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Anglo Disease at Fever Point?

by afew Mon Sep 15th, 2008 at 07:06:20 AM EST

The Anglo Disease is a syndrome, typically displayed by the US and UK (hence the name), in which the financial sector unhealthily dominates the economy.

In view of today's considerably dark Monday, does the following describe the ailment and predict the outcome adequately? Or should we have spoken of the Black Death?

"Dutch Disease" was a term coined in the 1970s by the magazine The Economist to describe the syndrome suffered by the Netherlands after the discovery of the massive Groningen field propelled natural gas into the driving seat of the economy. The extractive sector became so profitable that it attracted the lion's share of new investment, and the resulting gas export boom altered the trade balance and boosted the currency, causing difficulties for the rest of an export-oriented economy. And, as with the "oil curse" that has struck other countries, depletion of the resource has since proved to be extremely painful.

On a larger scale, but of similar nature, is the high-profitability disorder that has, until recently, characterised the financial sector. The biggest single sector in the 2007 S&P 500 market capitalisation index, weighing 7%-8% of US GDP, its share in total corporate profits stood last year at over 40% from below 20% in the 1970s. Net total income growth in recent years has predominantly benefited a relatively small number of people either working directly in the sector or owners of financial assets. In the UK, where the sector's share of GDP rose to 9.4% in 2006, from 5.5% in 2001, City-dominated London received 50% of total foreign investment. Per capita Gross Valued Added rose by between 8% and 9% over the last decade in London while, in all other regions of the UK, it stagnated or fell. In fact, the phenomenon is so firmly based in the money centers of New York and especially London, that the label "Anglo Disease", by allusion to "Dutch Disease", might appear to be no unfair moniker.

How to describe the pathology of this ailment? Financiers, now unchecked by regulation or restrictions on leverage, can monetize many kinds of future revenue streams today, generating instant profits they and their clients can capture. That capacity to create apparent wealth out of thin air without limit cannot be matched by any other sector in the economy. Unsurprisingly, it sucks in talent, resources and skills that are not available for infrastructure investment or other economic activities.

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Meanwhile, the investors who have made those immediate profits possible still want to ensure that the future flows that underpin them do in fact materialize--and so they will impose their rules and discipline on the underlying economic activity. The result is an unrelenting focus on profits and shareholder value. Struggling to meet "return on capital" criteria, many non-financial activities experience yet further reductions in capital allocation, and relative decline. Meanwhile, public debate is dominated by financial analysts, as "net present value" becomes the standard prism through which to view any human activity.

Public policy attempts to provide balance are hamstrung by the fact that, from the financial viewpoint, regulations and tax are restrictions on entrepreneurship and profit to be opposed and if possible eliminated. As for labor, return on capital is improved if its cost can be reduced. Outsourcing, offshoring, and labor market flexibility have helped keep wages in check. Hence a major symptom of the Anglo Disease is long-term stagnation of the majority of incomes.

Flat incomes might constrain domestic demand, but easy credit (to the further benefit of the financial industry that channels it) has buttressed household spending. Expansionist monetary policies in the West have combined with Chinese mercantilism to offer rapid asset price increases with no consumer goods or wage inflation, generating high corporate profits. Global trade imbalances and what was a massive asset bubble created an economy blessed with the appearance of strong, inflation-free growth--an illusion that helped validate the underlying policies, despite rising inequality and ballooning, unsustainable, debt burdens. Starting with subprime lending, but now extending to other financial activities, market players have suddenly become scared by their collective imprudence and have engaged in a brutal process of deleveraging. While the credit crunch devastates bank balance sheets, the wider economy is also suffering. Credit available to businesses is shrinking, and the spigot of house equity withdrawals is turned off for consumers. The reality of declining or stagnant incomes for the majority can no longer be camouflaged. Prospects are dire, and further damage to the banking sector and the overall economy is likely.

The imbalances will only be unwound, ultimately, if incomes match spending more closely. That can, of course, happen through a consumer spending slump and an inevitably painful recession. The financial wagers and high-priced assets that surfed on a nicely growing economy will, at some point, have to be marked down as losses, as is happening already. The Anglo Disease will face treatment by the kind of drastic purge that threatens the patient's very life.

There remains another way: higher wages across the board, and a more modest financial sector restrained by regulators and unable to impose the artificially high return-on-capital requirements made possible only by excessive leverage. Making banking boring again is, compared to the alternative, a fairly gentle cure for the Anglo Disease.

John Evans, a writer, and Jérôme Guillet, an investment banker in the energy sector, are editors of the European Tribune, a current affairs website.

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This text was submitted as an op-ed to the WSJ... As yet unpublished.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Sep 15th, 2008 at 07:08:23 AM EST
It's overtaken by events, but is still worth posting, as it predicted the crisis and explained what was the underlying ailment.

We're moved from the latent form of the disease (if the damage to the economy outside the financial sector can be ignored, as the official statistics have led to believe for too long) to its acute form, where the symptoms catch up with the financial sector and bring it down.

