Jerome:
As I was traveling in Central Texas Monday afternoon I heard over NPR's Moneywatch that UBS had blamed the subprime meltdown on the growing inequality of income in the US, that the working class had been in a recession while the owning class made ever increasing amounts of money. This is bourne out by the figures of Shadow Inflation-the US has a real inflation rate of at least 10%, while wages have not kept up for the last 25 years for the middle and working classes.
That seems true to me in my small part of the world. At least half of the people in the US are living pay check to paycheck, with their only real asset in their homes. As the prices of energy ,healthcare and food have tripled in the last 10 years, their expenses have shot up incredibly. They then resort to living on high interest credit cards(18-22%) and borowed and refinanced against their homes to pay off their credit cards then refinanced again, successfully turning their current consumption into subprime debt.
We are well into overshoot on this problem-the owners have to realise that if you don't pay people a decent amount, they can't pay their bills and purchase more. And its only going to get worse the longer it is postphoned. Now American car manufacturers are offering rebates and deals where the payments are postphoned for a few months. The consumers take that money and use it to continue the Ponzi scheme of paying the mortgage, paying the credit cards for a few more months before paying the piper.
This is exaberated by the nature of current employment. Th reason that retail jobs and service rep jobs don't pay squat is because they are really not very productive-while the good paying working class jobs have moved overseas.

Its a real conumdrum.

Jerome a Paris,

First, my compliments on what is a fascinating article, and the choice of topic I find very compelling. Allow me to say that in my opinion there should be no danger of you, to use your words in the closing paragraph, being accused of "talking nonsense". I will admit to needing more time to really grasp the nuances of your positions and assertions how ever, but I would still like to venture some inquiries of my own. I hope you continue working the topic of what I take to be your concern aboout "Manufacturing vs. Financial" sector expansion, and the nature of real growth/wealth.

I was told many years ago that one of the most deadly theories in history and the one to be most cautious in using or accepting is "this time, it's different."

But, we have to keep in mind that there are occasions when the statement "this time, it's different" will be true, in other words, that we are not just talking about the standard "business cycle" swing back and forth between opposites (unerinvestment vs. overinvestment, deflation vs. inflation, growth vs. contraction, etc.). After all, we have mechanisms to cope with those. But what is almost impossible to prebuild a mechanism to control is the "revolutionary premise" (Alvin Toffler's term), or the complete paradigm shift.

Mr. Paris, do you see the current period as a time of complete paradigm shift?

Peak oil of course would be just such a paradigm shift, and would basicall junk the normal financial assumptions, i.e., there would be no way to invest in a way that could cover the normal contingencies.

Likewise, let us assume a positive revolutionary premise, say the rapid introduction of some system that would alter production and distribution in a radical way (distributed PV or radical breakthrough in storage batteries leading to super long range electric vehicles and use of renewable energy for instance). While the advance would create massive new opportunities, the "creative destruction" edge of the sword would basically junk out massive wealth producing firms (GM, Ford, ExxonMobil, Chevron, etc.) that are staples of many stock and bond portfolios. In other words, a radical breakthrough in technology/production/manufacturing, the hard money sectors, could have a catastrophic effect on the "soft money" side. In one way, real wealth would destroy what could be called "fiat wealth". Again to use an old Toffler term, we could end up with a "shabby gentry". This actually happened as we know during the industrial revolution, when some stayed locked into the "agrarian" methods of wealth production, while the more liberal and advanced moved on to the industrial model.

The question we must ask is (a)Where to put our money if we simply believe we are in a contraction phase of a normal business cycle (the normal bets have always beeen interest bearing investments, high grade corporate and government bonds, and hard assets (real estate, metals, and inflation hedges), or do we actually take the "this time it's different" bet, and go for the post industrial investments, and if so, what would they be?

The Western model assumes that growth in the industries we now know and are used to will in fact, after a time of contraction, return. If we bet against that, let's admit it, we are taking a huge chance. I once said that historically, to bet against the success of your own culture is very, very painful if your wrong. There were those who actually did it in the 1970's, pulling money out of investments seeing the energy and economic troubles of that period as permanent. When growth returned in 1982, some refused to reenter the markets, thinking it was a dead cat bounce, a scam, etc. They missed the greatest period of personal wealth building in history. Many of the folks that you mention as having stagnant incomes created that situation themselves. They refused to advance educationally, invest in the future (because they believed there really wasn't one) and thus, did not advance financially. Now, they are later in life, with little time left to repair the outcome of earlier bad decisions based on a misreading of the events.

