# The Declining Dominance of the UK Economy


## Introduction

The United Kingdom is one of the largest economies in the world today and was arguably the single country with the largest influence in bringing the world into the modern age as the forerunner of the industrial revolution. However, the UK is currently facing economic problems that are causing a decline in its dominance. In this newsletter, we will explore the reasons behind this decline and discuss the social, political, and financial problems that come with it.

## The Challenges

- Declining dominance of the UK economy
- Social, political, and financial problems
- Concentration of the economy in a few industries
- Poverty and regional inequality

## Two-Speed Economy

The UK is quickly becoming a two-speed economy, with extreme wealth concentrated in London and economic decline everywhere else. While the average standard of living is going backwards for most participants in the UK, those employed in the global industries of London are benefiting at the expense of everyone else in the country.

## The Crisis of Confidence

The UK's economic problems started with the events of Black Wednesday in 1992, which raised doubts about the country's management of its economy. Since then, the UK has faced challenges such as the global financial crisis, the eurozone crisis, and the uncertainty of Brexit. This lack of consistency has made it risky for investors and businesses to make deals with the UK.

## Dependency on the Financial Industry

The UK has become highly dependent on the financial industry, particularly in London. While this has been beneficial for the city, it has not done much good for the rest of the country. The British pound is arguably overvalued due to its use by the financial industry, making it harder for domestic industries to compete.

## Ageing Infrastructure and Declining Education

The UK, once a global leader in industrialization, now has ageing infrastructure, declining education, and weak utilization of technology. This has made its workers less productive and less globally competitive, leading to lower compensation. Workers in high-skilled jobs can earn more in other countries, causing a brain drain from the UK.

## Declining Population and Investment

The UK is losing highly skilled workers and failing to attract foreign investment. This negative outlook has made the country less desirable for investments, business startups, and careers. The gap between foreign direct investment outflows and inflows is at its highest level since the global financial crisis.

## Conclusion

The declining dominance of the UK economy and the associated social, political, and financial problems are concerning. If these problems persist, they are likely to worsen and have a detrimental impact on the country. It is important for policy makers to address these issues and work towards reversing the decline.

Stay tuned for our next newsletter where we will discuss possible solutions to these problems.


*This newsletter is brought to you by Trading212, an investment platform that helps you invest your money smarter and without commissions. Visit [Trading212](https://www.trading212.com/) for more information.*

The Declining Dominance of the UK Economy

- The UK's economy is declining and facing social, political, and financial problems
- The economy is becoming concentrated in a few industries, leading to poverty and inequality
- The UK is becoming a two-speed economy, with extreme wealth in London and economic decline elsewhere
- Confidence in the UK's economy is a major issue
- The decline started in 1992 with the UK's participation in the exchange rate mechanism
- The UK's dependence on the financial industry has not benefited the rest of the country
- The British pound is overvalued due to its use in the financial industry in London

- The British pound has been declining and is overvalued due to its use by the financial industry in London.
- Domestic British industries have been negatively affected, making it harder to compete with EU and global rivals.
- The UK has aging infrastructure, declining education, and weak technology utilization, making workers less productive and less competitive.
- Highly-skilled workers are leaving the UK for better opportunities abroad, causing a decline in population and a negative outlook for investments and business.
- The UK's wealthy residents are also choosing to invest their money in other countries with a more predictable future.
- The UK is experiencing regional poverty and struggles to afford living expenses.

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There's a reason we include confidence and stability on our National Leaderboard. It might not be an easily measurable economic metric, but it can have a massive effect on a national economy. If people don't have confidence that a country is in good hands and will be managed well into the future, then they will stop investing there. So why is the UK having a crisis of confidence, and to what extent is London to blame for the two-tier society that the UK is becoming?

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The United Kingdom is 1 of the largest economies in the world today and was arguably the single country with the largest influence in bringing the world into the modern age as the forerunner of the industrial revolution.

That makes the economic problems we are about to explore all the harder to hear, because the declining dominance of the UK economy, as well as the social, political and financial problems that are coming with it doesn't need to happen.

When an economy is going well, it's easy to keep it going well.

Its currency will be strong, people will want to invest in it, it can borrow at low rates, and it should foster political stability which means economic plans can be made over decades and generations rather than rapid election cycles.

