The ten graphs which show how Britain became a wholly owned subsidiary of the City of London (and what we can do about it)
Of all the charts I produced for my new book Can we avoid another financial crisis? (Keen 2017), the one that surprised me the most was the one showing British private sector debt relative to GDP.
The American data showed a perennial tendency for private debt to grow faster than GDP, followed by financial crises in which debt was written off, only for the process to repeat itself later on. Figure 1 shows the level of private debt as a percentage of GDP in red, and credit – which is the annual change in debt—in blue. There were regular occurrences of negative credit, and therefore a falling ratio of debt to GDP, but the apparently inexorable trend in the USA was for debt to rise relative to GDP until a serious crash occurred.
I expected a similar pattern for the UK. Instead, I saw the pattern in Figure 2. There was no trend in UK private debt to GDP until shortly after the election of Margaret Thatcher. Then, under both her rule and Tony Blair’s, the private debt to GDP ratio more than trebled in less than 30 years.
Figure 2: Private debt and credit in the UK since 1880
Private debt never exceeded 72% of GDP in the century from 1880 (when the Bank of England’s time series begins) till 1980, and its average value was 57% of GDP. By 2010, when it peaked, private debt had risen from under 60% of GDP to almost 200%. If any chart lets us date when Britain’s economy started to become seriously unbalanced, this is it. The decline in manufacturing had commenced much earlier, but the unconstrained ascendance of finance began in 1981. This was the date on which Britain started to become a fully owned subsidiary of the City of London.
This growth in debt gave The City immense power over the rest of the country, in a Faustian bargain that delivered ever growing demand from credit (which is equal in magnitude to the annual increase in private debt) in return for an ever-growing claim by The City on the assets and incomes of the rest of the country.
For a while, this bargain felt win-win for both sides: as the Bank of England recently acknowledged, bank lending creates money at the same time as it creates debt (McLeay, Radia et al. 2014). This money is then spent, either to buy assets, or goods and services. It therefore adds to total demand, and to incomes and capital gains. So, as banks created “money from nothing”, and the UK private sector spent that money that it got for doing nothing, prosperity seemed to abound. The rising credit-based demand substituted for the decline in demand from actually producing goods and services, and the additional financial claims against the UK’s physical resources grew from a relatively low level. The decline in manufacturing employment was offset by a rise in employment in finance, where the main output was not goods but credit-based money and its Siamese twin, debt. While the debt continued to grow, it boosted both economic activity (see Figure 3) and asset prices (see Figure 4).