Government interventions and over-borrowing have prepared the way for a re-run of the Global Financial Crisis

Introduction

We recently wrote that the enormous losses being handed to taxpayers by Western central banks were in effect the second part of the same bill for the Global Financial Crisis (GFC), only bigger than the first bill, with no chance of a recovery for taxpayers, and having caused a string of major problems along the way.¹ The cure has been much more damaging than the original illness.

Each of the many detriments caused by central banks’ ‘Quantitative Easing’ merits detailed examination in its own right, but a key question now is whether we are any further forward for all these exertions of central banks since 2010, the supposed end of the GFC.

No, in a word.

Gross Domestic Product (GDP), Government debt and debt cost²

GDP growth has been sluggish for the USA, UK and four main EU economies. But the growth in government debt has been spectacular. The cost of that debt has now returned to what it was in 2010, and so governments are in a doom loop:

Country	Gross Domestic Product (GDP) – in US$ trillions			Government Debt in US$ trillions3			10-year yield on government bonds
	2010	2023	Change	2010	2023	Change	2010	2023
USA	15.0	26.6	+77.3%	1.3	3.5	+169%	4.14%	4.02%
UK	2.5	3.2	+28.0%	1.3	2.1	+62%	3.98%	4.08%
France	2.7	2.8	+3.7%	1.7	3.3	+94%	3.34%	2.92%
Germany	3.4	4.1	+20.6%	1.7	2.6	+53%	3.18%	2.32%
Italy	2.1	2.2	+4.8%	2.0	3.1	+55%	4.11%	4.20%
Spain	1.4	1.4	+0.0%	0.6	1.7	+183%	3.45%	3.07%

The long period of low interest rates was a historic opportunity to reduce debt both at the levels of governments, individuals and businesses. Instead the opposite has happened, as borrowers have taken on much larger principal amounts of debt, given that the annual interest burden was so low.

Debt-to-GDP ratio

Irresponsible governments have allowed their debts to run well ahead of GDP, in a permanent and failed Keynesian⁴ reflationary experiment:

Country	Government Debt-to-GDP
	2010	2023	Change
USA	90.9%	122.3%	+31.4%
UK	70.9%	97.6%	+26.7%
France	86.3%	110.6%	+24.3%
Germany	82.0%	63.6%	-18.4%
Italy	119.2%	137.3%	+18.1%
Spain	60.5%	107.7%	+47.2%

Germany is an outlier in having reduced its Debt-to-GDP ratio by 18.4 percentage points, but any optimism would be misplaced, as the irresponsible EU and its spend-thrift acolyte institutions (the European Investment Bank, the European Investment Fund, the European Financial Stability Facility and the European Stability Mechanism) have piled on liabilities for which financial markets believe Germany is responsible, the other EU member states being either small, or uncreditworthy, or both. All depends on Germany’s payment capacity to service the debts of these EU-level entities as well as its own.

Population, wages and government debt per person

Whatever debts individuals and businesses have taken on themselves, their governments have taken on a substantial amount of debt in addition for their account, since the debt service can only come, eventually, from the same individuals and businesses.

Governments have borrowed on average an extra amount of six months of people’s wages in order to keep spending up, a part of which will have been spent to the benefit of the population:

Country	Population (millions)		Average annual wages5		Government Debt per capita in US$		Number of months of wages per person
	2010	2023	2010	2023	2010	2023	2010	2023
USA	309	336	37,3466	58,292	4,336	10,294	1.4	2.1
UK	63	68	29,058	44,246	2,006	5,240	0.8	1.4
France	65	68	32,870	45,068	2,560	4,878	0.9	1.3
Germany	82	85	41,473	53,286	2,153	3,084	0.6	0.7
Italy	59	59	29,789	34,154	3,337	5,241	1.3	1.8
Spain	47	49	23,112	30,302	1,336	3,428	0.7	1.4

Residential property prices

Residential property prices in the USA and UK are once more looking inflated:

Country	Average House Prices in US$ thousands				Years of wages to raise Average House Price
	Sep 20077	2010	2023	Change8	Sep 2007	2010	2023	Change9
USA	29210	283	489	+73%	8.411	7.58	8.39	+0.81
UK	194	216	370	+71%	6.912	7.43	8.36	+0.93

Affordability – measured by years of average wages needed to raise the average house price – is back to pre-crash, 2007 levels in the USA. In the UK it is well above those levels: the primary effect of Bank of England Quantitative Easing has been to continue the house price increase that started in the early 1990s, and to elevate prices to unaffordable levels.

For the four EU countries we have the Year-on-Year change in house prices from 2006-2023:

Country	Change
France	+2.55%
Germany	+4.40%
Italy	-0.62%
Spain	+0.95%

These EU trends do not look like an inflated bubble in comparison with the USA and UK. There were sharp price falls during the Eurozone financial crisis of 2010-3 and the recovery since then has in part been making up lost ground. All the same, prices have recently fallen sharply in Germany so there remains some downside risk in the EU, especially if residential real estate falls as an asset class globally, as commercial real estate has done.

Conclusion

In many ways we are back in a pre-crash scenario of 2007 and we are certainly no further forward than in 2010 when the worst of the crisis was supposed to have been mastered. The exertions of central banks and their direct detriments have led only to higher government indebtedness and a consequentially lower ability to respond to future problems.

The USA and UK look ripe for another residential property price crash, led on by over-borrowing, and by the same fiscal irresponsibility engendered by governments and central banks as a response to the GFC. Book your tickets now for ‘GFC – The Sequel’.