UK Leading The Way?

When it comes to financial markets, I have often noticed that the UK seems to lead the US directionally by about 6-12 months. US interest rates, stock market movements and real estate patterns often have been preceded by similar patterns in the UK. I hope this pattern does not persist when it comes to banking.

While President Obama was mesmerizing the country with his inauguration, the prices of bank stocks were falling to new historic lows. Investors were asking themselves, "what is causing all of this?" The answer was in the UK. There is a movement for complete nationalization of Lloyd's Banking Group and the Royal Bank of Scotland. But the question of "what happens then?" is not clear.

The following graph illustrates the national debt level as it exist in the US:



This graph is disturbing as it indicates a level of borrowing which is unprecedented. When, and if, the government programs "kick in," there will remain an astonishing level of debt. This level of debt must be addressed through increases in profitability - a long term solution. The short run is the problem at hand.

Fortunately, the US and the UK do have different issues with external debt to GDP ratios. "External debt" is defined as the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services. In this respect, US debt levels are 100%, while UK is close to 400%. This level is greater than the debt level listed for the overall US debt. Scary times for the UK, but not necessarily leading the way for the US.