Wednesday, 22 October 2008

The Pound Is Always Trouble For The UK

In my Bloomberg column I've been writing about the potential for a sterling collapse for some time. Indeed, I went off warning about it, because it never seemed to happen. Now, with the pound down to $1.62 from $2 in the space of a few weeks, it looks to be on the way. In Britain, an economic crisis is always in the end a sterling crisis, and this time around it looks no different. The UK econoy needs to be understood as a currency bubble, which is what has allowed the country to appear so prosperous. With that bursting, the trade deficit is going to be an issue again. So too is the fact that so much of government debt is funded overseas. Why would you want to buy that in a rapidly depreciating currency? There is a complacent assumption out there that so long as the Bank of England slashes interest rates, and the government pumps up spending, the economy will get through the downturn. But a collapsing currency puts real constraints on that, because it pushes up the cost of imports, and may make it impossible for the government to borrow more money.

No comments: