Like many countries, Britain is following austerity policies at the moment, paring back government services to try and get debt under control. Every new budget or economic speech is analysed by City commentators. “Have they done enough?” they ask. “How will the markets respond?”
It’s a little hypocritical of the City to wag a finger at government spending. Stepping back and surveying Britain’s debts in total, corporate debt dwarfs the government’s, and almost all of that is from the financial sector:
This eye-opening graph appeared in a Morgan Stanley briefing (pdf) at the end of last year. It puts Britain at the top of the league of most indebted countries, and the City’s contribution is so enormous that we’d be still be at the top if you removed government and household debt from the equation. (It’s worth mentioning that this is fiendishly complex and there is more than one way to add it all up. The Treasury’s estimates of corporate debt are a little lower.)
Economist Steve Keen shows the change in Britain’s debts on his website, and this is his graph on the right. Government debt, which is the smallest of the four debt categories, only rises dramatically as the financial crisis hits. That’s the bailout money, the stimulus spending, the falling tax revenues and increased spending on benefits as people lose their jobs. It’s not the cause of the crisis, as we’re repeatedly told for p0litical reasons.
“Public debt is not the problem,” says Keen, “and attempting to reduce public debt now is the wrong policy”. The corporate sector is desperately trying to get those debts under control – deleveraging and recapitalising. If government attempts to deleverage itself at the same time as business, nobody’s investing. “Rather than obsessing about public debt now, politicians and economists should have been concerned about rising private debt in the previous two decades.”
(This, incidentally, is similar to what the Labour party have been saying. They suggest that we should reduce the deficit over a longer time frame so that it doesn’t coincide with business deleveraging. But then they also presided over that ballooning corporate debt in the first place, so they don’t deserve any credit for the suggestion.)
The lobbyists of the financial sector are doing a fine job of keeping the attention on government debt while they scrabble to get their houses in order. But time is short. Globally, Standard and Poor’s estimates that $2 trillion of corporate debt will mature in 2012. “We are not sure that there is enough demand to meet the substantial debt refinancing needs” it warns.
What does this mean? It means we’re still very vulnerable, whatever the politicians may be saying about recovery in 2012. Banks cannot re-capitalise and lend at the same time, so the financial sector won’t be able to do their basic job of funding investment or job creation. If the government can’t do it either, then we might need to temper our expectations a little about growth in 2012. It also means that we might not have seen the last of the bailouts.