This is what deleveraging looks like

By Leith van Onselen

It’s starting to turn pear-shaped for the United Kingdom (UK) economy. Last week, the UK slid deeper into recession, with GDP falling -0.3% in the first three months of 2012 on an annualised basis, following a -1.2% annual rate of decline in the final quarter of 2011 (revised down from a previously reported -0.8% annual decline).

Unemployment has also risen in the UK recently, increasing by 0.5% over the past 12 months to 8.2% as at April 2012:

One of the key issues facing the UK economy is that it is saddled with far too much debt, as illustrated by the below chart from McKinsey Global Institute:

In the years leading up to the Global Financial Crisis (GFC), the UK economy was turbo-charged by a positive feedback loop between rising asset values and consumer confidence, and increased borrowing, household expenditure and employment.

In a nutshell, the rapid rise in UK household net worth up until 2007, most of which was on the back of rising home values, led to households withdrawing large amounts of home equity between 2001 and 2008, which provided a boost equivalent to 3% to 9% of disposable incomes (see below chart). Much of this borrowing was spent on consumption, which in-turn further boosted incomes and employment.

However, as soon as the GFC, and UK housing prices corrected, households began reducing consumption and repaying debt, as evident by the increasing home equity injection.

It’s a case of the positive feedback loop, described above, working in reverse. That is, with home prices falling, UK households suddenly felt poorer, eroding consumer confidence and their willingness to spend (the ‘wealth effect’). And with asset prices falling, and many households moving into negative equity, they had little choice but to tighten their belts and begin the process of debt repayment, thus crimping consumption expenditure, incomes and jobs (see below charts from Delloitte).

The shift from borrowing (consumption) to saving has occured despite UK mortgage rates falling sharply since the GFC:

And UK housing affordability improving significantly:

The below analysis of the British Bankers Association’s (BBA) latest consumer credit data by IHS Global Insight highlights the cautious mood of UK households [my emphasis]:

The BBA reported that there was a renewed net repayment of £198 million in unsecured consumer credit in April. While this followed a small increase in consumer credit of £96 million in March, it was the seventh net repayment in nine months.

There was marginal net borrowing of £8 million on credit cards in April, while there was a significant net repayment of £206 million in personal loans and overdrafts.

The net repayment in consumer credit in April ties in with the marked falling back in retail sales.

The renewed net repayment of consumer credit in April indicates that consumer appetite for new taking on new borrowing remains limited while there is also an ongoing strong desire of many consumers to reduce their debt.Consumer desire to keep a tight grip on their finances is clearly the consequence of still serious concerns over the outlook for the economy and jobs Indeed, it is very possible that increased worries over the outlook resulting from news that the economy is back in recession and from the situation in the Eurozone may well intensify the desire to improve personal finances.

This is also evident in the BBA reporting that net mortgage lending was limited to £715 million in April as “capital repayment by householders remained at a high level”.  This suggests that house owners are looking to take advantage of low mortgage interest rates to reduce their outstanding mortgage levels to improve their balance sheets.

The UK experience should give pause to those commentators expecting interest rate cuts from the RBA to stimulate housing and consumption.

While lower interest rates should, in ‘normal’ circumstances, help in stimulating demand, they prove less effective when asset (housing) prices are contracting and a deflationary mindset has taken hold. In such circumstances, indebted households are just as likely to use the extra disposable income from lower mortgage rates to pay down debt, whilst those households reliant on fixed interest for their income (e.g. retirees) will find themselves with less money to spend.

[email protected]

Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. ” In such circumstances, indebted households are just as likely to use the extra disposable income from lower mortgage rates to pay down debt, whilst those households reliant on fixed interest for their income (e.g. retirees) will find themselves with less money to spend.”

    Yes – take cash from those who need to or can spend it and give it to people to scared to spend it.

    As that makes no sense the RBA strategy in cutting rates can only have the objective of stimulating the demand for debt.

    FHB’s should resist the temptation of ginger bread houses.

    • Yep, the RBA will cut rates to stimulate debt. The greatest problem now in the world is 3 things, exporting go manufacturing and services, importing of cheap foreign labor such as students and skilled migrants that often end up in unskilled jobs and the realestate market, which has allowed for global investment, speculation.

      All these things have lead to 1 thing only, a reliance on debt for middle to low income earners and a massive wealth injection for the wealthy.

      This has all been created by two groups of people, the wealthy and government.

      I think we all know where the EU is heading and its going to create unstable countries. The wealthy have the advantage of opening accounts in other countries to shield their savings or live in other countries, but the middle to low income earners don’t have this choice.

      globalization does not work, it has allowed the rich to source cheap labor anywhere in the world at the expense of developed nations.

      • George Locust

        Globslization per se is not the problem.

        Although i do agree that Australias inward migration rate is too high. I want nothing to do with the “Big Australia” agenda.

        • Globalization is not the problem per se, but as Paul Keating said, all the productivity gains **cough** Labour exploitation arbitrage ** cough ** went to the richest 1% of the developed world. The rest of the developed world citizens have nothing but household debt to show for it.

        • Aristophrenia

          Globslization per se is not the problem.

          Yes it is. Yes it absolutely is.

          Advocates for it benefit massively, while those who suffer from it – have no voice – none.

          On balance MILLIONS of lives have been decimated, absolutely destroyed by globalisation and thats before we even start on global warming.

          The impact in South America, Africa, Asia of globalization has literally destroyed the lives of tens, if not hundreds of millions of people.

          It has been an unmitigated disaster for the vast majority of people – while a small few have benefited massively.

          Globalization was good for some like Ghulags were good for some.

          • Minebot, what has happened to the purchasing power of that $1.25 since 1990?

            At least halved, if not worse, so well back to square one for the plight of the poor which you so disparagingly dismiss.

            Comments like this make me sick.

          • 4D,

            Statistics prove that statistics can prove anything that you want them to prove.

            Not sure whether Alex coined that one or not, but sure sounds like something he’d agree with.

            Now take your $1.25 and bugger off, you ungrateful little man 🙂

          • Alex Heyworth

            I seem to have touched a raw nerve here. 4D, your comment about inflation is correct, of course, although you have exaggerated it. Inflation in Australia was 59.8% between 1990 and 2008. A basket of goods that cost $1.25 in 1990 would have cost $2.00 in 2008.

            I chose a comparison of global poverty levels at random. Feel free to choose a different one. I doubt if you will find one that shows poverty increasing, though. The fact remains that, although globalization benefits the rich, it benefits the poor as well. It has definitely not ” been an unmitigated disaster for the vast majority of people” as Aristophrenia (sic) suggested.

            As for your comment, Julius, you are lucky it escaped the moderators’ attention. It does not conform to site policy. If you want to be rude, there are plenty of other sites where that is permitted. I suggest you go there next time you want to vent.

          • Tassie TomMEMBER

            As often as I disagree with the opinions of AH, I agree that globalization has done a lot of good for lifting the poorest of the poor out of extreme poverty.

            The only problem I have with globalization is that, if I own a piggery, then I need to follow Australian humanitarian standards to grow my pigs and to employ my workers. However, we are happy to import pork from pigs grown less humanely and from workers without Workcover or Superannuation.

            I guess that a job in a piggery in the poorest nation in the world, where you might get trampled to death by pigs or get your arm chopped of by slaughtering tools, is better for them and for their family than no job at all and starving.

            My problem with globalization is that the “moral” standards applied to protect the Australian society and environment is conveniently forgotten when applied to overseas production. Orson Wells called this “Doublethink”.

          • I must have missed the ceremony when you were appointed honorary moderator on this site, Alex.

            Since my comment was directed tongue-in-cheek to 4D, your feigned outrage has been in vain.

            If you’d like a definition of “rude” – add up the amount of money that has been ripped out of the countries, whose citizens you deem so fortunate to have struck the jackpot of $1.25 per day, by multinational mining companies. I wonder what the profits of the four largest mining companies would have been during the 18 years that so much of the worlds population had such hysterical good fortune.

            How much money went to the British royal family through their stake in Rio Tinto, et al, during the same period? Or to the likes of Marius Kloppers?

