Tuesday, January 17, 2012

The Myth of Debt Labour

In the UK a common myth is generally held to be true by people about the nature of the debt.  The myth is that the United Kingdom under Labour regimes of Blair and Brown had run up too much debt during the good times, and that when the economic crisis came the UK government was already so in debt that it did not have the resources to deal with the economic collapse.  Cameron became Prime Minister running on the government debt and nothing else.

The above graph shows how false this claim is.  In the years running up to the 2008 collapse the UK had significantly less debt as share of GDP than the world average.  and far less than Germany.

In fact when you include in the analysis nations like Iceland, Ireland and Spain, which are all in major debt crisis now, you see a clear pattern.  EU nations that had very low levels of debt before 2009 suddenly see debt exploded.  The levels of government debt are clearly the effect not the cause here.

And this is the nightmare the Europe is facing, the conservative European governments are technically bleeding their nations to death: treating the symptom while ignoring and even hiding the cause.  The UK debt is a product of the imbalance of finance, housing and and retail over other sectors, and these sectors have collapses.  Actually there is reason to believe that low debt before 2009 was a sign of danger.  This may be because the low debts were driven by tax revenues from the boom and this certainly is the case in the US.

But it may also be possible that low levels of government debt were allowing large deposits in banks to be mis-allocated.  People generally don't think about public and private debt very deeply.  But for a nation like the UK think about it.  Public debt will go to things like building roads, schools and hospitals, paying teachers, making repairs and promoting education.  Cuts, like the vicious cuts being seen in the UK today have a negative impact on human services like education.

While government debt goes in to things that on the whole are certain to return value (schools, police, health care) private debt in a boom will go where ever.  Popular places to pump private debt is real estate, especially building high rises, overseas investments, credit card loans, and what ever new vehicle they banks can come up with.  This kind of debt has two negatives, firstly much of it returns no economic benefits (building more high rises than you need does not help the economy and only reduces the value of other assets) but also the high interest rates of private debt mean that things like consumerism leave future generations with debt.

So it is possible that these high levels of private debt and low levels of public debt in nations like the UK, Ireland and Iceland actually hurt the economies, moving the nations investment wealth out of providing solid public services in to speculation.

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