Merryn Somerset Webb has just recorded a podcast with me about the economic impact of the Coronavirus and what to do about it. This is a brief post to provide some of the data that I referenced in that discussion. Her podcasts are here, and the recording should be up soon.
While mainstream economists obsess about the level of government debt, the real cause of economic crises is not government debt but private debt. The UK’s data here is simply stunning. Between 1880 and 1982, private debt never exceeded 72% of GDP, and it averaged 57%. But it exploded after the deregulations that allowed the banking sector to lend to finance house purchases (and the privatisation of council housing and so on), rising to a peak of 195% of GDP in 2009.
That debt was split relatively equally between the household and corporate sector. After the 2008 crisis, both sectors have stabilized with almost three times the debt level, relative to GDP, that they had before financial deregulation.
The impact of that increased debt for the household sector has been simply higher house prices.
The causal mechanism runs from new mortgage debt to house prices. Putting it simply, most houses are bought primarily with mortgage debt, rather than out of income. So the monetary flow of demand for housing is primarily the flow of new mortgage debt. Divide this by the number of houses for sale, and you have a rough measure of the average demand price per house. Given how inflexible the supply of housing is, the change in this flow of demand is the primary determinant of the change in the house price level. So all this additional debt has done is simply drive up house prices by higher leverage.
This in turn has made Western nations in particular far more financially vulnerable than they were at the time of the last pandemic, in 1918, when private debt levels in the UK were at a historic low of 33% of GDP. With interest rates almost as low as today back then, the debt servicing burden on the economy was 1/5th of what it is today.
This is why a proposal that I put forward as long ago as 2012—a “Modern Debt Jubilee”—is essential. Without it—and without income support from the government right now as well—the financial system could well collapse. A Twitter correspondent called it a “Universal Basic Bailout”, and that’s not a bad description in modern terms.
I’ll post this now and edit later to include an updated version of the argument I first made 8 years ago for a Modern Debt Jubilee. For now, to see the concept, please follow this link.