If however, we are on the edge of the "revolutionary premise" (either negative, post peak collapse or even leaving peak aside, the collapse of standard Western models) or the technical blast upward of advanced technology (the aforementioned energy breakthroughs, some type of advanced and cheap "fusion in a jar", etc., then we have to ask ourselves where to position to take the greatest advantage of it. "Safe money" might be anything but safe, while radical plays may be the best bet for wealth accumulation.

The thoughts above are more in the way of inquiry than commentary, because I am getting later in years (49 years old) and really need to read this one right. I am honest about that fact that to this point in life my readings of the future financial picture have been poor. In the 1970's, I was one of those who bet that Carter was right when he quoted the CIA and said "the end of the big oilfields is here, there are no more fields to be found." I assumed nothing good was going to come to the U.S. and world economy in my lifetime, and missed the 1980's-90's runup. By the time I saw how far behind I was wrong and how badly wrong I had been, it was essentially too late. So I went with what I saw as the safe bet, good dividend plays, American electric utilities.
Again, I misread, as this was just before Enron, Calpine, Aquilla, Duke, Dynergy, etc., and I lost most of what I had managed to save. And then, the "revolutionary premise" struck in an instant on 9/11 and I was almost wiped out.

Post 9/11, energy prices slid, stocks slid, and business pulled in it's horns. I completely misread what path our nation would take at the political level. My assumption was that we would pull in our horns, possibly tax fuel massively and call up first voluntary and then possibly mandatory service, i.e., a World War II austerity program. I could not have been more wrong. I assumed that even without that however, it would be MANY years, perhaps two decades before the stock market would get back to where it had been. My guess for the Dow right now, if I had been asked then, would have been somewhre about 9500.

I recount all of this not to bore you (though it may well have that effect!) but to let you know that I am a complete cynic (and I have many friends in exactly the same position, experienced investors who have been wiped out over and over....that's why I often doubt many of these stories about people willing to take risk, and huge liquidity bubbles of easy money....I have not seen them in person, and niether has anyone I know....money has been damm tight where I am, credit....VERY hard to get and at very poor terms, and earned wealth from investments, very seldom heard of) but back to the cynic: I think the Dow for example, in 5 years could be (a) 5000 (b)22000, or non-existant. I think oil per barrel could be (a) $22.00 per barrel (b) $122 per barrel, or non relevent.

I could go on. So as a last question, I would like to ask you what what methold you use to establish rational price on money (interest rates) on stocks, on oil, or on any other commodity? Do you have a way to rationaly say, the financial sector is overbought, or a way to say the manufacturing sector is overbuilt? Because while everyone says we should be in manufacturing, the question is, manufacturing what? Are we not over capacity in every sector, from farm equipment to clothing, cars and electronic goods (never mind houses, would we really want more manufacturing capacity there?)

But, back to the fundamental question: This time, is it really different?

Roger Conner Jr.
Remember, we are only one cubic mile from freedom

You lose me a little with the details, but I think what you are basically saying is that "discovery" of a finite resource creates an unsustainable boom. I'm not sure that is anything surprising or controversial.

You seem to be implying that economies without such a resource boom are better balanced. My question is, are those economies better off in the long run? In particular, if the UK had not built a booming financial sector what would have happened? Would our decline in maunfacturing have not happened? Would the capital investment have really gone into "less profitable" sectors, or just gone abroad? Would we have a better economy now and be a better country to live in if we had left North Sea oil and gas where it was?

The other point I would make is that there seems to be an assumption that smooth continuous growth is the "normal" case, and boom/bust cycles are abnormal - downturns caused by aberrant events. Of course, smooth growth is desirable, but in a complex system cyclical behaviour is inevitable. Although undesirable, the downturns are as much part of the normal behaviour of the system as downturns. The downturns needs to be considered as part of the overall system, and any system or model must also incorporate downturns, rather than treat them as exceptions.