            I’m sure that additional 21% of the worlds population who came into the good fortune of $1.25 a day would be ecstatic to know that their natural resources have been put to such good use in the Queens stables.

            “The fact remains that, although globalization benefits the rich, it benefits the poor as well.”

            Well, I guess those poor people should just be thankful for small mercies, shouldn’t they? This is the old “crumbs off the table” argument.

            Don’t talk to me about rude, mate. Your “rude” trick is out of the same book as the one that the mining industry is currently using to divert the debate about EMAs. The going is getting a bit rough – so now they are playing the “racism” and “xenophobia” cards.

            You blokes are so predictable.

          • Julius, the bulk of your argument lies with AH, a formidable contest.

            My brief foray; you are so ideologically driven, to be blind. Resources companies, their direct beneficiaries and more importantly, the opportunity and growth provided by their expertise has allowed the developed and emerging worlds to progress and enjoy the accoutrements of modern life. We all want a mobile phone, an aircraft journey, reliable water and power provision. All of which not possible with a resources industry.

            To cut it short, the current EMA debate is a furphy. Companies across Australia have outsourced work opportunities for ordinary Australians for decades. If you can explain to me the difference, fine, go for it. But I’m telling you mate, ain’t no difference, apart from geographical location.

            It’s only eight o’clock here in Perth – debate open!

            Globalisation, on the whole, has been of benefit to the poorest and the most cosseted in the world. It is a work in progress, flawed and, to my mind, with inherent challenges – which can come by excluding the human element. But that will be resolved.

          • 3d,

            Well, it’s 2230 over here, and there are many that would agree that I need all the beauty sleep I can get. But a quick retort.

            No, I am not ideologically driven – sorry, that’s just another furphy to discredit an argument. Frankly, I don’t subscribe to any particular ideology – just function off experience and observation. I’ve worked in the resources industry, here and abroad. I know it for what it is – some good, some not so good – but certainly not the philanthropic industry that you and AH would have us believe.

            We all want a mobile phone? I think that the people on $1.25 a day just want a fair crack at life, some food, water, education, and a government that doesn’t keep shoving them off their land in return for some backhanders from mining companies.

            Again, deliberately or otherwise, you have misrepresented my comments on EMAs. I’ll be generous and give you the benefit of the doubt.

            I do NOT have a philosophical problem with the concept of EMAs. I never said I did.
            I do, however, believe that it is a concept that, given the sheer numbers of people involved in the case of the mining boom, needs to be debated. Clearly, Roy Hill is just the beginning. This is a quantum leap from the odd call-centre.
            What I object to is the predictable tactic of the mining industry in trying to shut down that much-needed debate with accusations of racism. All Australians should be free to debate this en-masse importation of labor into the country, and the mechanisms through which it will be handled, without being labelled racist. You, yourself have been critical of government policy that has been ill-conceived, poorly implemented, with no rational exit policy attached. Or is that a criticism that you reserve only for those policies that don’t suit you?
            I have seen things in the resources industry that make it particularly galling to hear that industry lecturing on social morality. Got it now?

            Globalisation has its flaws, which will be resolved? Yes – but when, and at what cost, and what will be left by the time it has been resolved.

            I’m sure I don’t have to tell you that one of the best ways to ultimately get what you want while there’s a storm breaking all around you is…just keep ‘em talking.

            As for AH – well, if his concern about my “rudeness” was genuine, then I don’t know how he ever survived in the mining industry – if that indeed is where he’s from. And I’m not sure how long he’ll last on internet chat-boards either. You seem to know a lot more about him than I do.

            As a side-note – I don’t set out to be deliberately rude to anyone – but important issues invite robust comment. That is something I think you understand all too well.
            An old saying about kitchens and heat comes to mind.


          • Alex Heyworth

            Julius, happy to engage with your robust opinions at any time. However, telling people to “bugger off” is definitely in breach of the site comment policy. Maybe you should read it. There’s a link at the top of the page.

            I’ve never worked in the mining industry, although I worked on a seismic crew many years ago. I certainly don’t think the mining industry is philanthropic. Like all companies, miners will do whatever they think is in the best interest of their shareholders – as they should. Sometimes what they want is also in the best interest of the rest of us, sometimes it isn’t.

