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The despair bubble

We’re in a gloom boom – it may be time to invest in some optimism

4 August 2012

6:00 AM

4 August 2012

6:00 AM

Economists, we should all have learned by now, are mostly quacks. They practise neither a science nor an art but a bad game of darts. Boozed up on shoddy theory and meaningless statistics, they wobble to the oche of public life, hurl an arrow at the backboard, then blame the flight, the lighting, anything but their own incompetence, when it falls to the floor.

So why listen? Why bother with their endless fainting fits over the slightest flicker in the numbers? When they try to tally the Office of National Statistics’ claim that the British economy shrank by 0.7 per cent in the three months to June with the CBI’s manufacturing survey, which shows cautious optimism, or the obvious advantages of shrinking the deficit with the effect of the eurozone crisis on exports, they are quickly lost in a macroeconomic fog. It is easier at that point to cry wolf than keep trying to make sense of it all.

The despair becomes addictive and self-fulfilling. As George Soros would say, it obeys the laws of reflexivity. The first time it appears, it may be justified. But then everyone starts to pile on. The economists claim to know what they are talking about, and we make the fatal mistake of believing them. Before you know it we are in a despair ­bubble.

There is only so much a government can do to stoke an economy, and the coalition has largely done it. Keeping Britain’s AAA credit rating will be regarded by historians as a significant achievement. Ask the Spanish and Italians if you doubt that credit ratings matter. It is the central piece of the government’s kitchen-table economics. Debts need to be reduced and the chequebook balanced before you can invest again for growth.

While other countries remain in an economic tailspin, the Treasury can now use the national balance sheet to guarantee private-sector loans and promote investment. This comes with challenges. Those who can borrow don’t want to, and those who can’t borrow shouldn’t be lent to. So what will more government-backed lending achieve? But this will change over time. There will always be an entrepreneur somewhere with a productive way to spend cheap money, and it needn’t always be Richard Branson. It shows that the government has faith in Britain’s businesspeople to say here is the money, come and get it, and to trust they can use it wisely.

And, to return to Soros, every bubble must eventually pop. All misery must come to an end, and it feels now as though the doom merchants are done. This isn’t just giddy Olympomania — though I’m sure that if Keynes had seen Danny Boyle’s opening ceremony, he would have felt good about the state of Britain’s animal spirits.


There will still be an audience for glumsters like Nouriel Roubini of New York University, and Marc Faber, author of the GloomBoomDoom newsletter, who writes incessantly from his lair in northern Thailand that we are all going to hell. Faber suffers from a very Swiss kind of melancholy and predicts the economic crisis will culminate in war. He advises living on a farm, guarded by vicious dogs, where you can grow your own food.  Rich investors read this stuff, thank the stars they live in Nassau or Zug and totter down to their wine cellars indifferent to the fate of millions. The Euro-bears will continue to smack their lips at the troubles of Spain, Greece and Italy, hoping for vindication of their opposition to the single currency. But buy doom now, and chances are you’ll lose.

In the investment world, markets are ticking upwards, asset values are rising and fund managers look considerably less green than they did a year ago. The price of gold, which rises in times of uncertainty, has been falling gently. Investors are no longer pestering hedge funds for their money back, but rather putting more in. Banks in Britain and elsewhere in Europe look cheap, and aside from the odd Barclays shambles or ­JPMorgan Chase trading loss, are generally more stable than they have been in five years.

There is a lot of property outside central London which looks like a bargain. Iceland has forsaken banking and is finding economic redemption in its traditional industries, like fishing. Ex-bankers there now make their living harvesting cod sperm. Even Dubai’s property market, which was pulverised by the crash, is perking up. It may be hard to see through the lingering haze of the 2008 financial crisis, but we are much further from the abyss than we were. Asset prices more dependably reflect the perceivable risks.

As Ian Dury and the Blockheads once sang, there are plenty of reasons to be cheerful, and especially if you’re British. Top of the list is London. We are fast becoming a world of city states. When thinking of economies, we should be thinking of London, New York, San Francisco and Beijing rather than the UK, US and China. Britain is incredibly fortunate to have one of the great ones as its capital, a train or bus ride away for anyone in the country. It has taken its licks. The City will take a while to recover from the new banking regulations and the corrosive effects of the Libor scandal. But it will. London’s creative classes seem to hurtle on regardless of the wider economy. Whatever is going on in the rest of Britain, London is young, crowded, magnetic and endlessly regenerative. The Italians, Greeks, Spaniards and French would love a city of London’s stature. Lacking one, they immigrate in their hundreds of thousands.

Then there’s technology. In February, the world’s biotechnologists gathered in Marco Island, Florida, to be floored by a group of British scientists and entrepreneurs from Oxford. They presented a gene-sequencing device the size of a USB key that can sequence DNA at a fraction of the cost of other machines. Their company, Oxford Nanopore, is one of the hottest tickets in an exciting field — and proof of how British science can be commercialised.

Every country in the world craves a thriving technology sector. Those with one are going to accelerate away from those without, because progress in technology tends to be geometric rather than arithmetic. Advantages in technology multiply rapidly, which explains why technology firms can obtain such stratospheric valuations so quickly. Silicon Roundabout may sound like the title for a modern Ealing comedy, but add it to the longstanding efforts to build technology businesses around Oxford and Cambridge and you have what’s starting to look like a very real deal. Britain has everything from two-person game developers hoping to make the next Angry Birds to heavyweight chip makers and biotech firms.

••• 

One of the secrets of Silicon Valley’s success has been a cascade effect. Those who succeed in technology don’t retire to their yachts. They set up second, third and fourth businesses, and invest their fortunes with other entrepreneurs. The Valley is full of such investment cliques, Google guys and the PayPal Mafia, dozens of new millionaires minted by Facebook, all jostling to find the next big thing. This thickens the networks of relationships, trust and expertise which lead to vibrant entrepreneurial communities.

This process takes a couple of generations, but it is happening here. Mike Lynch, who founded the data-analysis company Autonomy, and trousered half a billion pounds when he sold it to HP last year, is setting up a fund with other ex-Autonomy executives to invest in start-ups. The money gets smarter and more cleverly deployed with every success.

It is important to remind oneself of Britain’s economic assets, because success depends on comparative rather than absolute advantages. Look around the world and Britain’s relative position has not changed much recently. China is getting richer, but it remains a spooky place to do business. India is as chaotic as ever. Western Europe, except Germany, is in a rut. Enterprising people want to work and succeed, a
nd Britain remains one of the most enticing places in the world to try.

Our biggest challenges are the same as in every developed economy. How do you keep creating jobs at home, when companies can choose cheap labour overseas or technology instead of people? How do you stay open to the world, yet insulate yourself from shocks? How do you manage both a competitive economy and a generous society? The answer to these questions is not to be found in an ONS report. It is in the quality, ingenuity, tenacity and morale of your people, which economists rarely seek to measure.

Britain is not heading for the economic rapids. It is actually rising from the bottom of a cycle. It has products and services which the emerging economic giants will want in ever greater volume, ranging from education to financial services to energy and medical technology. Its world-class companies are in a terrific spot. Its people can get up each morning and go to work with reasonable faith in their institutions and the range of their opportunities. The past four years have been a stern test of faith in markets and people. But Britain is like a bungee jumper at full stretch, nose to the river coursing below. Provided no one snips the cord, it will soon come soaring back.


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