Economists, or at least politicians, seem to have a view that if only they can tweak the system, they can have stable growth without downturns. This I think is misguided and probably futile. It would be like trying to adjust the weather to be always sunny and never rain.

If I get your idea straight, you believe that those countries which make large returns off financial services will suffer like the countries that made large returns off resources - on the conclusion of that 'bubble'.

Firstly, you haven't really demonstrated that the end of that bubble is coming. Yes, many here might agree that it will, but you ascribe the last 25 years to new IT and deregulation, so what's to stop there being some new reason for some new 25 years of growth? That case needs to be stronger.

Secondly, with the way the world works, finance is at the heart of our civilisation. If there is threat that reduces growth, etc. in finance, then it will also strike ever other industry and thus country. Doesn't matter if you have a country which has a healthy manufacturing base - it still suffers, perhaps worse since there is a fixed cost base in that situation, at least finance is virtual.

Lastly, the 'so what' question. You postulate that the finance edifice might fall, and that it might disproportionately strike the UK, US etc. - but what option for action is there? With the Dutch disease there is an implicit need for strategic diversification and preparation for a known problem and date. However thanks to point 2 above, that's not a winner with this concept, so.....what?

I'd suggest at heart what you are groping for is an alternative theory of non-growth economics. A way in which the growth/interest rate/inflation horsemen don't hold sway over civilisation. Understanding the parameters of that might give you some clues on this.

Hi Jerome - an excellent post. Resource economics - a branch of neoclassical economics developed to reconcile sustainability concepts with neo-classical principles defines a sustainable state in many ways, but perhaps the simplest is one "where utility is non-declining through time". This goes to the heart of your point - "utility" (consumption) is going to decline for the reasons you give.

The problem that you rightly expose is that the natural resource base from which we derived out wealth, while it was there, is now going to be used up; and we will have squandered all that wealth - the UK for instance with the North Sea.

Hartwick said that in order for utility to be non-declining through time, that total capital should at least remain constant. Where non-renewable natural capital, such as oil and natural gas, is concerned, sufficient rent from the extraction of that resource should be invested in man made capital such that total capital, including natural capital and man made capital (know how and capital assets), remain constant. The principle is the same as maintaining a forest or fishery - to only live off the income it provides, not the capital itself.

In the case of oil this would have meant that sufficient of the profits from the UK oil industry were invested in alternative energy sources to abide by Hartwicks rule. This patently did not happen, but was consumed giving an illusion of greater wealth, even if it was for quite a long time.

What Hartwick had not identified was the destruction of other industries for the reasons you give. In other words Holland; and the UK shortly, is going to suffer doubly.

Of course Peak Oil is going to cook everything anyway, but this might provide some acedemic backgound for your treatise.

A telling example of this theory is the Pacific
island nation of Nauru
http://en.wikipedia.org/wiki/Nauru
once rich in phosphate deposits. More lately they have been to running prison camps for Australia and money laundering for Russian mobsters. It was kinda embarrassing when the entire national airline was repossessed.

Rich countries were their best buddies when the phosphate was being mined but now they only have holes in the ground nobody wants to know them.

The Dutch disease was cured by the "Polder Model", a social contract between the government, the employers organisations, and trade unions. The name polder model refers to the ancient need to have a co-operative society in a country that is for the most part reclaimed land below sea level. Last week's text of the new European treaty has quietly removed language of open competition as the ultimate aim of the union. So, is it your opinion that, in Europe at least, some co-operative action is already in the works to try and cure the Anglo Disease?

Hi Jerome! Did you post this back home on ET? (You should.) or did I just miss it?

The the reason financial servives industry behaves like a non renewable resource sector is that their profits and performance came by making short term gains at the expense of future viability. Well, the future has arrived and the party is over.

However, it is a delight to see this translated into the language of economists, to blow the economists up with their own concepts.

Nicely put.

Hi Jerome

I have been worried about the manufacturing / finance ratio for many years now, even before I knew about peak oil.
What's been worrying me it the resilience of our economy if globalisation slips into reverse or if our trade with foreign partners falters for some reason.

