McKinsey's graph of UK's debt position

I’ve picked up on the Financial Times’s Gillian Tett article about a report from McKinsey & Company on Debt and deleveraging: The global credit bubble and its economic consequences. Surprisingly, the report identifies the UK as the country that’s experienced the biggest jump in debt, relative to gross domestic product, over the past decade, as the chart shows. [Click to enlarge]

Gillian Tett’s views are instructive on the UK’s options for deleveraging - reducing debt in other words. She says,

[On deleveraging] while governments have sometimes softened this task before by creating rapid growth, often due to exports (via devaluation), or a peace dividend (after a war), those routes do not look offer an easy escape this time. Growth, in other words, could be tough to achieve. So that leaves three, unpalatable options, McKinsey suggests: outright default, inflation or belt-tightening.

McKinsey’s best guess – or hope – is that belt-tightening will predominate, and it consequently forecasts a grim climate of austerity for the next decade. It may be right. But to my mind, at least, it remains a very open bet whether western voters will accept austerity without a backlash; personally, I would thus put a higher emphasis on the other options too.

No matter how Gordon Brown and Labour present the data, as a nation we need to take action. The politics is all about what sort of action and when. In her last comment, maybe she’s pointing to inflation as a likely option. The worrying rise in inflation is the topic of my next blog post.

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