            Anyway, cheers to you too. Just because we disagree about lots of stuff doesn’t mean too much in the big scheme of things. And we possibly agree more than you might think. I’m by no means a rabid right winger.

          • Happy to rewind and call a truce, Alex.

            Also happy to submit my postings to the review and moderation of the MB crew. To date, having been posting since the sites’ inception, I’ve not suffered the lightest touch of The Princes’ editing pen.

            You are aware of the function of emoticons, I presume.

            A “Smiley”, as they are called, generally suggests that comments are made in jest or tongue-in-cheek. Emoticons are the internet equivalent of body language. Pays to watch for them. 🙂

            As I said, I have worked extensively in the resources sector. I have benefitted from its largesse, and I have seen what it can do to those who can be considered collateral damage.

            I too, am neither right-wing, nor left.

            I am, however, an Australian citizen who is becoming increasingly concerned at the extent to which large multinational corporations, particularly resource companies, are entering areas of debate which are legitimately the province of the citizens and their government. I have seen, in other countries, just how far this intrusion can go. It is not always a pretty picture.

            It is healthy that we can disagree – it is good for our democracy. But it should be in an atmosphere that is free of less-than-subliminal influence by those in a position to engineer a desired outcome.

            Look forward to catching up further down the blog.

            Oh……and good luck with the NBN connection. Hopefully some funds sourced from the mining industry will help to get it to your front door 🙂

        • That’s because every second week we have a personal story about ‘investors’ having their houses razed to the ground by tenants which enrages the masses of slumlords out there and has them believing this behaviour is commonplace and that they better get themselves a property manager. Another real estate industry accessory item.

    • The United States Federal Reserve Board used to publish a paper called “Profits and Balance Sheet Developments at U.S. Commercial Banks.” The report for 2009, the latest year I could find, can be found here:

      This paper demonstrates that the method used by the Fed to ease monetary policy in the wake of the GFC did not “lead to economic growth.” In fact, about the only thing the Fed’s manipulation of monetary policy achieved was to enhance bank profits.

      Between 2007 and 2009 there was an increase in the bank’s net interest margin or net interest spread. The interest rate the ten largest banks paid on interest-bearing deposits (such as those of my 90 year-old mother) dropped by 79% from 3.30% to 0.79%. The interest rate the banks paid on federal funds dropped by 90% from 5.15% to 0.54%. The interest rates the banks charged their customers, however, did not fall so precipitously. So while everybody else is getting murdered, the banks’ net interest margin actually increased by 14%, from 3.46% to 3.96%.

      But the manufacture of an artifically high net interest spread isn’t the Fed’s greatest crime, for as the Fed is seeing to it that almost interest-free money is being lavished on the banks, the banks are drastically cutting back on the amount of money lent to households and businesses. Loans and leases drop from making up 53.21% of bank assets in 2007 to only 46.99% in 2009.

  2. so add on T+1 or T+2 for this effect to take place in australia!

    any MB bloggers going to take on PM Gillard’s speech last night to the miners? I’d love to see 3d1k minebot reply to that one..

    • Cognitive Dissonance

      My 2C on the speech

      If Australia did not borrow itself to the limit buying existing houses of each other perhaps we could have borrowed ourselves to the limit buying into a mining boom.
      Perhaps then the politicians would not need to be sent in to steel some back, the booty would still be here.
      Australians would not tolerate the governments grubby mitts if this had happened, but it didn’t, so the vast majority look the other way while our elected officials get their hands on other peoples money.

      • dumb_non_economist

        What do you expect? The average person doesn’t have your understanding and has had the RE spruiking industry pushing it for decades. When did this start to become an issue even for most readers at MB, 3 yrs ago??
        Politicians should have been providing some leadership/direction as should have those so called leading opinion makers in the msm, but no, people were too busy making a shit load, let the average joe take the shit for something he won’t understand until it’s too late.
        How many warnings do you recall in the LONG lead up to the situation we now find ourselves in? Me, I heard not one, became aware of my stupidity by shear luck!
        As to stealing as you refer to it, I’ll call it taxing, imo increased taxes for the major iron-ore/coal miners should have occurred REGARDLESS of present circumstances. Back in 2000 IO was $15usd tonne, 2009 $160!!! They have done very well and should have been smarter about it sometime ago.

