Wednesday, January 12, 2011

We owe it all to UK banks

Today, the Office of National Statistics reported November trade data. The mainstream media were not tripping over each other to report the latest export and import numbers. The latest numbers were, truth be told, quite unremarkable.

The numbers told the same sad story they tell every month. Britain imports far more goods than it sells abroad. In terms of export markets, the US was number one in November. In fact, the United States is the only major economy where the UK records a surplus on its trade balance. With eight out of the other top 10 trading partners, the UK has a trade deficit. In the Wimbledon of World Trade, the UK is an unseeded player.

This huge trade deficit is covered by the financial services that the UK sells abroad. It is, it seems, the UK banks that sustain our unbounded capacity to import cheap manufactured goods from China, and slightly more upmarket items from continental Europe. Has this dependence on financial services been a good thing for Britain?

The economic history of Britain during the 20th century was a battle between industry and finance. The best example of this struggle was the ill-fated return to the gold standard in the 1920s.

British industry had lost competitiveness during the First World War and needed a depreciated exchange rate to recapture its export markets. The financial sector wanted a return to the pre-war monetary system based on gold and more appreciated exchange rate. Financial interests won that battle. British industry endured a deep recession and a decade of appalling unemployment.

After the second world war, the struggle continued. Britain went through a series of volatile economic cycles, driven by a need to maintain high interest rates to prevent foreign money from leaving British banks.

The consequences for manufacturing were dire. With high interest rates, manufacturing investment levels were low, and the sector suffered decades of decline. Our once great industrial cities were slowly wasted by the demands of those rotten banks in London.

There is an enduring myth in Britain that Mrs Thatcher broke this post-war cycle of economic underachievement. With her privatisation and unsympathetic attitude to struggling manufacturing companies, she reinvented Britain.

But the myth isn't true. What she did was hike interest rates and allow the exchange rate in 1980 to appreciate to the point where no British manufacturing exporter remained competitive. The banks made a killing, London prospered, but the economy of West Midlands died.

These import and export charts may not change much from month to month. However, they recount a profound truth about our economic history. One where the dynamism that characterised our manufacturing sector was destroyed by the needs of a few greedy bankers in London.

The plain fact is that UK banks may finance our seemingly limitless demand for foreign goods, but we have paid a heavy price for that largesse. The UK has become little more than a rentier state. We are a nation of estate agents, loan officers, and buy to let landlords. We owe it all to the banks.

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