When an economy is stagnating or worse still shrinking, then its currency becomes less desirable, borrowing money becomes harder, people will avoid investing in it, and policy decisions will be made by whoever can make the biggest promises to voters who want to weigh out of the economic mess.

It's easy to see what kind of situation the UK is in today.

The country is not nearly as globally influential as it once was, and its economy is becoming increasingly concentrated in a few industries that don't do a lot of good for the average Brit.

The economy that led the way in the industrial revolution and kicked off the biggest economic boom in human history is today struggling with very real problems like poverty and drastic regional inequality.

The biggest problem above all though is that it might not matter.

The actual economic situation of the UK is if anything underreported and that's because the country is quickly becoming a two-speed economy, with extreme wealth concentrated in London and economic decline everywhere else.

The 2 halves average out, but really the standard of living of most participants in the UK is going backwards.

If policy makers feel no pressure to reverse this trend then it will likely continue, which will be great for everybody lucky enough to be employed in the global industries of London, all at the expense of everyone else in the country.

It is, if nothing else, a really interesting case study into what defines economic success in the modern day.

So why despite centuries of dominance is the UK falling behind all of a sudden?

Has the growth of London come at the expense of the rest of the country?

And finally, is it going to be possible to reverse these problems now that they've taken hold?

Managing the economy of a country and managing individual finances are very different propositions.

A country can go into massive debt to fund investment into public services, and as long as they grow the economy overall it's considered a good investment.

But for individuals you need to be thoughtful about where you put your money, and that's why we're partnering with Trading212, an investment platform that helps you invest your money smarter and without commissions.

You can pick which companies you want as slices in your own investment pie and automatically allocate a set amount of your funds even outside of regular market hours.

If you're not sure which stocks to choose, you can see what other investors have in their own pies and copy it for yourself.

Even though I live in Australia, I get paid in euros, and trading 212 lets you hold multiple currency accounts so I don't have to move money and incur painful currency exchange fees.

If I do ever need to move currencies, the exchange rate is the same as the 1 that banks charge 1 another and fees are never more than 0.15%.

If you're like me and tend to forget to put money in regularly, you can also fully Intro Add Intro Add This month alone we have explored the economies of Italy and Greece, 2 other European economies that have been stagnant since the mid 2000s.

And it's important to make a big disclaimer here that the UK is not in as bad a situation as these countries were, not yet at least.

But the challenges that the UK is facing are both different, and while potentially less severe, they are going to be harder to deal with.

The biggest issue is simply a crisis of confidence.

There is a reason that we always include something as potentially ambiguous as confidence in the exploration that we do of all national economies and even include it in our leaderboard.

And that's Because it's 1 of the most important things that any economy can build up and once it's lost it can do some very tangible damage.

The economy of the UK has obviously had a long slow decline from its peak as a world-dominating colonial power, but its economic problems as they exist today arguably started on the 16th of September in 1992, now affectionately known as Black Wednesday.

Before this the UK still had its problems, but it was still seen as 1 of the most stable and reliable economies in the world to handle trade, finance and investment.

The pound was still the world's second most used global currency and it had the reputation for being well as sound as the pound.

Old people might remember this saying but it doesn't make much sense today.

2 years before this fateful day the UK entered into an agreement known as the exchange rate mechanism or This was almost an early precursor to the Euro.

What this agreement did was link the major currencies in Europe together with a pre-agreed exchange rate range.

If a country's exchange rate between another member country got too high or too low, the central banks of those 2 countries would need to intervene to get it back within the agreed-upon range.

This was a very expensive process and it meant that the central banks of all of the countries involved needed to keep a lot of reserves of all of the other countries involved to make sure they could buy or sell whatever currencies they needed to keep their own currency within an agreed-upon price range.

Now this whole thing, at least in theory, was not as stupid as it sounded.

By controlling the varying exchange rates between the countries it would make it a lot easier for businesses to trade and invest across borders without taking on exchange rate risk.

If a French company invested in an Italian business and then it doubled in value, that would be great, but if the Italian lira halved in value in that time, then the French firm would be right back to where it started.

The exchange rate mechanism made it so that this was theoretically not possible, which did provide a big boost to cross-border interactions between the major economies in Europe.