    • Was at a luncheon in Perth recently where Gillard was speaker. There may have been a resources representative or two present…To say the welcome tepid, the farewell cool would about sum it up.

      Last night’s speech, particularly ‘miners not owning the minerals’ was for the benefit of the troops (and was Constitutionally technically incorrect). No miner to pay heed. Just more “sharing the benefits” spruik.

      Get used to it. We’re all going to hear a lot of “Sharing the benefits” for “working families” for “Australian families” for “Australian working families”. As I said. Spruik.

      Did PM did not read the PerCapita paper (her own Chief of Staff(?) a board member) detailing the spreading of the benefits enjoyed by all Australians as a result of the boom. I’m sure she did – she just assumes no-one else has and can get away with such mindless mantra.

      • dumb_non_economist

        Are you’re referring to a Mr Banks’ speech (Productivity Commission)? He pulled that crap out of his arse! All I got from his speech were a lot of assertions.

      • russellsmith55

        Whether its anti or pro mining, I’m sick of hearing about working families. It’s such an overused cliche it ruins any argument it gets attached to.

        I grew up in a struggling single-parent ‘working family’ and have my own strong opinions about the whole deal. Mouthing the words doesn’t instantly buy a vote though.

        The last thing we need is people to think that because they’re a working family, that they can take on as much debt as they want and have the government always distort the system to take their often self-inflicted pressure off them.

      • and was Constitutionally technically incorrect

        Now that Col. Barnett and Can Do Newman are in the bag (or pockets), MineBot is going all constitutional on us. Wait for the change in tune if/when Labor comes to power in WA and QLD.

        • Sorry Mav, no State Government of any persuasion can change the Constitution.

          ps Find it really hard to imagine Labor getting in at State level any time soon in WA.

  3. Don’t these worldwide experiences make a strong case for german-style policies ensuring housing prices stay constant, in real terms?

    I wonder why politico-housing-bankster complex does not work like here in the lucky country…

    • It doesn’t work, because no one is educated according to German system. Germans are much more intelligent not to follow the crowd than the rest of the West.

    • On point one, yes, absolutely. House prices shouldn’t go up (in aggregate) in real terms (i.e should be same as rise in rental costs). This is classic GPEC ala Delusional Economics.

      On point two, because rising asset prices are a NECESSITY of a morally hazardous unconstrained credit based monetary system, the Germans went elsewhere – i.e peripheral Europe to derive profit.

      Mind you, house prices in Germany are now rising again (up12% since late 2009 to now, but prices fell 30% from 2003 to 2009!) mainly due to the excellent yields on offer (most German’s rent, and dont look down upon renters as 2nd class citizens like Australians do)

      • Germans rented at home, but brought into the Spanish holiday home property bubble. Not many are happy now. But largely Germans allow their capital to be used more productively.

      • George Locust

        Australian Landlord-Tenant laws also make life uncomfortable for renters. The fact that inspections can happen at 48 hours notice reinforces the “2nd class citizen” mentality. Not sure about Germany but here in Japan “inspections” are non-existent. The place we rent feels like a real “home”.

      • I take it then that you want government intervention to keep houses priced at some predetermined ratio to income or some other measure.

        How would that work, when we have government intervention pushing up the price of land and construction costs via developer contributions, GST on the land, stamp duty on the transfer, and then more gst on the construction.

        On top of that you want constraints on the sale prices?

        All we need are land developers who enjoy working for a loss and builder who are likewise inclined. I’ve looked so hard for those guys, but I don’t believe they exist.

        • No more theme has been discussed on this website than responsive housing supply.

          All the features you query in ‘how would that work’ are symptomatic of a bubble being in place, not of a better performing market.

          • No they aren’t RP – they are financial impediments to home buyers, and price constraints won’t work without removal of those impediments.

