In Britain, like in other countries, capitalism’s fault lines have been partially obscured by ‘cheap money’.
Debt – corporate, government and personal – is at huge levels.
As interest rates have gone up, however, that situation is becoming less sustainable.
Corporate bankruptcies are already running at a higher level than their post-2008 peak, with an average of 47 shops a day closing, for example, and will go much higher in the course of the next year, as recession bites.
Household debt has not reached its 2008 all-time peak, but was still at an enormous 133% of household disposal income in the third quarter of last year.
As mortgage rates increase, arrears will become widespread, and despite the banks promises to ‘lean in to help’ repossessions are likely to rise, perhaps dramatically.
Government debt is also at a historically high level.
Public sector debt reached 101% of GDP at the end of June, a level last seen in the early 1960s as a consequence of the debt accumulated during the second world war.
It is expected to reach 106.7% in 2023-24.
In an indebted world this is not the worst – France and Italy both have higher levels.
However, the weaknesses of British capitalism, and its increased international isolation, leave it among the more vulnerable of the most advanced capitalist countries to be punished by the markets, as the Truss mini-budget fiasco clearly demonstrated.
For now, Sunak and Hunt have managed to stabilise the situation, but new sharp crises are possible.
Over the next few years, the scale of UK government debt means that the Treasury will need to sell an average of £240 billion of gilts (government bonds) each year for the next five years.
That eclipses all previous records, other than the vast borrowing during the pandemic.
At that stage, however, the Bank of England bought the majority of them as part of its Quantitative Easing programme.
Now ‘quantitative tightening’ means the Bank of England is selling them too! When he was Governor of the Bank of England, Mark Carney described Britain’s government as being “reliant on the kindness of strangers” to finance its debt.
At the time – in reality – the bank he headed was financing the bulk of it.
Now, however, his assessment will be accurate.
But it will not be kindness but the profits to be made that will determine whether they will buy up UK government debt.
The possibility of a new disaster in the markets could not be clearer.
Such a crisis could potentially have wide consequences.
When Truss’s mini-budget trashed the markets it came close to causing a catastrophe in pension funds in particular, which are massively overleveraged, based on huge financial bubbles in the economy.
Pension funds have relied on ‘Liability Driven Investments’, which usually involves buying gilts and then in effect borrowing up to seven times their value.
Those that lend the money demand collateral.
In the case of the Truss debacle, as the price of gilts tumbled, more and more pension funds had to sell gilts in order to provide the promised collateral, but were increasingly unable to do so as their price plunged.
If the Bank of England hadn’t stepped in and promised to buy long-term gilts, major pension funds would have folded which, like the US subprime crisis in 2007, could have triggered a world financial crisis.
The problem has not gone away.
The total UK assets covered by Liability Driven Investments has exploded over the last decade from £400 billion in 2011, to £1.6 trillion in 2021.