The UK actually did not initially sign up to this scheme when it was first introduced by the European Economic Community, the forerunner to the European Union in 1979.

It took 11 years for the UK to join the agreement after political tensions within the country tossed up the benefits and risks of indirectly pegging their far more dominant global currency to the rest of Europe.

1990 was unfortunately not the ideal time to jump on board the because it coincided with the collapse of the Soviet Union and the reunification of east and west Germany, which might seem completely unrelated but let's explain.

The east, which was a satellite state of the USSR, was far less economically developed than the west, and the new unified Germany had to find a way to lift millions of people out of absolute poverty, modernize massively outdated industries, and build out connective infrastructure all without destroying the existing economy in the west, which by comparison was doing really well.

Now the reason this was important to the UK is because Germany decided the best way to do this would be to increase their interest rates so that foreign investors would be tempted to put money into Germany where they could make a good return, and then Germany could take some of this money and use it to make the investments it needed to get the east up to speed.

This was an unconventional approach because normally when a government wants to stimulate the economy like this they would lower interest rates instead of raising them so that businesses and individuals could borrow more money to promote economic activity through spending and business operations.

The reason Germany didn't do this though was because they were afraid of the potential for inflation if the economic shock of absorbing the east hurt production.

Germany in the period between the first and second world war suffered through terrible hyperinflation which spread poverty throughout the country and even 60 years later that memory had not been lost.

The high interest rates in Germany did exactly what they were designed to do, they attracted investors from all over the world that wanted to keep their money as deutschmarks because they could earn a much higher interest rate on it.

This included investors from the UK who had a comparatively much lower interest rate, and since the values of these currencies were tied together with the there was theoretically no risk in having money saved in Germany.

The result was that the value of the British pound wanted to go down and the deutschmark wanted to go up.

But the British central bank was not allowed to let that happen because of the rules of the The UK ended up having to sell huge reserves of foreign currencies to try and keep the value of the pound artificially high, and they were also forced to start raising interest rates at a time when the UK economy itself wasn't doing that well and probably would have benefited from lowering interest rates.

To make matters worse, lots of investors had the suspicion that even an institution as powerful as the bank of England couldn't hold back these market forces forever, and that eventually the value of these currencies would shoot back to where they wanted to be according to the laws of supply and demand.

This meant that they changed even more of their money into German Deutschmarks because if they were right not only would they earn a higher interest rate while they waited, they would also profit if the failed and the value of currencies was allowed to equalize at the levels where they should be.

Of course this did eventually fail, but not before increasingly desperate attempts by the bank of England to maintain their commitment to keeping the foreign exchange rate steady.

On the day of the collapse the bank raised interest rates from 10% to 15% before admitting defeat and lowering them back down to 12%, again all within a day.

The UK was hurt by this in the short term, as was the rest of Europe, but it did something far more damaging than that in the long term for the country.

It started to raise doubts over just how well managed the United Kingdom really was.

In the years since, the country was 1 of the worst hit economies by the GFC and was then collateral damage from the eurozone crisis, it went through a very uncertain breakup with the EU and it's now probably best known for its revolving door of prime ministers.

Although as an Australian I really can't say too much about that last 1.

The problem this has created is that now nobody has much certainty about the future of the UK, which means that it is risky to make investments or trade deals or really do anything with the country because it hasn't displayed the consistency that it was once famous for.

Now of course it should hopefully go without saying that the UK is still far more stable than a country like Somalia, but it's all relative.

The UK has become highly dependent on the financial industry above all else.

This has been great for the city of London where most of this business is conducted, but it hasn't done much good for the rest of the country.

Unlike a financial centre such as New York, most of the money that flows into London isn't flowing into domestic companies and projects.

Instead it's going into opaque financial investments made all over the world on behalf of people that choose to do business in the city because of its willingness to look the other way rather than the markets it grants access to.

London is still the second largest financial centre in the world, but the type of finance being done here is in many ways doing more harm than good to the rest of the country.

The British pound has been on a slow and stable decline compared to other global currencies for basically the past century, but it's arguably still overvalued compared to where it should be because of its use by the financial industry in London.

