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Your editorial "The UK economy is vulnerable" rightly points out the UK economy's vulnerability in the aftermath of the financial crisis and the housing bubble. I would argue that Britain is likely to face what could be labelled the "Anglo Disease", by allusion to the "Dutch Disease": a long period of economic sluggishness as the parts of the economy which were weakened during the boom of the financial sector are unable to replace that sector as the engine of growth when the boom collapses. The analogy with oil&gas, which underpinned the Dutch Disease, is twofold. First, in that finance, for the past 25 years, has been a sector with intrinsically higher returns, and second, in that the resource (very low interest rates) is coming to an end. The high returns were driven by macro-economic policy (inflation moderation, and the "Greenspan Put", which allowed more risks to be taken) in a favourable political context (the spread of liberal policies and free markets, deregulation, a higher tolerance for inequality). To a large extent, it was a self-sustaining mechanism, with higher asset values generating greater profits and making bigger bets possible, further sustaining prices. The capture of an increasing share of revenues by financiers was also made possible by giving the rest of the population access to more debt, thus allowing them to keep on consuming despite stagnant real wages, further creating demand for financial instruments.

Absolute levels of debt, increasingly poor risks, and asset price inflation turning into officially acknowledged inflation are all conspiring to end that cycle and, in all likelihood, to reverse it, as borrowers deleverage and asset prices come down. The exact symptoms of Anglo Disease are likely to include a long period of sub-par growth and, in the context of booming emerging markets, surprisingly persistent inflation. Politically, there will probably be calls for more equitable income distribution, and more stringent regulation of financial institutions, since these have proved unable to resist the temptation of drawing ever higher returns from from the practice of taking risks with other people's money.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 10th, 2007 at 03:21:25 PM EST
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"...the exact symptoms of the Anglo Disease..."
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 10th, 2007 at 03:23:56 PM EST
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"...ever higher returns from from the practice..."
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 10th, 2007 at 04:51:18 PM EST
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