What needs to be underlined is that the supposed prosperity of the past couple decades was, to a large extent, virtual, and it is disappearing right in front of our eyes. And that destruction is part and parcel of the system that was promoted, and not an exogenous, unpredictable "once in a century" event as some (like Greenspan) claim.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Sep 15th, 2008 at 07:17:22 AM EST
[ Parent ]
What needs to be underlined is that the supposed prosperity of the past couple decades was, to a large extent, virtual, and it is disappearing right in front of our eyes.

It was worse than virtual, it was borrowed from the future by "monetizing" revenue streams. This means you have to earn your future income just to cover the hole.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 07:19:25 AM EST
[ Parent ]
that it was worse than that, given that "real" activities suffered from under-investment during that period.

On the other hand, if we move back towards real activity (infrstructure and renewable energy come to mind, somehow), maybe the pain will not be so bad. The issue is about letting the wealth created be captured or not by the financial sector. If finance is brought down to size, maybe GDP will be lower, but overall activity may not be so much lower.

It's time for the real economy to default on the financial sector (rather than the other way round, as is happening now...)

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

by Jerome a Paris (etg@eurotrib.com) on Mon Sep 15th, 2008 at 07:22:11 AM EST
[ Parent ]
It's time for the real economy to default on the financial sector (rather than the other way round, as is happening now...)

Right, see my parallel comment on nationalisation...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 07:23:52 AM EST
[ Parent ]
I attended a lecture on the Credit Crunch last week. Among the bullet-point conclusions, the speaker included
The unwinding of Anglo-Saxon debt will slow economic growth for years.
He explained, without prompting, that the choice of the term 'Anglo Saxon debt' was because it is specifically the English-speaking Western™ countries (UK, US, Canada, Australia, NZ) that have had the biggest debt binges. And why should the unwinding of the debt slow down growth? Because as you say
Financiers, now unchecked by regulation or restrictions on leverage, can monetize many kinds of future revenue streams today, generating instant profits they and their clients can capture.
Monetizing future revenue streams means that several years' worth of future economic growth has already been realised as profits of the financial sector in the past 10 years (explaining the GDP - that is, income - boost coming from the financial sector). A few years of economic growth will be spent just making good on the liabilities incurred in the process by the productive part of the economy.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 07:16:16 AM EST

A few years of economic growth will be spent just making good on the liabilities incurred in the process by the productive part of the economy.

Which means that even if we work well we'll feel poor - again, according to macro-statistics. It was already that way to a large extent for a majority of the population even though the macro statistics were looking good; now that things will be bad on aggregate, the question now will be the sharing of the pain during these bad times.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Sep 15th, 2008 at 07:19:48 AM EST
[ Parent ]
Unless those liabilities are nullified by legislative act - which implies a nationalisation of the 'assets' side, that is, the credit institutions.

Don't hold your breath.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 07:21:25 AM EST
[ Parent ]
'Wall St Disease' might be a catchier title.

But anyway - this isn't just a financial crisis. Now that Venezuela has thrown out the US ambassador, this is going to mean a huge military realignment around the world. Expect Soviet missiles to start appearing in Central America soon.

I wouldn't be surprised to see Venezuela start demanding oil payments in gold too. (Or possibly bread and chickens.)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 15th, 2008 at 07:16:58 AM EST
They wouldn't dare.  Not with the discovery of Caribou Barbie. :)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 15th, 2008 at 07:45:29 AM EST
[ Parent ]
or 'off-the-wall st.' disease...

lehmann going for bankruptcy, i thought they had tightened up the bankruptcy laws recently.

or was that just for the little people?

'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 Mon Sep 15th, 2008 at 08:03:06 AM EST
[ Parent ]
Did I read Soviet?
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Sep 15th, 2008 at 08:08:00 AM EST
[ Parent ]
Zeitgeist

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 08:08:33 AM EST
[ Parent ]
Gah.
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Sep 15th, 2008 at 08:12:07 AM EST
[ Parent ]
Yup.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Sep 15th, 2008 at 08:17:38 AM EST
[ Parent ]
Rysskräck.
by Nomad on Mon Sep 15th, 2008 at 08:36:22 AM EST
[ Parent ]
Perhaps the missiles were made during Soviet times.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 16th, 2008 at 01:11:59 AM EST
[ Parent ]
http://www.dailykos.com/storyonly/2008/9/15/7374/81936/791/599241

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Sep 15th, 2008 at 07:46:14 AM EST
A!  I!  G!  A!  I!  G!

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Sep 15th, 2008 at 07:47:32 AM EST
What is up with you people??

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Sep 15th, 2008 at 07:48:39 AM EST
[ Parent ]
The Lion in Winter (1968) - Memorable quotes
Henry II: We're in the cellar and you're going back to prison and my life is wasted and we've lost each other... and you're smiling.
Eleanor: It's the way I register despair.


We all bleed the same color.
by budr on Mon Sep 15th, 2008 at 01:07:45 PM EST
[ Parent ]
This has been a LONG time coming.  

It's disaster, sure, but what of that?  

