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As you know, the US has been very slow off the mark in trying to grapple with its debt mountain. In contrast, in austerity Britain, we have already embarked on the painful journey out of the debt strait jacket, and in the process we have been drawing praises from economists.  Err, actually, that analysis seems to be wrong. It’s wrong because it only takes into account public debt. Factor in households, financial institutions and non-financial corporations and the public sector, and it appears that Britain is in the slow lane, and the US is actually doing rather well. The picture that emerges is not pretty.

McKinsay produced the report. I like Mckinsay reports. It was a document produced by the consultancies, see Farewell to cheap capital? The implications of long-term shifts in global investment and saving  that first alerted me to the danger that real interest rates may well rise quite rapidly later this decade. And one of their former partners, Eric Beinhocker, wrote the ‘Origin of Wealth’, which for me is just about the best economic book I have read in years. (‘Not as good as my new book, the ‘Blindfolded Masochist’, of course,’ he said, displaying a tiny amount of bias.)

Anyway this time McKinsay has looked at debt, see this link, Debt and deleveraging

And the US has come out pretty well.

The bar was set by Sweden and Finland in the 1990s. According to McKinsay, for these economies there were two distinct phases: “In the first, households, corporations, and financial institutions reduce debt significantly over several years, while economic growth is negative or minimal and government debt rises. In the second phase, growth rebounds and government debt is reduced gradually over many years.”

And right now, the US is doing pretty well. McKinsay says: “Debt in the financial sector relative to GDP has fallen back to levels last seen in 2000, before the credit bubble. US households have reduced their debt relative to disposable income by 15 percentage points, more than in any other country; at this rate, they could reach sustainable debt levels in two years or so.” In fact, it says the US is around one third of the way to the level of Swedish debt reduction of the 1990s.

But Mckinsay also took a look at both the UK and Spain, and its conclusion was not so good.

Here is the problem: if you combined public and private sector debt in the UK, since the end of 2008 it has risen from 487 per cent of GDP in 2008 to 507 per cent in 2011. To put this in context, back in 2000, the total debt was just 310 per cent of GDP.

Of the world’s ten largest developed economies – Japan, UK, Spain, France, Italy, South Korea, US, Germany, Australia and Canada –  only Japan had a higher level of total debt – 512 per cent – than the UK. Spain was third on the list with debt coming in at 363 per cent. In the case of the US and Germany, total debt to GDP was only marginally more than half the level seen in the UK.

Within the so called PIIGS, Ireland’s debt is 663 per cent of GDP, Portugal’s is marginally less than Spain’s at 356 per cent of GDP, but for Greece, debt is just 267 per cent of GDP.

In the UK, Spain, Portugal, Ireland, US, South Korea, US, Australia and Canada, household debt was over 80 per cent of GDP. Ireland had the highest level of household debt at 124 per cent, Australia was second with 105 per cent, and the UK third with 98 per cent.

The biggest problem facing the UK and Ireland is the scale of debt facing their financial institutions – 259 per cent of GDP for Ireland and 219 per cent for the UK. No other country was close.

Spain’s big challenge relates to the scale of debt within non-financial corporations – 134 per cent of GDP; only in Ireland is this greater, although the UK and France are not far behind.

McKinsay said: “UK household debt, in absolute terms, has increased slightly since 2008. Unlike in the United States, where defaults and foreclosures account for the majority of household debt reduction, UK banks have been active in granting forbearance to troubled borrowers, and this may have prevented or deferred many foreclosures. This may obscure the extent of the mortgage debt problem. The Bank of England estimates that up to 12 per cent of home loans are in a forbearance process. Another 2 per cent are delinquent. Overall, this may mean that the UK has a similar level of mortgages in some degree of difficulty as in the United States. Moreover, around two-thirds of UK mortgages have floating interest rates, which may create distress if interest rates rise—particularly since UK household debt service payments are already one-third higher than in the United States.”

And then comes the damming bit: “The United Kingdom therefore does not appear to be following the deleveraging path of Sweden. At the recent pace of debt reduction, we calculate that the ratio of UK household debt to disposable income would not return to its pre-bubble trend for up to a decade. Overall, the United Kingdom needs to steer a difficult course: reduce government deficits and encourage household debt reduction— without limiting GDP growth. The United Kingdom will need renewed investment by non-financial businesses to achieve this.”

But it seems that not even the US is off the hook. The snag for the US, says McKinsay, is that even when it had reduced debt to pre bubble levels, because US consumers won’t have access to as much equity in their homes, they will still be reluctant to increase spending to the rate seen back in the mid-noughties. So the story goes like this: boom occurred because consumers ran up debts. Now they have to repay those debts. But even when they have done so, the consumer boom won’t happen again as this time consumers will be reluctant to run up debts.

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