Guest Post: The Unending British Deleveraging Cycle

Tyler Durden's picture

Submitted by John Aziz of Azizonomics blog,

Current estimates of what is known in the UK as the M4 money supply — cash outside banks, plus private-sector retail bank and building society deposits, plus private-sector wholesale bank and building society deposits and certificates of deposit — show a serious contrast between Britain and the United States:



Could this divergence explain the strong divergence between UK and US real GDP?




I doubt it. It’s a chicken and egg question — does a prolonged deleveraging cycle explain real GDP weakness, or does real GDP weakness explain the prolonged deleveraging cycle? It may in fact be a self-reinforcing spiral effect where the first leads to the second and the second leads to more of the first, and so on. But there are a lot of other factors all of which may be contributing to the worsening situation — protracted weakness in business confidence, tax hikes, spending cuts, weak growth in the Eurozone, elevated youth unemployment, and uncertainty. All these factors are probably contributing to some degree to the weak GDP growth, and the prolonged deleveraging, and thus Britain’s depressionary economic condition.

But we can say that the difference cannot be that Britain’s monetary policy has not been aggressive enough. Britain’s monetary policy has been far more aggressive than that of the United States:


CB assets


How can we break the cycle? Well, as the above graph shows, more quantitative easing is unlikely to have a beneficial effect. The transmission mechanism is broken. What good is new money if it’s just sitting unused on bank balance sheets? What new productive or useful output can be summoned simply by stuffing the banks full of money if they won’t lend it?

The sad truth is that a huge part of the financial sector has failed. Its inefficiencies and fragilities were exposed in 2008, as a default cascade washed it into a liquidity crisis. And yet we have bailed it out, stuffed it full of money in the hope that this will bring us a new prosperity, in the delusional hope that by repeating the mistakes of the past, we can have a prosperous future.

The sad truth is that the broken, sclerotic parts of the financial sector must fail or be dismantled before the banks will start lending again, start putting monies into the hands of people who can create, innovate and produce our way to growth.

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walküre's picture

None of the CBs want to push the RED button.

Debt and loan reduction by 50%, asset and income appreciation and increase by 100%.

Let the chips fall where they may.

Prudence is for pussies.

BigDuke6's picture

Like in Germany the social contract in the UK has broken down.

New elites are welcomed in with enough cash to afford places at the bloated university system while the bankers remain untouchable.

White flight is just about over with only the dull and the welfare hangers-on left behind.

i suspect the UK will end up similar to south africa with attcks on farms and pockets of outright segregation and no go areas.

First the UK, then France , then Holland... 

walküre's picture

Politicians don't care. They need to have growing populations and growing economies to fund their growing paycheques.

Banks don't care. They need to have every debt slave they can get their greasy hands on.

The UK will remain the Queen's bastion and her entourage's playground for longer than France or Holland can keep their heads above water. When the Queen leaves, the place will fall apart.

BigDuke6's picture

Germany will need to rescue europe again and this time perhaps whats left of the british people will wise up and join them.

But i doubt it - the indoctrination by the MSM and BBC is incredible.  As long as they see a pair of tits or a bikini when they open the paper they sleep.

Almost as much as the isreal first bible bashing yanks.

Glass Seagull's picture

Pound going down, capiche?

Acet's picture

Frankly I think the UK is totally screwed, mainly because people keep re-electing extremelly pro-City politicians. Don't forget, as a percentage of GDP, the Financial Industry is SIX times bigger in the UK than in the US.

Also the UK has a far, far more calcified social structure and deep, historic networks of mutually supporting buddies at the highest levels (so called "old boys networks") which make it far harder for fresh faces which are unconnected to the Financial powers to get into positions of responsability in politics and regulation and thus highly unlikelly that the country will be able to reinvent itself in a timelly fashion.

So far, all we see is the same old, same old, only more of it.

Frankly, I suspect that only some kind of revolution (hopefully of the soft kind) will get the country out of its spiral of cronyism, decadence and rot.


CunnyFunt's picture

Like Wall Street, the City of London is a den of thieves and brigands, and can only be governed by criminals like themselves.

davidsmith's picture

What ZH writers don't seem to realize is that it's the fault of the middle class.  Why do ZH writers always want to find a small cabal of evildoers who they can hope to string up?  That's not looking at the facts.  The fact is that the middle class is supporting all this fascist looting in a gamble that this will preserve their bourgeois lifestyle.  Won't work forever, but it's worked so far!!!!!!

