Over the last few years there were two kinds of economic activity that did very well in the UK.
1. Homeowners sold ever more ridiculously priced real estate to each other.
2. A lot of mathematically sophisticated graduates went into the financial services industry and convinced a lot of people who should have known better that they had financially engineered a solution to the perennial boom/bust issues that beset the financial economy.
Since Margaret Thatcher, UK governments have fallen over themselves to protect the culture of the City and maintain Britain's status as the world's most convenient onshore tax haven. Now they are being hit with a triple whammy in this regard
- Continuing decimation of hedge funds/private equity funds etc
- Sharp drop in appetite for high end property, both residential and commercial, from rich Russians, and others from the Middle East etc. who benefited from the boom in oil and other commodities which has now ground to a halt
- Severe budget deficits which are going to have be financed by a currency that is more or less at parity with the euro now, and which could even approach parity with the dollar during 2009
It all looks grim and will probably require a new business model for the UK economy. On the other hand one should never underestimate the capacity for human beings to forget the mistakes of the past and snatch defeat from the jaws of victory.
If you listen carefully to the soothing platitudes coming from the political class you can detect that they are saying what the UK public really wants to hear i.e. things might be tough for a while but once - to invoke that lovely phrase from the Clinton era - we get this problem behind us - we just have to wait for a new kind of City based innovation that will get things back to normal and allow home prices to skyrocket again.
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