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The FT worries about the Anglo Disease

by Jerome a Paris Mon Dec 10th, 2007 at 07:42:17 AM EST

Well, they don't call it that yet, but hopefully they will soon...

The UK economy is vulnerable

(...) the reliance of the economy on business services and finance for about 30 per cent of output [is] more disturbing. This sector is not just big. The health of its most productive part - the City of London - is intimately linked to the health of global financial markets, and like a star football player whose performance flatters the rest of the team, its growth rate flatters the UK average.

If there is a marked global downturn, led by falls in property and other asset markets, then the UK will suffer disproportionately.

(...)

Tapping into the energies of globalisation has made the UK a geared bet on the strength of the world economy*. (...) Those who live by the global economy also die by it.

Remember that in today's econospeak, "the world economy" = the top 0.1% rich. The City of London has made every effort to attract millionaires over, via tax breaks or visas-for-sale and to mint them, via the financialisation of the economy and the accompanying capture of wealth by bankers and fund managers, and to claim the resulting concentration of wealth, as measured in GDP numbers, as a good thing for everybody else too. This has been an attempt (highly successful so far) to ride the Big Asset Bubble of the past 15 years (some would say 25), have a small number of well placed people take a healthy skim off, and claim that as actual value creation. But as it becomes increasingly obvious that the Bubble has run its course, it's going to end, and a lot of the virtual wealth will disappear.

This endgame is what I have labelled the Anglo Disease, in reference to the Dutch disease, whereby an extremely profitable industry (in the Dutch case, oil&gas) cannibalizes the rest of the economy, and leaves it in worse shape when the wealth extraction has run its course.

The big question to come, of course, is who will bear the brunt of the pain to come, ie was the skim virtual, or real, and who gets to keep it, and any residual wealth in the newly depressed economy?

I have explored this concept in various articles (linked to below the fold) and would hope to introduce it to the FT, now that they seem receptive to the reality of an exacerbated downturn in the UK. I propose to use the comments section below to get an LTE sent to them and, as usual, hope for your help in drafting it..


Previous "Anglo Disease" content:

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My brain isn't working well at the moment, so I don't think I can help with the LTE per se.

An economy based on ever increasing numbers of lawyers, bankers, accountants and journalists may sound like a horrible idea but it has worked well for Britain.

This quote from the linked article seems very important to me. Fundamentally, the notion that "advanced Western economies" are moving out of manufacturing and into services, as they previously moved into manufacturing from agriculture seems linked to building an economy of laywers, bankers, accountants and journalists.

What we appear to be seeing is an admission that the entire model relies on the asset bubble.

And perhaps that is the key issue for the LTE. This is not just about Britain being vulnerable to swings in the global economy, after all, a country dependent on manufacturing can equally be vulnerable to a downturn in the world economy. The issue here is that the modern British economy has been founded on a particular set of extraordinary conditions (low interest rates, asset bubble) that the FT has tended to assure us were "here to stay, a new world, the great moderation" but now look to have been just a temporary circumstance.

As the oil or gas can run out for a resource dependent country, has this "natural resource" of "Greenspan low interest rates" also gone for good? Is the financial sector destined to shrink as the coal mines once did?

by Metatone (metatone [a|t] gmail (dot) com) on Mon Dec 10th, 2007 at 10:13:34 AM EST
I've used your point about the "resource" in my first attempt below.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Dec 10th, 2007 at 11:48:07 AM EST
[ Parent ]
building an economy of laywers, bankers, accountants and journalists.

The Ministry of the Plan is getting larger and larger.

All those profession are interested in planning, allocating resources, selling the  current set-up... Not actually producing "stuff" or even useful services.

But they said that bureaucracy is overblown in state-centralised planning, that it can't happen in a neoliberal utopia.

Obviously false. And as in any hierarchical system, those doing the organizing keep a growing part of the resources for themselves. Parasites.

And they have the nerve to wage a war on the unemployed, and the working poor...

Un roi sans divertissement est un homme plein de misères

by linca (antonin POINT lucas AROBASE gmail.com) on Mon Dec 10th, 2007 at 02:44:32 PM EST
[ Parent ]
From where I sit, the UK economy looks like an aconomy based on ever-increasing numbers of real state agents, hairdressers, convenience stores, and digital photo printing/internet café businesses.

I wonder what will happen if the housing market freezes and real estate agents start closing branches because there just isn't the volume of sales to support all the jobs.

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

by Migeru (migeru at eurotrib dot com) on Mon Dec 10th, 2007 at 03:28:24 PM EST
[ Parent ]
UBS Sells Stake After Write-Down

After another big write down of 10 billion in mortgage related 'assets', UBS became the latest Western bank to seek a financial lifeline from the cash-rich East today, selling a stake of more than 10 percent to investors from Singapore and the Middle East.

"It's a measure of how the geopolitical and financial landscape has changed," said David Williams, the head of banking research in London at the investment bank Fox-Pitt Kelton Cochran Caronia Waller.....

For UBS, Mr. Williams said, it was an "interesting and depressing" day. "Only a year ago," he noted, "this was considered one of the most financially sound institutions in the world."....

UBS's group chief executive, Marcel Rohner, said, "We don't operate from a position of fear."

<chortle, chortle>

You can't be me, I'm taken

by Sven Triloqvist on Mon Dec 10th, 2007 at 10:40:10 AM EST
In afew's diary about offshore fiscal centres, there is a graph ranking countries according to the share of financial services to non-residents in the GDP. UK is ranking high above other industrialised countries. I think this graph would fit in this LTE...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Mon Dec 10th, 2007 at 10:51:30 AM EST

(source (pdf)

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

by Jerome a Paris (etg@eurotrib.com) on Mon Dec 10th, 2007 at 12:26:03 PM EST
[ Parent ]
Yep. I don't think the graph should be used in the LTE, but a reference to the IMF paper saying that along their criteria, UK can be seen as an offshore financial centre...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Mon Dec 10th, 2007 at 03:14:59 PM EST
[ Parent ]
Here's an attempt:


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&#65312;altiva&#8228;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 ]
This concerns the US, but here's an excellent graph concerning one of the aspects of the Anglo Disease -- from NBBooks' diary Lobbyist: Bush's Subprime Mortgage Plan Sandbags Congress :

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Dec 11th, 2007 at 02:05:18 AM EST
Thanks for this detailed analysis and for bringing together the links to previous postings. Very useful.

It looks well grounded comment... though part of me does think back to the history of French comments on the 'English' economy'.. for example....

The bank of England is destroyed: its fake currency shrinks to its real currency.. its credit lost; its resources annihilated; and general terror...

That is from the "Memoire sur l'Angleterre" the 1773 document laying out the hoped-for results of the French strategy of subversion in Britain's colonies in North America. Enthusiastic hopes of a collapse of the 'un-natural English economy' have surfaced many times over the centuries in France... Let's see how the present situation evolves.

Reference: Memoire sur l'Angleterre (1773) in Ministere des Affaires Etrangeres, Memoires et Documents: Angleterre Vol 52 Fol. 180-223.

Cited in I. and R. Tombs 'That Sweet Enemy' pp168-9

by saugatojas on Thu Dec 13th, 2007 at 07:47:56 AM EST


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