‘SPECULATORS MAY do no harm on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on the whirlpool of speculation. When the capital development of a country becomes the by-product of a casino, the job is likely to be ill done,’ wrote Keynes in 1936, during the depression that followed the Great Crash of 1929.
Writing today, he might add that a position where the economy is managed not to promote enterprise but to keep the whirlpool of speculation turning is beyond serious and becoming surreal.
Far be it from me to say I told you so (well, all right then), but the bill for entrusting the capital development of the country to the casino is now falling due – and the price will be high. As the waters drain out of the whirlpool, what’s left of the UK economic miracle makes a soggy sight.
It turns out the UK’s famous growth economy is built not on prudence and good management but on tick and soaraway property prices. The UK savings rate is negative: total personal debt is now around pounds 1.5 trillion and increasing at nearly 10 per cent a year. About pounds 1.2 trillion of that is mortgages as people chase house prices that nearly trebled in the decade to 2006 (in London, considerably more). We have thus managed the remarkable trick of transforming bricks and mortar into gauzy insubstantiality – a bubble containing thin air.
The architects of this transformation, of course, have been the City alchemists who, as we now know, vastly inflated the bubble by slicing, dicing and selling on the debt to other clever fools. But that is almost entirely the City’s function today. The time is long gone when its job was to provide a service to the economy it’s now the job of the rest of the economy to provide the material for its trades. Consider the foreign exchange market, where pounds 1 trillion is traded every day. Just 20 per cent of this is currency needed for trade or tourism. Eighty per cent is speculative – gambling, in other words. The tail has wagged the dog off its feet.
Even though the definition of a bubble is that the values are unreal, it’s the real world that gets to pick up the pieces. Even at the height of the credit boom, the City was uninterested in start-ups, much preferring buyouts of established firms on which it could weave its financial magic. Now, with the air hissing out of the bubble like a deflating tyre, the word is that start-up capital for the real economy is drying up.
Another casualty of City culture is the patient, human and organisation-building skills that underpin success in the material economy. Alas, computers can’t do everything, even in finance. It’s telling that the most sophisticated surveillance technology was unable to spot Societe Generale’s rogue trader piling up $50bn of trades – but didn’t anyone notice his behaviour?
For contrast, turn for an instant to somewhere that, for the last 15 years, has been as sexy as Horlicks. Germany, throughout the go-go decade, has been regarded by Anglo-Saxons with barely concealed scorn. Who cared about making things when all that could be done in China? Well, Germany has just put out an economic report for 2008 noting that its resilience to external shocks has ‘improved substantially’. Engineering, its economic heart, is expecting growth of 5 per cent this year (11 per cent in 2007) jobs, too, will increase.
Overall, German unemployment remains high, but the country is still the world’s largest exporter. Alone among industrialised countries, it has increased its export market share since 2000. Not only is its manufacturing sector ‘defy ing the laws of economic gravity’, as one analyst put it, Germany also has high hopes for its unregarded services sector. It has twigged that manufacturing and services aren’t alternatives they travel together. So where German exporters boldly go, Deutsche Bank and SAP follow close after. Unfortunately for the UK, the reverse applies. With nothing to piggyback on, UK services are no longer expanding to offset manufacturing’s balance of payments deficit they add to it.
The jewel in the German economic crown is not the famous global names but the Mittelstand – the medium-sized, family-owned companies that employ 70 per cent of German workers and power its export performance. These firms thrive on long-term relationships with employees, customers, suppliers – and banks, which see their job as providing continuity and support rather than doing deals. This is why the private-equity ‘locusts’ arouse such fear in Germany: imported Anglo-Saxon attitudes would tear its economic fabric apart.
Back in the UK, timid recognition that there is still life outside the casino came with last week’s announcement of a boost to the UK’s apprenticeship scheme – partly, it is rumoured, under pressure from German employers, who persist, oddly, in seeing the UK as a manufacturing base. It seems churlish to carp. It is indeed welcome – just 25 years too late.
The Observer, 3 February 2008