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Dear Sir,

In your editorial today ("The UK economy is vulnerable"), you rightly point out the dangers for the UK economy from 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", in reference to the "Dutch Disease": a long period of economic weakness 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 as it comes crashing down. The analogy to oil&gas, which underpinned the Dutch Disease, is twofold. First, in that finance, in the past 25 years, was 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 favorable 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 bigger 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 revenues, further creating demand for financial instruments.

Absolute levels of debt, increasingly poor risks, and asset price inflation turning into official inflation are all conspiring to end that cycle and, in all likelihood, 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 likely be calls for a more equal sharing of income, and more stringent regulation of financial institutions, which proved unable to resist to the temptation of ever higher returns from increasing risk-taking with other people's money.

Sincerely, etc

I'll add a link to the series here as as PS.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Dec 10th, 2007 at 11:47:08 AM EST
Just a note that in Britain a lot of people assume "Dutch disease" to be a reference to "Dutch Elm disease", which wiped out the English elm tree population.

I assume many of the financiers will understand the difference, but many lay readers will not.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Dec 10th, 2007 at 12:37:32 PM EST
[ Parent ]
is a traditional term of the trade for economists, so I'm not worried about that wrt the FT.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Dec 10th, 2007 at 12:56:27 PM EST
[ Parent ]
I've added  this article and the FT link to the WP entry on Dutch Disease.

A 'centrist' is someone who's neither on the left, nor on the left.
by nicta (nico@altiva․fr) on Mon Dec 10th, 2007 at 03:41:39 PM EST
[ Parent ]
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 revenues, further creating demand for financial instruments.

Why pussyfooting around the bush? It's stagnant real wages.

We have met the enemy, and he is us — Pogo

by Migeru (migeru at eurotrib dot com) on Mon Dec 10th, 2007 at 01:00:55 PM EST
[ Parent ]
Is that true of the UK?
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 10th, 2007 at 03:11:47 PM EST
[ Parent ]
What other revenues does the "population: have? I you want to talk about stagnant revenues it should be for other economic sectors.

We have met the enemy, and he is us — Pogo
by Migeru (migeru at eurotrib dot com) on Mon Dec 10th, 2007 at 03:39:56 PM EST
[ Parent ]
I agree about the word "revenues" but had the impression real wages had risen in the UK (as compared to the US).
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 10th, 2007 at 04:48:33 PM EST
[ Parent ]
Absolute levels of debt, increasingly poor risks, and asset price inflation turning into official inflation are all conspiring to end that cycle and, in all likelihood, reverse it, as borrowers deleverage and asset prices come down

Deleverage
A company's attempt to decrease its financial leverage. The best way for a company to delever is to immediately pay off any existing debt on its balance sheet. If it is unable to do this, the company will be in significant risk of defaulting.

Investopedia Says:
Companies will often take on excessive amounts of debt to initiate growth. However, using leverage substantially increases the riskiness of the firm. If leverage does not further growth as planned, the risk can become too much for the company to bear. In these situations, all the firm can do is delever by paying off debt.

Any sign of deleverage shown by a company is a red flag to investors who require growth in their companies.


Shouldn't it be "as borrowers delever", though?
by nanne (zwaerdenmaecker@gmail.com) on Mon Dec 10th, 2007 at 01:30:08 PM EST
[ Parent ]
Americano-finance-speak says "to leverage", and so, "to deleverage".
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Dec 10th, 2007 at 03:13:00 PM EST
[ Parent ]
As you are introducing the concept to the FT, it might be worthwhile to do a short recap on how the other parts of the economy were weakened. In your explanation here, you cite displacement of investment, an increase in demand that can't be met by domestic production, leading to increased dependence on imports, and an increase in the exchange rate that hurts exports from other sectors.
by nanne (zwaerdenmaecker@gmail.com) on Mon Dec 10th, 2007 at 02:09:20 PM EST
[ Parent ]
Here's a comb-through:

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
[ Parent ]
"...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
[ Parent ]
"...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
[ Parent ]

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