No Way Out? The British Economy Is in Very Deep Trouble

It’s not looking too good for the UK economy, according to Tullett Prebon Strategy Notes, 26th May 2011. They point to the huge debt burden which comes from a monetary system where all money is created as debt by commercial banks, and show how our economy is entirely dependent on borrowing.

Now that the vast majority of people are heavily indebted, there is no-one to keep up the borrowing.

The study states, that:

• The debate over deficits and growth ignores the pivotal role played by private borrowing in driving economic output during the ‘Brown bubble’.

• Over the past decade, the British economy has been critically dependent on private borrowing and public spending. Now that these drivers have disappeared – private borrowing has evaporated, and the era of massive public spending expansion is over – the outlook for growth is exceptionally bleak.

• Sectors which depend upon either private borrowing or public spending now account for at least 58% of economic output. These sectors are now set to contract rather than expand, which renders aggregate economic growth implausible. And, without growth, there may be no way of avoiding a debt disaster.

The report makes some powerful observations on the debate about deficit reduction and the back-and-forth between the main political parties:

Government and opposition alike base their thinking on the assumption that, by one means or another, growth can be restored. We see no reason whatsoever to assume this. To focus on the deficit is to ignore the fact that the British economy had become debt dependant long before the financial crisis.

Together, private and public borrowing has averaged 11.2% of GDP since 2003. Over the past decade, borrowing has driven up output in financial services (+123%), construction (+27%) and real estate (+26%), whilst lavish public spending has propelled expansion in health (+35%), education (+27%) and public administration and defence (+22%). Real output in all other industries is now 5% lower than it was ten years ago.

As incremental borrowing escalated (from 4.9% of GDP during 1996-2002 to 11.2% between 2003 and 2010), growth rates dropped rather than improving. Great Britain plc has increased its capital (debt) base very markedly without generating any improvement at all in income growth.

The UK economy is critically debt-dependant – with five of the eight biggest sectors directly dependant either on private borrowing or on public expenditures – this outlook suggests that growth is likely to be very low indeed.

Dependence on substantial levels of annual incremental borrowing has put Britain into a high-debt, low-growth trap. Because growth was feeble even when fuelled by the continuous injection of debt-funded demand, the outlook, now that the country’s borrowing capacity has been maxed out, may be for extremely low economic growth.

It’s worth reading the complete report.

The study further writes about the addiction to borrowing. But when the entire money supply has to be borrowed from the banks, then of course we will be addicted to debt.

And in our current system, money comes into existence only when we go into debt. And if we are not going into debt, then no money is created.

While the study correctly points out on the dependence on the borrowing in our economy and makes correct conclusion that we got into the trap of high debt and low growth, it still doesn’t go deep enough to see the underlying fact that without private borrowing there would simply be no money in circulation. Our dependence on borrowing is not a choice. When all money is created via banks making loans, it is mathematically impossible for the public as a whole to stay out of debt. If you manage to stay out of debt, it means someone else has to sink further ‘under the water’ in order to maintain the money supply.

There is no way that the public can get any money unless banks make loans. If banks don’t lend, there is no money. We are absolutely entirely dependent on bank lending in order to have a money supply in our economy.

Anyway, the study is right in its conclusion:

“It would be by no means unreasonable to conclude that, short of almost unthinkably drastic restructuring, there may be no way out of Britain’s low-growth, high-debt trap.”

….provided we do not reform the way that money is created.

NOTE: Quite often these reports from companies in the financial sector have a bias or particular interest. For instance, gold funds do better when fear about the economy is higher, so gold funds tend to release reports that talk about how the economy will get worse. Tullett Prebon provides trading systems and services for banks and other clients, and should be able to make money whatever happens in the wider economy. So this should be a relatively unbiased analysis of the current state of affairs. It also confirms what an understanding of the monetary system would imply – that we are completely debt-dependent and have potentially reached the end of the line.