second quarter - 1,374 billion at an annual rate; even higher than my calculation.

Posted by: David Smith at August 24, 2007 11:23 AM

Agreed, no way it will cut rates. Though inflation has slowed in the latest report, items such as food, oil, school fees etc are likely to go up in the next quarter or two.

To be honest I was a little surprised by the Fed's quick rate cut. What happened to "we are more concerned about inflation". Reaching for a cut every time the markets may be a trouble is not a prudent long term strategy.

Posted by: JohnN at August 24, 2007 02:31 PM

Sometimes I feel like a bit of a broken record but I'm still concerned about China's inflationary potential.

There is growing evidence of a labour bottleneck pushing up wages especially where skilled and managerial workers are concerned - though we can all argue about whether the huge unskilled rural workforce will continue to drive down factory gate prices as they flood into the cities looking for work.

As for commodities the China effect does appear to be strongly inflationary. The Chinese middle class is developing a taste for dairy products Asia Pacific dairy producers have been rubbing their hands with glee), wheat and other foodstuffs. I don't need to recount tales of Chinese and Vietnamese businessmen buying $500 bottles of French wine so that their guests have the best only to add ice or coke to disguise the taste! And no these aren't urban legends - it does happen.

Whence wheat and dairy so too oil; Maybe not today. Maybe not tomorrow, but soon and for the rest of your life (to borrow a phrase).

So perhaps we should fear a rising yuan. Not only will it push up the price of things we import from China but it'll give the Chinese middle classes considerably greater buying power and increase demand and thus prices for a lot of the things that we produce (and can't necessarily produce much more of to meet rising demand).


Posted by: Jonathan at August 26, 2007 03:06 AM

These statistics are perfect but don't you think the water is almost above us...Seems as if doomsday is arriving .What is the solution? There should be some way out. Day in and out we are getting iron and pressed with debts or financial fiasco everywhere...Not only UK the entire world seems to be in doldrums....The problems-we can all say what they are bu the solution is tough....What is that? I see people around me in a redundancy or loosing their homes.It is sad....I hear hues and cry of people who are just surviving.without a job and even meager food...this is killing hearts and souls....We need to raise our voices towards those who are holding the reigns and those who follow only fancies of life....I am a financial writer and offer free advice on debts.In case i can help. i will be privileged..

Posted by: Debbie Brown at August 19, 2009 12:16 PM
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