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The FIRE goes out

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Countries like the UK have come to be known as FIRE economies, because they consist largely of companies involved in Finance, Insurance and Real Estate. These markets were seen as far more sexy and productive than boring old manufacturing or farming.

Which, according to a certain viewpoint, is true: there’s a limit to how much stuff people really need, so once your manufacturing and food distribution processes are suitably efficient it seems wasteful to pour more resources – and people – into making and growing stuff when you can make far more money working out how to flog what you and other countries make at higher prices to more people.

However, if your manufacturing and agricultural base shrinks too far, you end up being dependent on imports for the necessities in life. This is a problem. To put it simply, you can probably do without home contents insurance but everyone needs to eat.

Given what’s happened over the last 12 months, it’s safe to say that FIRE on its own is not the golden goose it was once perceived to be. Finance is screwed, Insurance is having to be bailed out and Real Estate… well, the bottom for global house prices is a long, long way from here.

There was a time when Gordon Brown taunted Germany and France for their old-fashioned economies that were dependent largely on manufacturing and agriculture respectively. They’re probably chuckling to themselves right now. Or maybe not, as the medium-term growth prospects for both countries aren’t exactly rosy.

It seems logical to me that basing your national economy on any one area – be it FIRE, agriculture, manufacturing or selling weapons to third-world countries – isn’t a sensible approach, just as you’d be daft to hold your entire investment portfolio in dollars, for example.

Diversification is a more sensible option. Policitians probably won’t have the stomach for it, but the current recession will do their dirty work for them. A drop in the value of sterling should make our tiny manufacturing sector that much more competitive, while food price inflation (a not unrelated phenomenon) makes home-grown nosh that much more appealing. Meanwhile the reduction of the FIRE sector is continuing at a cracking pace, thanks to bank mergers, estate agency closures and a general cutting back of non-essential spending.

Ultimately, if the political establishment can ignore the threats, pleadings and future job offers from the bankers, builders and insurers and let their badly-constructed house of cards collapse naturally, what rises from its ruins should be a more balanced UK economy. Just don’t ask me how long it’ll take us to get there.

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