Domestic British industries have also been hurt by this because it's made it harder to compete with regional peers in the EU, who also had the advantage of more favourable trade deals now that the UK is no longer a member, as well as other emerging rivals around the world.

What's more is that the UK, which was once the global leader in industrialisation, now has ageing infrastructure, declining education and weak utilisation of technology, which is making its workers less productive, less globally competitive and therefore less well compensated.

Workers in the UK in high-skilled jobs can earn much more in places like the USA, Canada, Australia and even Asian financial hubs like Singapore, Hong Kong and Shanghai.

This is causing a weird situation where the UK has a lot of people migrating to the country from undeveloped economies to find a better life with better opportunities and equally a lot of people moving out of the country to find an even better life with even better opportunities.

The net result of this in and out gaming is clear though.

The UK brings in more people than it loses for now, but it's losing a lot of highly skilled workers and it's been losing more and more every year since 2007.

If the trend continues the UK will end up with a declining population, it's missing all of its most productive workers.

This overall negative outlook has in turn made the UK an even less desirable place to make investments or start a business or begin a career.

Advanced high-income countries, which again the UK still is on average, usually have 1 last defence against these problems, which is that their own wealthy citizens can make up for the lack of foreign investment and ease problems like national debt.

Japan for example has the highest debt to GDP ratio in the world, but not too many economists are particularly concerned about it because most of their debt is owed at very low interest rates to their own people.

The UK also has lots of wealthy residents that can make necessary investments into the economy but just like foreign investors they are choosing to invest their money into other countries that have a more predictable future.

The gap between foreign direct investment outflows and inflows is at its highest level ever in the UK since the GFC.

Now while all of this might seem overly theoretical, it's having very real impacts in the UK as the country struggles with regional poverty from a growing number of people that can't afford to live in their own country.

Unfortunately if these problems persist they are likely to only feed off each other just like in 1992 as more and more desperate attempts are made to maintain the sinking ship.


Speaker 0: The United Kingdom is 1 of the largest economies in the world today and was arguably the single country with the largest influence in bringing the world into the modern age as the forerunner of the industrial revolution. That makes the economic problems we are about to explore all the harder to hear, because the declining dominance of the UK economy, as well as the social, political and financial problems that are coming with it doesn't need to happen. When an economy is going well, it's easy to keep it going well. Its currency will be strong, people will want to invest in it, it can borrow at low rates, and it should foster political stability which means economic plans can be made over decades and generations rather than rapid election cycles. When an economy is stagnating or worse still shrinking, then its currency becomes less desirable, borrowing money becomes harder, people will avoid investing in it, and policy decisions will be made by whoever can make the biggest promises to voters who want to weigh out of the economic mess.

It's easy to see what kind of situation the UK is in today. The country is not nearly as globally influential as it once was, and its economy is becoming increasingly concentrated in a few industries that don't do a lot of good for the average Brit. The economy that led the way in the industrial revolution and kicked off the biggest economic boom in human history is today struggling with very real problems like poverty and drastic regional inequality. The biggest problem above all though is that it might not matter. The actual economic situation of the UK is if anything underreported and that's because the country is quickly becoming a two-speed economy, with extreme wealth concentrated in London and economic decline everywhere else.

The 2 halves average out, but really the standard of living of most participants in the UK is going backwards. If policy makers feel no pressure to reverse this trend then it will likely continue, which will be great for everybody lucky enough to be employed in the global industries of London, all at the expense of everyone else in the country. It is, if nothing else, a really interesting case study into what defines economic success in the modern day. So why despite centuries of dominance is the UK falling behind all of a sudden? Has the growth of London come at the expense of the rest of the country?

And finally, is it going to be possible to reverse these problems now that they've taken hold? Managing the economy of a country and managing individual finances are very different propositions. A country can go into massive debt to fund investment into public services, and as long as they grow the economy overall it's considered a good investment. But for individuals you need to be thoughtful about where you put your money, and that's why we're partnering with Trading212, an investment platform that helps you invest your money smarter and without commissions. My favourite feature is pies.

