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Anglo Disease: LQD - the Economist is worried

by Jerome a Paris Sat Dec 1st, 2007 at 08:12:06 AM EST

You read it here first. Now it's in the pages of the economist:


The City of London's tumble

At the start of this decade, the financial sector--banking and securities, insurance and specialist services like shipbroking--made up 5.5% of national output; by 2004 that share had jumped to 8.3%. Over the same period manufacturing dwindled from 17.9% to 14.1%. The financial sector's expansion has continued apace: by 2006 it made up 9.4% of the economy, according to provisional official estimates.

(...)

The recent City-led expansion of finance in Britain has meant that a sector worth almost a tenth of the economy has been responsible for 30% of overall GDP growth over the past three years.

(...)

In the past decade Britain's financial sector has contributed about 30% of all corporation-tax revenues. For all the attention devoted to how some escape their fair share of taxes, the taxman has also reaped handsome returns from the City's high fliers, who make up many of the top 1% of earners contributing 22% of income-tax receipts. The fiscal dividend has been vital in paying for Labour's big public-spending increases.

(...)

It has come to seem, for many people, a sort of laboratory in which a rawer, less-cohesive Britain is emerging; a crowded, hustling place of vaulting earnings for the rich and of widening income disparities, which drains talent and wealth from the rest of the country.

Despite these fears, those who cheer as the City falters, will be wrong. The gains from London's position as a global financial hub, a source of envy to other countries, outweigh the losses. Every economy needs an engine-room: better one manned by bankers than none at all.


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Every economy needs an engine-room: better one manned by bankers than none at all

Well, unfortunately the water is pouring into this engine room now that the vessel has hit the iceberg.

The fact is that this globally extractive industry is - with a few honourable exceptions - parasitic upon truly productive industries. It produces virtually nothing of real value, but rather, manufactures out of thin air financial claims over real value.

I must say I had not appreciated the full effect on government finances that a collapse in City earnings will bring about. It makes it all the more necessary to come up with a new framework for public finance.

As you say, we're just hitting the windscreen as we apply the brakes: the real crash is just up ahead....

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Dec 1st, 2007 at 09:41:49 AM EST
What strikes me in that striking quote is the supposition that finance is the only possible engine-room. Either it's us (for there's no doubt where the Economist belongs), or nothing.

It's true that since Thatcher the rest of the British economy has been eaten up, destroyed, drained of vital resources. This is the Anglo Disease, like the Dutch Disease in which investment and resources were channeled into natgas to the detriment of the whole economy and its balance.

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Dec 1st, 2007 at 09:53:52 AM EST
[ Parent ]
What I find most depressing about the notion of "City Finance as the engine room" is that:

a) It doesn't seem to recognize any value to diversification. I'm not fond of the City on various grounds, notably the way subsidies and policies are skewed to the benefit of the City at the expense of other industries. But, that doesn't mean to say I'm against Britain being involved in Financial Services, or even it being a serious part of the economy. But why should/must it be the only part?

b) I suppose this can be read as part of my first point, but taken as a whole, the "engine room" nature of the City seems profoundly dependent on various cycles in the world economy. We've had some years where those conditions have been favourable, but what kind of idiot doesn't plan for adverse conditions? But it seems there is no idea of how the economy continues when the City takes a downturn.

by Metatone (metatone [a|t] gmail (dot) com) on Sat Dec 1st, 2007 at 12:36:16 PM EST
[ Parent ]
Better to have one engine room, than none at all.  Financial services is the one area where Britain still has some claims to a world leadership position.  With the decline in all revenues the external earnings of the financial services sector is the only gravy train left.

The current implosion in that industry is very bad news (VBN) for Britain and Gordon Brown indeed.  Not only have the Eurozone and Frankfurt, London's chief competitor, been relatively unaffected, but Eurozone countries still have strong industrial sectors to add substance to the sometimes ephemeral nature of financial services and products.

Think where will the Chinese, Indians, and Oil producing countries invest their massive surpluses from now on?  The nosediving dollar, the stagnant pound, or the Eurozone which still produces a lot of real products (Airplanes, Cars, hi tech goods) that people actually want and need in the real world?

The very thing that is supposed to have held Eurozone countries back - excessive government regulation - is also what has ensured that their financial services are backed by real assets.  

The dollar will recover it's poise in due course, the USA's real economy is still quite strong.  But whither Sterling?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Dec 1st, 2007 at 02:23:35 PM EST
[ Parent ]
The dollar will recover it's poise in due course, the USA's real economy is still quite strong.

The dollar as currently constituted is finished.

The crash coming will be as dramatic as that at the end of the Japanese bubble and there is still a long way to fall. The difference will be that there will be stagflation in the US, not chronic deflation as in Japan.

The underlying US economy is potentially strong, for sure, but where will the money come from to mobilise it? The one thing I do know is, it won't be in dollars as we know them.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Dec 1st, 2007 at 05:42:06 PM EST
[ Parent ]
The Yen is still there after many years of stagnation.  The US has a long history of devaluing the dollar as a way of correcting huge government and trade imbalances.  Their problem is that the Chinese are refusing to let them play that game unhindered.  At the moment the EU central bank is being suckered into taking all the strain - something which will ultimately cause recession in Europe if not corrected soon.