As I understand it, in order to be a healthy wealth producing economy, you need both manufacturing and finance in your locality. It's OK for individuals to specialise. When the whole country specialises lets it manufacturing disappear overseas and wither, the whole country is specialising and then becomes more dependent on trade (and easier to charge higher prices to).

The same paradigm applies to food and energy creation. If you don't keep your non-substitutable parts of the economy then you are having to trade whatever the global circumstances.

Now peak oil and expensive transport just brings it into sharp relief exactly how exposed we are in the UK to having to trade for survival.

Carbon - Coventry, UK (the british Motown as was)

The dramatic decline in the UK manufacturing base started in the mid seventies, perhaps not coincidentally, at the same time as we started to produce and export North Sea Oil.

Most economic commentators that I have read in the UK have complained that the pound has been overvalued since at least the time of Margaret Thatcher, while in contrast the history of the pound for most of the period from the end of the first world war until the mid-seventies was one of continuous balance of payments crises and devaluation.

Would it not be more reasonable to postulate that the UK has simply had thirty years of continuous Dutch disease.

Because we could export lots of oil, we could pay for our imports without exporting very much else. The pound became overvalued, so basic manufacturing became uncompetitive, and industry declined.

Britain in this regard would seem to share, to a lesser extent, the fate of producer countries as diverse as KSR and Nigeria, where high costs make labour intesive industries uncompetitive.

In the UK we were fortuante that into this space stepped financial and other services, which currently provide near full employment.

Although we have recently become an oil exporter again, the pound is still overvalued, but at the moment this is due to a shorter term but very big housing bubble, which appears to be finally beginning to crash (though both France and Spain demonstrate that financial excess in housing is hardly a uniquely anglo disease).

Once the bubble has been pricked, interest rates and so the exchange rate will drop, and the UK might start increasing manufacturing exports again.

Oddly enough, detailed examination suggests that with one crucial exception the UK and French economies are remarkably similar. France has major international banks, as well as service companies such as Carrefour. The UK has near record levels of car production, though we wisely leave the management of these companies to the Japanese, Germans and the French.

The only big difference between the UK and French economies is down to employment and productivity. The UK has very flexible employment policies that allow the creation of many low paid jobs, and also allows relatively low levels of productivity. France has chosen very high levels of employment protection, which is very good for those poorer French people who have a job, though less good for those that do not. A consequence of the very high costs of employing people in France is very high productivity, it is easier for a French company to employ a machine than a human being.

It would be presumptious of me to claim which is the better model, but in the last few weeks a majority of the French electorate have made some pretty clear statements of the direction they wish to go.

Smaller countries such as Holland, Switzerland, Finland and Sweden have managed to move to a post industrial future while avoiding the turmoil of the UK, possibly a useful model for all the larger countries? For the UK to temper the worse effects of free market capitalism, for France, Germany and Italy, how to successfully move on from a religious position that holds that manufacturing is the source of all wealth.

Jerome
Fine article. I am with you with all that you write in it.

The global financial world has evolved into a gigantic gambling casino with hallucinated welth. Surely this is not sustainable, and will at some point burst perhaps along with the global fiat currency system.

Then comes PO upon this. We are ceartainly in uncharted waters. I am not the man to forsee the outcome, but personally i have all my savings in gold and silver, and nothing in any kind of paper certifikates.

Kenneth

Jerome, as far as the UK is concerned you have described
the situation very accurately.
As a retired banker I have always considered that the
discovery of North Sea oil and gas was a disaster for this
country, as it enabled us to avoid making necessary structural reforms to our decaying industries, and to
continue living well beyond our means.
Also our new found wealth has attracted vast numbers of
economic migrants. The income from the North Sea bonanza
has been largely frittered away, and the oil and gas will be
"effectively all over by 2020" (Per UK Department of Trade
and Industry website). We will then be almost totally
dependent on selling financial services, and despite
propaganda to the contrary, it is relatively easy for other
countries to compete for this business.
By that time the UK will have to try and support a population probably approaching 70 million, in a World
facing shortages of food and other critical resources.
IMO the situation here has the potential to become somewhat
ugly.

I'm not quite sure I agree with your cart and horse statement about the long term decline of inflation and thus of interest rates. It is fashionable to make this link, but I am not convinced that inflation has been held in check in the period stated. Like the reality of resource depletion, it has merely, and cleverly, been made to appear to be in check while the fundamental reality continues.

