Home > Economics > Is it the debt, Ctd

Is it the debt, Ctd

Compare the following two charts, again from the Debt and Deleveraging report by the McKinsey Global Institute:

And I remind you again of UK and US Nominal GDP:

I look at these charts and think: “Sorry, which economy is supposed to be experiencing stagflation, and which one is supposed to be in recovery?”

I’m not saying that deleveraging doesn’t matter, I’m saying that it isn’t obvious to me how it is supposed to explain the discrepancy.

Categories: Economics
  1. interfluidity
    April 28, 2012 at 8:03 pm


    We have to distinguish between past deleveraging — “having delevered” — and delevering now.

    And we should keep in mind Steve Keen’s point that it is “credit acceleration”, the rate of change in the rate at which debt is taken, that feeds into the GDP growth rate.

    The US went through a period where it shifted from increasing leverage to decreasing leverage, and that was painful, we had a big recession. Per Keen, once we reached a constant rate of debt retirement, it ceased to be a drag on growth. The subtraction from GDP was the same from one quarter to the next, and so was invisible in a computation of the growth rate [(new_gdp – old_gdp)/old_gdp]. We delevered for a while, neither helping nor hurting GDP growth. Now in the US, deleveraging is slowing or even reversing; we are relevering a bit. That shift from negative debt growth to flat or positive debtgrowth is a tailwind for the US economy. We get a bit of a recovery, for a while.

    In the UK, leverage is still very high, at the margin people are struggling harder to repay their debts, credit is still decelerating. Unless debt to income falls or people’s risk tolerance rises or the government offsets private sector deleveraging with borrowing of its own (or creditors delever by spending or the government taxes creditors and spends the proceeds), the impulse to repay debt is a headwind to the British economy.

    That real wages have fallen in the UK makes this effect especially sharp. GDP is an aggregate number, but within consumer democracies like the US and UK, a lot of household debt is distributed among people who sell labor for a living. If these people have seen real wages fall _faster_ than the burden of debt (wages were not entirely sticky!), but they have not yet succeeded to delever, they want to bad, and at the margin their nerves should be a drag on the economy.

    • April 28, 2012 at 8:21 pm


      I need to think more about this but you are starting to win me over. Where should I go to actually get the best overview of Keen’s thinking? I’ve only seen his stuff discussed second-hand, and I would be the first to admit my understanding of debt is not terrific.

      The thing most unclear in my mind is whether deleveraging is *causing* declining real wages despite (slightly) increasing nominal wages, or whether there has been some real productivity shock that is exacerbating the ongoing debt dynamics. I understand the latter, still trying to wrap my head around the idea of the former. If I can get that straight in my mind, the UK would (as you said) point one in the direction of a more Post-Keynesian way of thinking about demand.

  2. Bill
    April 28, 2012 at 11:32 pm

    In looking at the graph, it appears that English financial institutions had a much bigger share of total borrowing than in the United States. Financial institution debt increased by 87% in England, and 16% in the US. Wow, England really took a risk with so much private financial institution debt as a percent of total debt. That may not be a risk, if you regulate well, but if you don’t…. No wonder the government has to reduce spending….to accomodate the risks posed by private financial debt on the total economy.

    Next time someone says that we in the US need to regulate less or the financial sector will move to England, maybe we should say: Good.

    It might sink them.

  3. SKO
    April 29, 2012 at 2:06 am

    If you want to get an idea of where Keen is coming from, his INET paper is a good place to start. It’s important to keep in mind that Keen tries to use a differential equations approach instead of comparative statics. His monetary theorizing can be found here. He can be a bit full of himself, but I think his ideas have plenty of merit.

  4. interfluidity
    April 29, 2012 at 5:13 am


    The INET paper SKO recommends is good. For an even more concise intro, try his blog post Dude, where’s my recovery? (despite the cheeky title).

    I want to emphasize that, although I think the balance-sheet focuses post-Keynesian story captures a lot, I don’t think any one account captures everything. For example, in talking about measures like debt/GDP and suggesting that as a measure for the burden of debt elides distribution, and I think that distribution is very important. We have to care how we get debt/GDP down: if the denominator grows, are the people with the debt sharing in the income? Every time one tells a story, one risks suggesting that all the other stories are mistaken. But lots of stories are simultaneously true, even logically contradictory stories.

    A commenter at interfluidity points to a, well, debunking of UK inflation by Paul Krugman. I’m not sure what to think about this. (If we mentally deduct taxes from inflation, is it double counting somehow to complain about “austerity” measured via a budget stance that includes those taxes?) Regardless, it does seem worth thinking about.

  5. April 30, 2012 at 11:06 am


    1. Given that the tax increase was a VAT increase, deducting that from income/inflation is simply a question of looking at GDP at factor cost rather than at market prices. In fact, I believe that to the extent nominal income/product needs to be stabilised, it should be at factor cost rather than market prices. We don’t want the central bank tightening in face of a VAT increase or loosening in face of increases government transfers, do we? A comparison of this measure (nominal income at factor cost) for the UK/US may be more interesting.

    2. You bring up the flow vs. stock of debt story to drive home the post Keynesian point on US vs UK recoveries, but does this in some way augment the case for a modified Austrian type story of ‘bear the pain earlier to be better in the medium term’, the pain here obviously being deleveraging.

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