Wednesday, August 26, 2009

The inevitable recession

Two things impress me about this chart, which captures net bank lending to households. First, despite the credit crunch, households are continuing to accumulate debt. The very last data point is still in positive territory.

Second, during the height of the bubble, banks were extending over ten percent of GDP in new credits to households. Remember, this chart is calculated on a net basis. In other words, it is new loans minus repayments.

This was nothing short of madness. It was unsustainable. The UK economy had become utterly dependent on huge flows of consumption and housing related credit. When the flows reduced, a recession was inevitable.

However, the real irony is that the same people that created this horrific vista are the same people who now tell us that they have found a solution. Their chosen path to prosperity is, naturally, more debt.

5 comments:

  1. A reduction in lending to households makes sense given that 1 in 6 have no one who works (http://news.bbc.co.uk/1/hi/business/8222145.stm). Not to mention there are 5 million people who never worked under labour. All scary statistics!

    ReplyDelete
  2. And in absolute values lending must have shrunk even more due to the decline in GDP.

    UK GDP didn't go negative until 2008 Q1
    (http://www.statistics.gov.uk/cci/nugget.asp?id=192) so that steep drop is actually even sharper.

    ReplyDelete
  3. There are two thing impress by this chart one is the despite the credit crunch,
    Second one is the during the height of the bubble, banks were extending over ten percent of GDP in new credits.

    ReplyDelete
  4. Thanks to provide the information. Now we can think about it in depth.It can be good for us.

    ReplyDelete