            I pointed out that there are structural issues to be dealt with before anything can be achieved. It’s a strange system that loads up a tax and then takes it out, which of course is what the FHOG tries to do on a selective basis.

          • Yes they are Peter.

            Your words were..

            when we have government intervention pushing up the price of land and construction costs via developer contributions,

            Yes, governments tend to take a clip, either via increased txation, or decreased service provision when excess money flushes into a sector.

            This is what spurred recent government decision here.

            GST on the land,

            10% on properly priced land isn’t an issue. 10% on excess price land is.

            stamp duty on the transfer,

            Stamp duties increased massively in nominal terms and as a percentage during the bubble. This is completely expected and rational. People making $45,000 extraordinary income don’t mind when the government takes $10,000 than i should.

            and then more gst on the construction

            Same as land.For example bricks increased what? 250% in price during the bubble, when inflatin was stated as 65-71% ?

            That is an outcome, which I stated before, is symptomatic of a bubble. The structure, other than stamp duties, has nothing wrong with it. The problem is with pricing, during to exhuberant behaviour, not the structure itself.

            Behaviour is corrected by a crash.

          • RP – I agree that a boom tends to push up the prices of materials and contractors, and yes there is gst on those costs, but to solve the problems the authorities need to go back and start again.

            There will be loss of work in the construction industry, and building materials manufacturers will struggle and probably lower prices, but those gestures in themselves won’t be enough to fix the problem, which will just reappear in the next housing boom.

            Anyway perhaps we should just agree to disagree, even though we probably are not as far away as it seems.


          • RP – I agree that a boom tends to push up the prices of materials and contractors, and yes there is gst on those costs, but to solve the problems the authorities need to go back and start again.

            It will end up the same.

            Housing is non-tradable (for the time being) manufacturing. Any manufactured item can bubble if there are supply side impediments, particuarly if the good is an inelastic need.

            There will be loss of work in the construction industry, and building materials manufacturers will struggle and probably lower prices, but those gestures in themselves won’t be enough to fix the problem,

            If construction is overcapitalised, which I would be inclined to say it is, then losses are a must.

            which will just reappear in the next housing boom.

            I’ll remind you of Leith’s work on supply side responsiveness, and areas where response time is fast.

            With rigid planning, the bubble we see now is a premium from rationing. With competitors able to bring supply to market with no response constraints, all a supplier who elects to ration will do be stuck with excess inventory.

    • I think Germans get too much credit. After all, their banks were on the buy side of the US Sub-prime mortgage disaster.

    • Don’t these worldwide experiences make a strong case for german-style policies ensuring housing prices stay constant, in real terms?

      Actually increased productivity should translate to EVERYTHING becoming cheaper, unless there is a real and everlasting strucural shortage.

      Capitalism in inherantly deflationary. We disguise that by recalibrating money supply forever upwards.

      Educated people, whos job it is to protect a wider group, *cough*Heather Ridout*cough*, should always be the invisibile hand that corrects towards this outcome.

  4. In the UK, Gordon Brown didn’t believe the economy needed anything other than the city. There was also a scheme where companies like Prudential could build all the commercial property it liked and write it off on tax. Even in pre 2007/8 times you could go to any new industrial/business estate and find new buildings that had never been occupied. Many of them are still vacant.

    Great post UE, and agree who will take on debt now with fewer people with full time work. Some people will get suckered in though.

  5. But….An acquittance had a factory in Auckland that had been on the market for yonks; wasn’t selling ; changed R/E agents, who advertised in China. Result? 4 offers in the first week. Now China can’t buy all our property (can they?!) but there’s still an undercurrent of foreign demand underpinning our markets, from what I can see.

    • It is actually the master gambit.

      China runs a surplus from all the consumer crap we buy off them.

      We borrow that surplus to make our homes more expensive.

      Once expensive, we sell the homes to the Chinese, repaying the principal and keeping the margin.

      Housing crashes. We buy the houses back and proper price, with a whole bunch of chinese made crap we effectively obtained at a cost born by the failed chinese property speculator.

      It is a master gambit, to make the Chinese the last in line of greater fools.

      I don’t trust we are that clever to organise such an outcome.

