UK’s Only Options are “Default, Inflation or Belt-Tightening”

Yesterday, McKinsey released a new report showing that the combined public and private debt in the UK is now 449 Percent of GDP. It’s actually the biggest debt to GDP jump of any western nation over the span of the past ten years.

Given that recently-imploded Dubai World is still top of mind, and the Iceland meltdown was really not so long ago, it must make a mighty bitter pill for them to swallow.

According to the Financial Times:

“…if McKinsey consultants are to be believed, the real leverage giant – at least among the big western economies – is actually the UK. After crunching the data, McKinsey estimates that the gross level of British private and public debt is now 449 per cent of GDP – up from 350 per cent at the start of the decade.

“And even excluding the liabilities of foreign banks based in the UK, the ratio still runs at 380 per cent – higher than any country except Japan (closely followed by Spain where debt has also spiralled dramatically, according to a McKinsey report issued today.)”

Article author Gillian Tett goes on to describe how with debt levels this high a massive deleveraging is clearly in order for the country. Further, without any rapid economic growth on the horizon to aid in that deleveraging, few alternatives remain:

“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.”

Tett doesn’t expect voters to find austerity particularly acceptable. Instead, she puts “a higher emphasis on the other options”. Should the UK want to avoid the consequences of a sovereign default, it will look to inflation, and that’s the dangerous beauty of a fiat currency… have printing press, will print. It is the path of least resistance.

More details on the McKinsey report and Tett’s perspective are available from the Financial Times in its coverage of how deleveraging will be an unsavory task.

The Daily Reckoning