From Landon Thomas at NYT: In Britain, visions of Japan’s decade of stagnation
Britain may finally be emerging from recession, but many analysts warn that it is a false dawn. In fact, they argue, the economy here is so ravaged by growing debts and ruined banks that it could well be following in the steps of Japan’s lost decade of the 1990s.
I still don’t understand why we refer to Japan’s “lost decade,” as singular. The country is now moving into its third consecutive lost decade.The Nikkei is still at 1984 levels.
But back to the UK: the NYT piece quotes the latest research from Variant Perception (no link). I got it in my inbox earlier this week, and it’s a fascinating (though not pleasant) read. Notably, they talk about the outside possibility of a “sudden stop” event. As mentioned in this space before, a “sudden stop” is what happens to emerging economies when they lose access to capital markets. Confidence is lost in the government’s ability to pay back debt and everyone races to get out of the system. See Argentina.
The problem is acute for indebted emerging markets because they don’t borrow in a currency they can print. So, the argument goes, you can’t have a sudden stop in Britain, or the US, because we print the currency in which our debt is payable.
I’ll let the VP guys take it from here:
The structural problems in the domestic economy, and difficulties in other economies across the globe, will impede the prospects for sustainable growth in the UK. Debt will continue to grow, and the creditworthiness of the country will continue to weaken. Investors will be more and more reluctant to meet the borrowing needs of the UK.
If the situation continues to deteriorate there is a non-negligible possibility the UK could face a ‘sudden stop’ in capital inflows. A debt crisis would precipitate a currency crisis. This would not be especially unusual for the UK: during the postwar period, there has been one on average every 15 years. These have happened like clockwork.
The possibility of this course of events unfolding is small, but not negligible. If a new government is formed next year, perhaps they will be able to enact the policies that will reduce the deficit and restore confidence in the financers of the UK deficit. We believe, though, that to say the UK will not have a debt crisis is complacent and pays no heed to the past.
If Britain is laid low by a sudden stop event, if the BOE finds itself the only buyer of British government debt, the argument in favor of deficit spending whenever there’s an “output gap” will, in my view, suffer a fatal blow.
Also worth calling out, the VP guys note that household debt is still growing quickly in the UK:
In order to return to health, the UK, more than most countries, needs to deleverage. However, this process still seems to be in its early stages. UK consumers have so far not materially improved their balance sheets since the onset of the crisis. This is concerning: before the crisis, UK consumers were some of the most indebted in the world, and so have more urgency than most to reduce their indebtedness via deleveraging or default.
But …. household debt to GDP in the UK continues to rise. This is partly a denominator effect, as nominal GDP has fallen in the recession. However, even on a QoQ basis, household debt has barely contracted.
The US consumer, by comparison, is showing much clearer signs of reducing leverage. Over the last 2 years (to Q209), US household debt to GDP has risen by 0.7%-pts, while in the UK the same metric has risen by 4.4%-pts, more than 6 times as much.
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