The Fates are kind.

by Gaianne on Tue Sep 16th, 2008 at 04:40:48 PM EST
[ Parent ]
European Tribune - Anglo Disease at Fever Point?
There remains another way: higher wages across the board, and a more modest financial sector restrained by regulators and unable to impose the artificially high return-on-capital requirements made possible only by excessive leverage. Making banking boring again is, compared to the alternative, a fairly gentle cure for the Anglo Disease.

Firstly, I agree that corporate revenues should be split more equitably as between "Capital" and "Labour" - which is another way of saying "higher wages".  Unfortunately, the pathological structure of "the Corporation" means that just ain't gonna happen.

So we need an enterprise model other than "the Corporation", and fortunately, new ones are no longer a novelty.

Secondly, the relative decline in wages  is only a part of the problem.  The greater issue is the increasing inequality in ownership of "Wealth" aka Capital.

By "Wealth" I do not mean claims over wealth issued by credit institutions - because in my opinion any leverage using such credit is "excessive", and indeed is the direct cause of asset price inflation - but "property" in productive assets, particularly land.

This is where taxes on privilege, such as the privilege of private property in the "Commons" of land, in the Commons of non-renewable energy, and even the "Creative Commons" of knowledge, are long overdue.

Until the current Danish government came to power and capped it, the Danes raised some 30% of their tax base from a tax on land values. Even Milton Friedman called this tax - which I would call a "Location Benefit Levy" - the "least bad" tax ,because it is simple and inescapable. It is also equitable, although I am not sure that was a consideration for Friedman.

With such a tax in place, regressive indirect taxes could be abolished, and some headway made on cutting direct taxes for low earners.

Similarly, a "Carbon Levy" on non-renewables could sustain a "Pool" fund to be used to invest directly in the future production of renewable energy assets, and indeed, even the future savings ("NegaWatts").

To achieve this diract investment, Redeemable Units in such a Pool would essentially "monetise" the energy value of carbon, rather than the complete bollocks of monetising something of no intrinsic value at all - by which I mean CO2, not dollars, but if the cap fits....

The result could be an expanding Pool of renewable energy assets in public ownership - but with "Not for Loss" private operation - which would give rise in due course to an "Energy dividend" to all.

Finally, I would abolish Corporation Tax, and replace it with a "Limited Liability Levy" made on GROSS corporate revenues, collected at the clearing level, and representing a tax on the privilege f "free" limitation of liability.

This would get rid of most of the tax industry overnight, plus 90% of the work of accountants, who could do something useful instead.

To conclude, I believe that we reached the point of "Peak Credit" over a year ago and that we are just about to hit the second wave effects of the "Credit Crunch".

Fortunately, the pervasive spread of the Internet and the direct "Peer to Peer" connections it enables makes credit intermediation, whether by Privately owned Banks, Publicly owned Banks, or even National Treasuries (cf "Social Credit") obsolescent.

IMHO, the real cure for the "Anglo Disease" is the widespread introduction of new forms of "Equity" within frameworks based upon partnership and trust law.

So, through a "Debt/Equity swap" on a grand scale it is possible to "Equitise" the US and the UK, to begin  with.

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

by ChrisCook (cojockathotmaildotcom) on Mon Sep 15th, 2008 at 07:55:35 AM EST
Sicknesses with fever used to have a crisis point, bevor antibiotics, where it was make it or break it. That means if they made it, the worst was over and recover, thought at times slow could start.

Lets hope this is the point, and that recovery can now begin. However, hopefully, by not trying to restore the old way, but by using this opportunity to create something more solid and just. Though I have my doubts, not that i think it is not possible, but I doubt that it is possible with the current people in power.

by Fran on Mon Sep 15th, 2008 at 09:07:55 AM EST
Lets hope this is the point, and that recovery can now begin.

Listening lately to economists here on TV I would say it did not even start yet...long fall in front of us...
Here they (treasurer)say (maybe just to please us) that "if you want to be at the best country in this crises it would be Australia"...but they may just daydreaming...

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Mon Sep 15th, 2008 at 10:09:15 AM EST
[ Parent ]
Maybe if the best parts weren't turning into a desert . . .
by Zwackus on Mon Sep 15th, 2008 at 06:33:30 PM EST
[ Parent ]
Lets hope this is the point, and that recovery can now begin.

Most people in the US are still trying to figure out why this is a problem for them.  I fear we have a long way to go before a majority find out.  That may not happen until after McCain's inauguration.

I do agree that we should hope to create something more just and lasting out of the ashes---because I refuse counsels of despair on principle.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Sep 16th, 2008 at 01:30:02 AM EST
[ Parent ]
Why aren't you trying to send this to more sympathetic journals? For example, there is an article in today's Guardian about how the rise of the City has badly damaged manufacturing and how the reverse may happen now, but it is an article much less clear than yours.
by Deni on Tue Sep 16th, 2008 at 05:02:42 AM EST
Indeed. If not the Guardian print edition, then certainly the "Comment is Free" segment.

And welcome to ET, Deni..or is it welcome back?

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

by ChrisCook (cojockathotmaildotcom) on Tue Sep 16th, 2008 at 08:39:13 AM EST
[ Parent ]


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