You can pick which companies you want as slices in your own investment pie and automatically allocate a set amount of your funds even outside of regular market hours. It's great for dollar cost averaging. If you're not sure which stocks to choose, you can see what other investors have in their own pies and copy it for yourself. Even though I live in Australia, I get paid in euros, and trading 212 lets you hold multiple currency accounts so I don't have to move money and incur painful currency exchange fees. If I do ever need to move currencies, the exchange rate is the same as the 1 that banks charge 1 another and fees are never more than 0.15%.

If you're like me and tend to forget to put money in regularly, you can also fully Intro Add Intro Add This month alone we have explored the economies of Italy and Greece, 2 other European economies that have been stagnant since the mid 2000s. And it's important to make a big disclaimer here that the UK is not in as bad a situation as these countries were, not yet at least. But the challenges that the UK is facing are both different, and while potentially less severe, they are going to be harder to deal with. The biggest issue is simply a crisis of confidence. There is a reason that we always include something as potentially ambiguous as confidence in the exploration that we do of all national economies and even include it in our leaderboard.

And that's Because it's 1 of the most important things that any economy can build up and once it's lost it can do some very tangible damage. The economy of the UK has obviously had a long slow decline from its peak as a world-dominating colonial power, but its economic problems as they exist today arguably started on the 16th of September in 1992, now affectionately known as Black Wednesday. Before this the UK still had its problems, but it was still seen as 1 of the most stable and reliable economies in the world to handle trade, finance and investment. The pound was still the world's second most used global currency and it had the reputation for being well as sound as the pound. Old people might remember this saying but it doesn't make much sense today.

2 years before this fateful day the UK entered into an agreement known as the exchange rate mechanism or This was almost an early precursor to the Euro. What this agreement did was link the major currencies in Europe together with a pre-agreed exchange rate range. If a country's exchange rate between another member country got too high or too low, the central banks of those 2 countries would need to intervene to get it back within the agreed-upon range. This was a very expensive process and it meant that the central banks of all of the countries involved needed to keep a lot of reserves of all of the other countries involved to make sure they could buy or sell whatever currencies they needed to keep their own currency within an agreed-upon price range. Now this whole thing, at least in theory, was not as stupid as it sounded.

By controlling the varying exchange rates between the countries it would make it a lot easier for businesses to trade and invest across borders without taking on exchange rate risk. If a French company invested in an Italian business and then it doubled in value, that would be great, but if the Italian lira halved in value in that time, then the French firm would be right back to where it started. The exchange rate mechanism made it so that this was theoretically not possible, which did provide a big boost to cross-border interactions between the major economies in Europe. The UK actually did not initially sign up to this scheme when it was first introduced by the European Economic Community, the forerunner to the European Union in 1979. It took 11 years for the UK to join the agreement after political tensions within the country tossed up the benefits and risks of indirectly pegging their far more dominant global currency to the rest of Europe.

1990 was unfortunately not the ideal time to jump on board the because it coincided with the collapse of the Soviet Union and the reunification of east and west Germany, which might seem completely unrelated but let's explain. The east, which was a satellite state of the USSR, was far less economically developed than the west, and the new unified Germany had to find a way to lift millions of people out of absolute poverty, modernize massively outdated industries, and build out connective infrastructure all without destroying the existing economy in the west, which by comparison was doing really well. Now the reason this was important to the UK is because Germany decided the best way to do this would be to increase their interest rates so that foreign investors would be tempted to put money into Germany where they could make a good return, and then Germany could take some of this money and use it to make the investments it needed to get the east up to speed. This was an unconventional approach because normally when a government wants to stimulate the economy like this they would lower interest rates instead of raising them so that businesses and individuals could borrow more money to promote economic activity through spending and business operations.

The reason Germany didn't do this though was because they were afraid of the potential for inflation if the economic shock of absorbing the east hurt production. Germany in the period between the first and second world war suffered through terrible hyperinflation which spread poverty throughout the country and even 60 years later that memory had not been lost. The high interest rates in Germany did exactly what they were designed to do, they attracted investors from all over the world that wanted to keep their money as deutschmarks because they could earn a much higher interest rate on it. This included investors from the UK who had a comparatively much lower interest rate, and since the values of these currencies were tied together with the there was theoretically no risk in having money saved in Germany. The result was that the value of the British pound wanted to go down and the deutschmark wanted to go up.