My personal view is that we have been trying to print our way out of a situation in which the manufacturing capability as well as the energy capability has been slipping from our hands. Low foreign wages, ownership of the current trading associations, and control of the currency that energy has been denominated in, plus an overwhelming but increasingly irrelevant military domination has allowed the fantasy to continue.

I agree with your premise, but the inflationary aspect depends mightily upon what is currently a fashionable definition and methodology which your treatise seems to be in itself undermining. Inflation isn't wage demands or goods prices but the creation of money above and beyond the scope of the economic activity which it relates to. A deflationary recession doesn't destroy that money but merely reduces its velocity. As the FSU discovered after the realignment, the vast amounts of money in savings with no goods to buy suddenly had the prospect of velocity.

China has been a huge influence upon inflation, at once inflating the incomes of the traders and deflating those of the workers. If neoliberalism means removing the bargaining rights of workers in a race to the bottom, it appears to be just about to succeed in shooting itself in the foot. At once invisibly deflationary and inflationary - you can't see it if it averages out and therefore doesn't exist - it is vunerable to one or the other becoming precipitately dominant with no simple redress.

In a way, this was what happened in the 70's when inflation by outside forces managed to get us to the dime is a dollar point before being stopped by high interest rates. At least that is the official story. I would submit that the actual remedy was the development of energy alternatives to OPEC and that the rates and recession merely drove the point home to speculators. Attempts to print our way out of an energy shortfall were as fruitless then as they are now, but the insistence that global labor costs be tallied to measure domestic inflation still has credibility. While I accept the official fiction as a good story, I would hope that other government departments wouldn't base policy upon it.

No doubt they will. And of course the accumulation of outsized and unseviceable debts will never be held accountable. What? Mea culpa?

Very interesting article.

One thing that has struck me about the financial industry is its reliance on models that assume infinite growth - continued expansion - no resource limits. Once we hit resource limits, those models fall apart, and I think the financial sector hits the wall. There is no way long term loans of any sort (home mortgage, business, governmental) continue to make sense, once a person understands that the future will be worse than the present, not better. The Anglo Disease model helps understand what happens when the finance sector hits the wall.

I have written about the way the finance sector assumes infinite growth a couple of different places. One of these is Our World Is Finite: Is This a Problem?. Another is Our Finite World: Implications for Actuaries. The latter is an article aimed at actuaries in Contingencies magazine, published by the American Academy of Actuaries.

Measured from the absolute peak in 1980 to the absolute low in 1999, WTI oil prices fell, in nominal terms, from about $40 per barrel to about $10 per barrel, with lots of fluctuations along the way, but always below the 1980 nominal peak.

I suspect that this long term oil price decline was a contributing factor to lower interest rates. It certainly contributed to faster economic growth. This economic growth was further aided by the technological revolution, which allowed many poorer countries to start industrializing, and to begin turning out low cost goods at a very high rate, which contributed to the shifting of manufacturing to overseas companies.

All of this was based on the expectation of continued low energy prices, and most importantly on the expectation of an exponential rate of increase in exported crude oil and petroleum products, the very lifeblood of the world industrial economy.

If this expectation of an infinite rate of increase in the consumption of a finite energy resource base were justified, our economic system would actually make some degree of sense (leaving aside the climate change issue).

Unfortunately, common sense, our mathematical models, and recent data suggest that it will not be possible to experience an infinite rate of increase in the consumption of a finite energy resource base.

And as I have repeatedly warned since January, 2006, the developing problem is net petroleum (crude oil + product) exports.

From 2005 to 2006, the top five net exporters showed a 3.3% decline (the top four were close to 5%) in net exports (EIA, Total Liquids). From 2005 to 2006, the top five net exporters showed a 5.5% increase in consumption. In 2006, the top five net exporters accounted for half of worldwide net exports.

If we assume a 5% decline rate in production by the top five and a 5% rate of increase in consumption, their collective net exports would be around zero by about 2020.

In my opinion, the lifeblood of the world industrial economy is draining away in front of our very eyes.