The US economy is still growing faster than the EU - and current currency movements will only exacerbate that divergence unless the EU reduces interest rates sufficiently to halt any further appreciation of the Euro.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Dec 1st, 2007 at 07:11:24 PM EST
[ Parent ]
US growth is illusory.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Dec 1st, 2007 at 07:25:18 PM EST
[ Parent ]
The dollar will recover it's poise in due course, the USA's real economy is still quite strong.  But whither Sterling?

It will join the Euro, of course, as soon as the City decides it is in its own best interest or the BoE/FSA/Treasury crash the ship through incompetence. However, the UK will have to go through two years of pain while they join the EMU exchange mechanism before they can actually join the Euro.

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

by Migeru (migeru at eurotrib dot com) on Tue Dec 4th, 2007 at 08:16:23 AM EST
[ Parent ]
Is this a LGD or a LQD?

A Lazy Goat Diary or a Lazy Quote Diary?

by afew (afew(a in a circle)eurotrib_dot_com) on Sat Dec 1st, 2007 at 09:43:27 AM EST
Last Gasp Diary?

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Dec 1st, 2007 at 09:47:40 AM EST
[ Parent ]
I suspect the phrase in Jerome's mind was:

Lazy Graph Diary

by Metatone (metatone [a|t] gmail (dot) com) on Sat Dec 1st, 2007 at 11:36:15 AM EST
[ Parent ]
Could be a Lazy Gloat Diary.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Dec 1st, 2007 at 05:04:27 PM EST
[ Parent ]
European Tribune - Anglo Disease: LQD - the Economist is worried
It has come to seem, for many people, a sort of laboratory in which a rawer, less-cohesive Britain is emerging; a crowded, hustling place of vaulting earnings for the rich and of widening income disparities, which drains talent and wealth from the rest of the country.

Ya think?

Despite these fears, those who cheer as the City falters, will be wrong. The gains from London's position as a global financial hub, a source of envy to other countries, outweigh the losses. Every economy needs an engine-room: better one manned by bankers than none at all.

Of course they outweigh the losses if you're one of those with a regular seven figure bonus.

If you're in the majority of the population - the poorly paid who can barely afford somewhere to live - the losses far outweight the gains.

Because there are no gains.

Does the Econo take its own writing seriously? Are the writers genuine ideologues, or do they sit around their word processors laughing and chuckling to themselves as they write this crap?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Dec 1st, 2007 at 05:09:30 PM EST
They genuinely believe it, I think.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sat Dec 1st, 2007 at 05:24:16 PM EST
[ Parent ]
i remember watching the pit (!) where the wall street trading is done on tv, and thinking that these folks waving their arms and shouting into mobile phones were the pulse of the 'financial community' and they all looked completely demented.

banking has controlled politics since the medici era; without credit to make war, no ruler could expand his realm.

these last 100 years they have increasingly outgrown their 'eminence grise' role and instead of representing sobriety and prudence, it appears they have become corporate gamblers, as well as treasure-protectors for the dictators' ill-gotten gains, narco- and human traffic money launderers, as well as their old role of financing military spending and manipulating politics from behind the velvet curtain.

i hope chris is right and out of the ashes of this worldwide ponzi scam there can arise a fairer, more transparent system.

maybe banking needs to go back to being stodgy and dull!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Dec 1st, 2007 at 05:43:38 PM EST
Why on earth would bankers go back to being stodgy and dull when they are paid huge bonuses to gamble with other people's money?  When they win they and their banks make billions, when they lose the Government has to bail them out to avoid  a financial melt-down and a loss of confidence causing recession in the real economy.  It's an absolute no-brainer to pursue a high risk strategy with other people's money if the Government/Central bank has to bail you out if it all goes south big time.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Dec 1st, 2007 at 07:04:28 PM EST
[ Parent ]
hey frank, i was snarkin', probably should have said....

you nailed it, they shouldn't be profiting off gambling away money that's not theirs unless they can also swallow losses when they occur, without whining that's it's a national emergency and asking for bailout funds from the same people/taxpayers who thought their money was safe in the hands of 'dull, stodgy', but dependable experts.

what happens, imo, to make the military industrial complexes and banking so corruptly powerful, is that governments come and go according to elections in quite short timespans, whereas the contracts for defence and loans are for longer spans.

this makes these industries so deeply entwined with 'national security' in such secretive ways that there is not enough accountability, and though every so often a little scandal about $700 screwdrivers comes out, you just know it's the tip of the iceberg.

when the government in in hock to bankers, and the people too, skullduggery ensues as predictably as day follows night, enshrouded in mystery and as opaque as mud.

Too Much Power = Too Much Corruption

thanks for your reply-

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sun Dec 2nd, 2007 at 04:26:17 AM EST
[ Parent ]
when the government in in hock to bankers, and the people too, skullduggery ensues as predictably as day follows night, enshrouded in mystery and as opaque as mud.

That's why a new global solution can only be proposed by those resource rich governments: Russia, Norway, GCC who are:

(a) not in hock to banks, IMF, whatever;

(b) fed up with receiving IOU's from the Fed in exchange for real value ("money's worth") such as oil, and looking askance at any other IOU's.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Dec 2nd, 2007 at 08:17:16 AM EST
[ Parent ]


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