But the British central bank was not allowed to let that happen because of the rules of the The UK ended up having to sell huge reserves of foreign currencies to try and keep the value of the pound artificially high, and they were also forced to start raising interest rates at a time when the UK economy itself wasn't doing that well and probably would have benefited from lowering interest rates. To make matters worse, lots of investors had the suspicion that even an institution as powerful as the bank of England couldn't hold back these market forces forever, and that eventually the value of these currencies would shoot back to where they wanted to be according to the laws of supply and demand. This meant that they changed even more of their money into German Deutschmarks because if they were right not only would they earn a higher interest rate while they waited, they would also profit if the failed and the value of currencies was allowed to equalize at the levels where they should be. Of course this did eventually fail, but not before increasingly desperate attempts by the bank of England to maintain their commitment to keeping the foreign exchange rate steady.

On the day of the collapse the bank raised interest rates from 10% to 15% before admitting defeat and lowering them back down to 12%, again all within a day. The UK was hurt by this in the short term, as was the rest of Europe, but it did something far more damaging than that in the long term for the country. It started to raise doubts over just how well managed the United Kingdom really was. In the years since, the country was 1 of the worst hit economies by the GFC and was then collateral damage from the eurozone crisis, it went through a very uncertain breakup with the EU and it's now probably best known for its revolving door of prime ministers. Although as an Australian I really can't say too much about that last 1.

The problem this has created is that now nobody has much certainty about the future of the UK, which means that it is risky to make investments or trade deals or really do anything with the country because it hasn't displayed the consistency that it was once famous for. Now of course it should hopefully go without saying that the UK is still far more stable than a country like Somalia, but it's all relative. The UK has become highly dependent on the financial industry above all else. This has been great for the city of London where most of this business is conducted, but it hasn't done much good for the rest of the country. Unlike a financial centre such as New York, most of the money that flows into London isn't flowing into domestic companies and projects.

Instead it's going into opaque financial investments made all over the world on behalf of people that choose to do business in the city because of its willingness to look the other way rather than the markets it grants access to. London is still the second largest financial centre in the world, but the type of finance being done here is in many ways doing more harm than good to the rest of the country. The British pound has been on a slow and stable decline compared to other global currencies for basically the past century, but it's arguably still overvalued compared to where it should be because of its use by the financial industry in London. Domestic British industries have also been hurt by this because it's made it harder to compete with regional peers in the EU, who also had the advantage of more favourable trade deals now that the UK is no longer a member, as well as other emerging rivals around the world. What's more is that the UK, which was once the global leader in industrialisation, now has ageing infrastructure, declining education and weak utilisation of technology, which is making its workers less productive, less globally competitive and therefore less well compensated.

Workers in the UK in high-skilled jobs can earn much more in places like the USA, Canada, Australia and even Asian financial hubs like Singapore, Hong Kong and Shanghai. This is causing a weird situation where the UK has a lot of people migrating to the country from undeveloped economies to find a better life with better opportunities and equally a lot of people moving out of the country to find an even better life with even better opportunities. The net result of this in and out gaming is clear though. The UK brings in more people than it loses for now, but it's losing a lot of highly skilled workers and it's been losing more and more every year since 2007. If the trend continues the UK will end up with a declining population, it's missing all of its most productive workers.

This overall negative outlook has in turn made the UK an even less desirable place to make investments or start a business or begin a career. Advanced high-income countries, which again the UK still is on average, usually have 1 last defence against these problems, which is that their own wealthy citizens can make up for the lack of foreign investment and ease problems like national debt. Japan for example has the highest debt to GDP ratio in the world, but not too many economists are particularly concerned about it because most of their debt is owed at very low interest rates to their own people. The UK also has lots of wealthy residents that can make necessary investments into the economy but just like foreign investors they are choosing to invest their money into other countries that have a more predictable future. The gap between foreign direct investment outflows and inflows is at its highest level ever in the UK since the GFC.

Now while all of this might seem overly theoretical, it's having very real impacts in the UK as the country struggles with regional poverty from a growing number of people that can't afford to live in their own country. Unfortunately if these problems persist they are likely to only feed off each other just like in 1992 as more and more desperate attempts are made to maintain the sinking ship. Now. Thanks for watching mate, bye.

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The Economy Of The UK Is In Serious Trouble