The reason that something which sounds like good news is called a disease is that the investment in that profitable sector tends to cause a drop in investment in other industrial sectors, because it is so much more profitable; at the same time, there is a lot of extra revenue from the export of the resource, which generates new demand which cannot be fulfilled by domestic production and gives rise to increased imports. The fact that resource exports grow strongly also tends to cause the domestic currency to get stronger, thus further penalising other sectors of activity on international markets. The result is a weakening of the rest of the economy, and increased reliance on the resource sector.

This then becomes a problem when the new sector is based on finite resources, and eventually goes into decline. At that point, exports dry up, but the rest of the economy, having become uncompetitive and fallen behind, can no longer pick up the slack and has become too small to carry the economy over. Thus the overall economy suffers.

In effect, the displacement of existing activity by the new sector is, to some extent, irreversible, and thus, when the resource dries up, the overall economy is permanently weakened.

There might be a way around this. A nation finding itself in such a situation could direct the profits from the unsustainable boom industry to be used to purchase things that cannot be produced domestically, things that will contribute a long-term improvement in the quality of life and sustainable economic productivity of the nation.

The purchases of the targeted imports should equal the sales of the boom industry exports in order to maintain a stable balance of trade and thus a stable currency. The use of the profits to procure imported assets instead of domestic purchases will minimize distortions in the domestic economy.

Of course, the "invisible hand" of the marketplace is incapable of making this happen. Deliberate and carefully planned interventions by the national government are necessary. There are probably a number of different strategies that could be employed to this end.

In the absence of such government intervention, the workings "invisible hand" will indeed cause the "Dutch disease" or "Anglo-disease" phenomenon that you have described. You have thus put your finger on one more example of what is known as a "market failure".

Great topic and article! It coalesces several thoughts that have been bouncing around in my head, re: the decline of manufacturing and the increasing returns to finance here in the US.

Are we at a turning point? Technical analysis of the interest rate chart in the article shows that rates are nearing breaking the trendline, this usually indicates the end of the trend. It is possible that the inflation in energy costs, health care, and housing may be finally overcoming the depressive wage effects of the introduction of so many workers to the workforce after the global collapse of communism.

This depressive force on wages has allowed the central banks to introduce huge increases in the money supply (M3 is growing at, what, +13% here in the US) without producing inflation that shows up the government stats, at least. Where it has shown up, big time, is in the world wide creation of asset bubbles in housing and stock markets. This has helped lead to huge increases in the returns to finance, just as the depression in wages has crushed the middle class and transfered wealth to finance.

But with that monetary inflation finally beginning to show up in the stats, in commmodity prices, in wages, and interest rates, it may be that the increase in returns to finance may be slowing. And with P/E ratios that only can make sense in a low interest rate environment with double-digit returns, any slowing in growth rates may make the financial bubbles burst.

And of course, peak oil makes everything worse.

Another interesting take on this is brought forward in several of Kevin Phillip's books (American Theocracy is the latest) where he offers that every dominant economy/empire goes through phases, where production gives way to finance, (which offers higher returns than productive work), but eventually ends in that economy being overtaken by other new producers/technologies.

At any rate, a fascinating article. Thanks!

If I understand it correctly, ever increasing leverage made the 15% return for the financial community possible, while the underlying economy grew only at a much slower rate.
- Is there a natural limit to ever increasing leverage ?
- Can leverage unwind in an orderely manner or will it result in a crash ?
- Can resource constraints be balanced by increasing energy efficiency ?

WNC Observer noted a strategy that the US and UK could try in order to minimize the economy-devastating effects of the Dutch or Anglo Disease. Norway, Azerbaijan, Kuwait and Russia, at least according to Wikipedia, have some form of investment funds in foreign currencies and vehicles equal or near ly so in value to the profits from their boom resource. In the case of Norway this is oil, I believe that's the same for the other 3. The result is that their gains come into their countries slowly and do not cause the results that Jerome has described. Note, though, that if income were distributed more equally in the first place, such bubbles and bursts would have far less consequence in terms of human suffering. Norway is such an example.

Bonjour Jerome,

Nice article. What you wrote made a lot of sense.

One thing missing in the press these days is something that was very big in the 1970's - the recycling of surplus oil income. The countries that do have more income than they can use tend to put the surplus in the USA and the UK - not so much in India and China. In countries like Saudi Arabia, the real reserves are largely in private hands.