CunnyFunt's picture

Who do you think is doing all this "fascist looting"? The "middle class"?  What is the "middle class", anyway?

theprofromdover's picture

The only reason UK is coping just now is the huge volume of foreign money pouring into London. The Chinese, Russians, Greeks, Spanish, French, Italians are putting their money into London real-estate. Even the Swiss. Last safe haven outside of Gold.

They seem to think that the UK justice system is more honest than most when it comes to property, and will look after them. Maybe once upon a time, less so now.

theprofromdover's picture

(There mosdef ain't any upholding of property rights in US courts.)

kito's picture

its unbelievable the exorbitant privilege this country has...................boggles the mind................only america has been able to have its cake and eat it too..........................until when????....that is the question...until when??????

davidsmith's picture

Wow, is this a stupid article!!!  The "transmission mechanism" is functioning perfectly smoothly for fascist looters.

Miss Expectations's picture

"The sad truth is that the broken, sclerotic parts of the financial sector must fail or be dismantled before the banks will start lending again, start putting monies into the hands of people who can create, innovate and produce our way to growth."

So, start the whole fucking thing over again with bank lending?  That's the plan?  Shouldn't they completely subjugate Africa first?  That little party's just beginning.

Rustysilver's picture

The articles at ZH delineate problems one country at a time: Greece, Spain, Italy, France, UK, etc. I think they all have the same problems.

I don't think U.S.  is any different. From my prospective, US is like that cruise ship stuck in the middle of the ocean. It looks great and shiny from the distance, but looking closer it stinks like hell with overflowing toilets like NO super-dome.   People want to get out but there is no place to go.

Teamtc321's picture
Armed Cops Descend on U.K. Man Over Facebook Picture of Toy Weapon

WTFUD's picture

Lets have a silent prayer for All of the meat products being removed from fleamarket shelves. Gonna run into billions in current and future losses for da bosses. A small consolation is that it can be shipped back to the romanians at knock down prices and come back into the food chain as pickled sausage.
Cheese Salad Sandwick 1 Turkish Hanging Doner Kebab 0

Wile-E-Coyote's picture

At long last people in the UK are starting to get it. The panic amongst politicians and the BOE is almost palatable, they know that the UK is along for the ride and has no power to save itself. The general public is now feeling the pain of inflation, wages are now at 2003 levels, the low paid are hurting.

The governments econonmic stats are all lies, CPI 2.7% no way more like 8-9%. It now costs on average £1800 a year to heat and light the average home, food is rising at an eye watering rate, and all we are told is things are getting better. Well they are not, things are getting harder, the roads are full of pot holes, a couple of inches of snow disables the country; this is 2013 not 1813.

What will happen over here? Well the people of the UK are a laid back bunch and will roll with the punches up to a point, if anyone is in any doubt what the average UK worker is capable of go back and look at the pole tax riots, the miners strikes. Civil unrest coming to a town near you soon (UK).

The mainstream media in the UK misdirects the public, but the alternative madia is strong, more and more peope are educating themselves about the crimes commited by the bankers and politicians, their actions are nothing less than treason. A time of reckoning is coming.

CunnyFunt's picture

Is it any wonder that the UK public has been progressively disarmed over the years? I suppose you could fight the villains with stones, golf clubs and cricket bats (if they aren't already banned).

Wile-E-Coyote's picture

Yep,.. you have all the guns but you don't know what to do with them. The only people who use guns in the US to protest are the mentally ill and the deranged, you go figure.

s2man's picture

the broken, sclerotic parts of the financial sector must fail or be dismantled before the banks will start lending again

But that would cause a defaltionary depression.  Which would cause asset values to decline.  Which would kill banks.  Which won't be allowed, since the banks run things.  Got it?


WhiteNight123129's picture

Do not worry..

There is always the possibility of sending some Fed officials and dropping at nigh 100 dollar bills on the sidewalk one here, one there.  Or they could put it in enveloppes making it look like drug money in projects. That would help the poor and kick-start inflation. BoE can hire some people to do that. 

Base money always end up in the system, one way or the other. First it might go into the stock markets. The people not buying this crap sell and then they spend. Did you say tyler that the Banks were buying stock while retail was selling? There you have your transmission mechanism, duh!! Banks were buying with base money, pump the stock market, the retail sells, here you go your base money transmission mechanism. Through the stock market.

And who would report they have found of enveloppe full of dollar bills? Humm?