  6. Interesting but I’m not sure that overall household deleveraging is happening in the UK. According to the UK BBA figures you cite, the net new mortgage lending appears to exceed the net repayments of other types of credit.
    The problems in the UK appear to be happening with just a reduction in the growth of credit rather than actual deleveraging. What will happen if and when they do actually reduce their debt?

  7. Folks in the UK have a great deal of household debt. At a debt to income ratio of 149%, the only households in Europe with more debt are those in Denmark, the Netherlands, Ireland, and Switzerland.

    The IMF only last month released a report which explores the effect of high household debt in the event of an economic downturn.

    Oddly enough, there are economists out there who argue debt doesn’t matter. From the IMF report:

    [“quote]Yet others suggest that the recent rise in debt is not necessarily
    a reason for concern. For example, Fatás (2012) argues that the McKinsey reports’ focus on gross debt is “very misleading,” since what matters for countries is net wealth and not gross debt.2 A high level of private sector debt as a share of the economy is also often interpreted as a sign of financial development, which in turn is beneficial for long-term growth (see, for example, Rajan and Zingales, 1998). Similarly, Krugman (2011) notes that because gross
    debt is “(mostly) money we owe to ourselves,” it is not immediately obvious why it should matter.[“end quote”]

    All this high falutin theorizing was not the purpose of the IMF study, however. As the IMF paper states:

    [“quote]…we first conduct a
    statistical analysis of the relationship between household debt and the depth of economic downturns. Our purpose is to provide prima facie evidence rather than to establish causality.[“end quote”]

    What the IMF researchers found was:

    [“quote”]•• Housing busts preceded by larger run-ups in gross household debt are associated with significantly larger contractions in economic activity. The
    declines in household consumption and real GDP are substantially larger, unemployment rises more, and the reduction in economic activity persists
    for at least five years. A similar pattern holds for recessions more generally: recessions preceded by
    larger increases in household debt are more severe.

    •• The larger declines in economic activity are not simply a reflection of the larger drops in house prices and the associated destruction of household
    wealth. It seems to be the combination of house price declines and prebust leverage that explains the severity of the contraction. In particular, household consumption falls by more than four times the amount that can be explained by the fall in house prices in high-debt economies. Nor is the larger contraction simply driven by financial
    crises. The relationship between household debt and the contraction in consumption also holds for economies that did not experience a banking crisis
    around the time of the housing bust.[“end quote”]

    • Cognitive Dissonance

      If you give them more ‘tools’ they can utilise, you get a cushy job.

      If you are really good at it and can produce these very complex and not close to being understandable mathematic formulas that illustrates what they want to see you may be in the running for a Nobel prize.

      If you can do all of the above and at the same time say nothing no one can disagree with (or really understand for that matter (aka Greenspan talk)), then maybe, just maybe, you can get yourself into that top position.

      The IMF, the top dog now is Christine Lagarde. Christine before her elevation to greater things was the finance minister of France and during her tenure she resided over the largest run-up in debt the country has ever seen. The IMF’s response to anything should be obvious, if it appears to be the other way, I tend to assume I am ill informed

      • What you say about Lagarde is without a doubt true. When push comes to shove, and when it comes to finalizing IMF policy, I’m sure her sociopathic ideology—the one true faith of the merchants of debt—-will trump any and all empirical evidence which her underlings are able to uncover.

        That said, however, what about the specific conclusions of the IMF researchers? Are you in agreement with this epiphany of theirs, that—-Low and behold!—-debt does matter! Or are you in the Krugman et al camp which asserts that debt doesn’t matter?

    • And when its over you will have 4 generations of savers …..

      Growth of 0.5 to 1 % will be though of as quite acceptable.

      People, the same people will not be king hit a second time.

  8. Woohoo! Leith used the phrase “positive feedback loop” correctly.

    Falling asset prices are also a positive feedback loop.

  9. Alex Heyworth

    This is what deleveraging looks like in a nation that has 500% of GDP lead in its saddlebags.

    How easy it would be if they didn’t have to pay the interest on all that debt.

    • How better if all that debt capitalised into bubble prices was instead used to buy depressed assets overseas?