Essentially, the ruling and wealthy elites in these places like to have property, assets and cash in the Anglo-Saxon economies - not in France with its wealth tax ("l'impôt sur la fortune"). Right now, wealthy Russians are doing the same and that is why good London property increased in price by 40% in the past 2 years.

Also, in the 1970's, a country that imported too much had a run on its currency (even the USA) regardless of how high interest rates were pushed to try to attract funds. Today, this concept has been stood on its head. New Zealand is importing too much, they raised interest rates to cool the economy and even more foreign/Japanese funds poured in which which raised the currency! Quite astounding in a historical context.

I image that a serious credit squeeze would change this and the normal feedback mechanism would begin to function. When that happens will probably depend on when the wealthy and their advisors take Peak Oil on board.

One thing non-Americans/non-British must find bizarre is the almost complete lack of a, "weak currency lobby" in these two countries. This would basically be the industrial lobby, which is pretty insignificant at this point when compared with the financial services lobby. The, "Industry versus Finance" debate ended in the U.S. about 80 years ago, with Henry Ford and other, "industrialists" suffering an overwhelming defeat. It's been finance ever since.

(Too bad Ford expressed the, "industrialist" point of view in largely antisemitic terms. Because of this, not only did the debate end, it was more or less struck from the record.)

Jerome,
Your description of the effects of the "disease" reminds me of the aftermath of a collapse in a biome following an overshoot in one species' population. While the ecosystem recovers, it's typically not to the point preceding the runup to the overshoot, but to a lower level. I don't know whether there's a useful parallel there between the economic and ecologic situations, but it might be worth a look.

It might also be worth considering whether Greer's theory of Catabolic Collapse is of some use here.

This is an interesting article from an Australian perspective. We have had a very long period of continous growth from 1990 till now. If anything, economic growth appears to be accelerating here in Australia on the back of another resources boom.

Australia has some diversification but the core of our economy is based on providing resources to the world. These are more in demand now than they have been for some time and it is true that the small manufacturing industries we have are finding competing with massive mine expansion very difficult.

However here we don't worry about running out of resources, we worry that the world won't want them.

Is the decline in Manufacturing mainly a result
of "crowding out" or from the rise of China?

I looked at the percentage of GDP in Japan from manufacturing and don't have detailed data, but manufacturing stayed relatively constant from 1995 to 1999 from 24.5% to 25% of GDP while financial services increased to 18.9% from 17.9%. The growth in financial services occurred when the overall Japanese economy experienced very low/negative real growth. Japan has been a major investor in China, given that it is much cheaper to manufacture there. ref: http://www.nationsencyclopedia.com/economies/Asia-and-the-Pacific/Japan....

Decline in the 1960's in the US in manufacturing onward can be seen as a result of the rise of Japan, East Asia ex/China and the resurgence of Europe, coming after WW2 in which the US was the only major nation not to suffer horrific damage.

Hi Jerome.
Interesting article.

Isn't the Anglo Disease just the first worldwide example of the very old fashioned credit boom, credit created by the financial system "out of nothing" i.e. no active capital employed by the financial system, but rather a counterfeit (ponzi) operation riding on the back of the real economy, albeit perfectly legal. This "created capital" then chases the inflationary part of the economy which in our case seems to be just about everything (i.e. all asset classes are rising - or were until very recently).

This is certainly being led by London and New York but is a characteristic of almost every country, since every country now has a fiat currency which can be created costlessly and we have an infrastructure that now permits the simultaneous worldwide expansion of credit (this has been the case since Nixon killed gold convertibility - the last link to any kind of monetary discipline). We are now in a truly momentous monetary experiment - the first totally fiat regime.

The monetary inventions this time around have been awesome with may of them so exotic they can't even be priced. There are many shocks in store as these "inventions" get priced in the real world.

Historically the only way these expansions get stopped is by popular repudiation of the currency.

I believe we are at the beginning of a massive inflation (and simulataneous debt repudiation) which will do just that and is guaranteed by the debt already created and cannot now be stopped, peak oil may provide the catalyst to end it.

According to von Mises.

"Credit expansion is the governments foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous."

And.

"If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."