'Debtonation' - why it's still relevant

Welcome readers, to my newly refreshed blog, and thanks to Georgia Lee and Maz Kessler for making it look so good, and work so well. I had thought that the title needed refreshing too. After all, I am fond of defining 9th August, 2007 as ‘debtonation day’, and that is now long past.

To refresh your memory: it was on that day that the world’s banks woke up to the scale of their debts, and to the simple truth that they may not all be repaid. On that day, the French investment bank BNP Paribas suspended three investment funds due to a “complete evaporation of liquidity” in the market. BNP’s announcement compelled the intervention of the US’s Federal Reserve and the European Central Bank, which both pumped $90billion into the global banking system. As Larry Elliott notes, 9 August, 2007 ” has all the resonance of August 4 1914. It marks the cut-off point between “an Edwardian summer” of prosperity and tranquillity and the trench warfare of the credit crunch – the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit. ”

So ‘debtonation’ stands as a reminder of that day. However, we also know that the private debts of the individuals, households but also more importantly the corporate sector have not ‘debtonated’. They are still on the books, and in the case of the private sector in the UK, but also wider Europe, look set to rise further. As Douglas Coe and I have pointed out in a paper we have written for PRIME, “Private debt has risen relentlessly since the early 1980s. Most commentators focus on the extent of household debt, which rose from around 40 per cent of GDP before the 1980s to a peak of 110 per cent in 2009. But corporate debt is even more elevated, rising from 50-60 per cent to a peak of 130 per cent in 2009. The latest National Accounts show that both measures fell back in 2010, but only by a very small margin: households to 105 per cent of GDP and corporates to 125 per cent.”

So there are very large debts on the books of the private sector, that have not ‘debtonated’ yet. And we are not alone in believing that their ‘debtonation’ will lead to yet another financial crisis, involving the banking system. Standard and Poor’s caused a flutter in the stock market dovecotes this week, when they downgraded US debt. But of greater interest is their comment on the threats facing the US banking system (drawn to my attention by Yves Smith ):

“We believe the risks from the U.S. financial sector are higher than we considered them to be before 2008, as our downward revisions of our Banking Industry Country Risk Assessment (BICRA) on the U.S. to Group 3 from Group 2 in December 2009 and to Group 2 from Group 1 in December 2008 reflect (see “Banking Industry Country Risk Assessments,” March 8, 2011, and “Banking Industry Country Risk Assessment: United States of America,” Feb. 1, 2010, both on RatingsDirect).

Which is why the title for this blog will not be changed.

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5 comments to ‘Debtonation’ – why it’s still relevant

  • David Williams

    Good to see you back Ann. . . .

  • The financial Condition of Europe is not basically distinct, in it’s quality, from the US-American one. These conditions configured during a couple of years and the causative dynamics of their development started in 80s of the past century – or even earlier.
    With these conditions in mind, the ‘legal’ attacks of the US and the European (mainly German) treasuries against Swiss Bankers and tax evaders are totally disproportionate, ridiculous and hypocrite, from the businesslike as well as from the moral point of view. Even if ‘successfull’, they won’t really resolve the basic problem and will cause new problems instead.
    The longer this crisis lasts, the more obviously these randomly selective ‘legal steps’ will turn out to the global public to be attempts to camouflage the real and damaging crimes which are part of this crisis.
    No doubt that banks, bankers and governments, government departmens and other public and private legal entities round the world, including Switzerland, were – and still are – mutually entangled in those highly complexe illicit financial tactics, strategies and operations.
    It appears quite improbable that there will ever be an impartial, nonpolitical instance, commission, authority to investigate and settle this injustice which has damaged and still damages the global finance and economy.
    This means, ‘business’ basically continues as ‘usual’ as long as sufficient electricity for the IT-units will be available?

  • Ann

    Thanks David…wish I had more time to devote to the blog. But thankfully am doing interesting relevant work, which hopefully will enrich the blog too..

  • I loooooove the title. It’s great! Congratulations on relaunching. I will do my best to follow it. Please release your book on first world debt on Kindle, please.

    This is heavy stuff and very interesting. I think debt is a fascinating topic and one under evaluated. This is a bit off topic but I thought I’d share it… ever since college I have had this idea that the increased availability of credit at the consumer level has had a real inflationary effect on fixed goods, especially housing.

    Am I wrong in believing that 100 years ago people could become homeowners on their savings alone? That people bought or built homes with CASH after a reasonable amount of time saving?

    Now, in much of the developed world, that’s just impossible, and it seems to me that that’s a real form of inflation and, my instinct tells me, that it was caused by an expansion in the money supply — if you count credit as part of the money supply. And I would tend to think you should.

    Is this totally old news? Am I crazy?

    anyway, debt freaks me out. I’m about to sell a house. If all goes according to plan, at the moment I sell it I will be completely debt free. Hopefully this means I can watch the coming drama without feeling it… though that is probably wishful thinking.

  • Extremely pertinent Ann… Great stuff!
    As a small business owner for 20years I use debt/turn-over ratio
    as THE critical business-control driver, and my own stress levels
    are directly linked to this. I don’t see too many people talking about
    psychological linkage of us mortals to our debt levels, but
    I think it’s critical. The world would be a MUCH happier place if
    we could get a grip on this!!!
    I also believe there is a silver bullet for our present debt crisis:
    http://www.suretech.co.za/CreditCrisis.pdf
    (which I wrote in May 2008)
    Neil Jeffrey, Cape Town SA

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