Showing posts with label sterling. Show all posts
Showing posts with label sterling. Show all posts
Monday, 18 July 2011
Sterling Will Fall Again....
I've made my debut as a Huffington Post blogger this week with a post on sterling. You can read it here....
Monday, 8 March 2010
A Sterling Crisis...Bring It On.
In my Money Week column this week, I'm arguing that a sterling crisis is the best thing that could happen to Britain. Here's a taster....
First Greece, now Britain. As the markets wait to see whether the Germans and the French will bail-out the weakest of the euro zone countries, currency traders are already turning their guns onto the next country with a massive fiscal deficit, a huge trade gap, and no clear plan for bringing its finances under control.
A full-scale sterling crisis is now a real possibility. That, however, is to be welcomed. There is a collapse of confidence in the pound every ten or twenty years. It happened in the 1960s, the 70’s, the 90s, and its happening again now. In each case, it was the catalyst for a break with a failed economic consensus. As it was then, so it can be now. Only one thing will cure the UK of its addiction to piling up more debts, printing money, and believing that it can simply spend its way of its problems, with hardly any pain – and that’s a full-scale rout in the currency markets.
Nobody can have failed to notice the way that sterling has dropped in value over the past two years. From a high of more than $2 to the pound, it has plunged back through $1.50, re-visiting the lows it visited in the immediate aftermath of the credit crunch. Against the euro area – with which the bulk of British trade is conducted – the decline has been just as dramatic. When the single currency was launched, a pound bought you around 1.7 euros. Now it is 1.1, and parity may well be not far away. As anyone who has gone abroad in the past year will know, our money is not worth much any more.
It isn’t about to recover any time soon. The index of wagers against the pound by hedge funds and other speculators is at a decade high. Investors are betting big the pound is going to fall a lot further.
The reasons for that are perfectly straightforward. The UK has one of the largest budget deficits in the developed world: at more than 12% of GDP, it is as big as the Greek deficit, and wider than the Portuguese or Spanish. The recession has been as deep here as anywhere and the recovery pitiful.
More seriously, the British show no willingness to tackle their problems. The Irish are getting to grips with their deficit. The Greeks are being forced to get their spending under control. The UK has been propped up by the prospect of a change of government in a May election. But with the polls narrowing, that no longer looks like the certainty it once was. And even if the Conservative Party does manage to win the election, it is far from clear that David Cameron’s government will have the kind of public support needed to slash 10% to 15% from public spending.
Increasingly, the UK looks like it might be the Lehman Brothers of the rolling sovereign debt crisis. It isn’t small enough to be easily rescued, like Greece. Nor is it too big to fail like Japan and the US. It is precisely the right size for the markets to make an example of it.
It’s sometimes argued the UK can’t have a sterling crisis, because we have our own floating currency, and our own central bank. The markets may well push sterling down, but since Britain doesn’t target any particular rate, it doesn’t matter very much. Indeed, the more sterling falls, the sooner an export-led recovery can get started.
Dream on. If you think the markets can’t punish you, you are living on fantasy island.
The UK is critically dependent on foreign money. We don’t begin to save enough to finance our massive budget deficit. Of the outstanding stock of government debt, £200 billion is held overseas, and that’s even after the Bank of England started buying all the gilts it could get its hands on. You can’t just print money to fund the deficit in perpetuity, nor can it be bought by British investors, because we don’t save enough. It has to be funded abroad – but no one will want to buy gilts in a fast depreciating currency.
And the UK has a massive trade deficit. We import most of our manufactured goods and much of our food as well. Even the oil is running out: for the last five years, Britain has been a net importer of oil and gas. If sterling falls too far, the cost of everything we import will soar, creating a big spike in inflation. Again, you could just ignore it. But your run the risk the rest of the world will just stop accepting your money. At a certain point, the Bank of England would be forced to jack up interest rates to defend the pound, pushing the economy back into deep recession.
Britain has a long history of sterling crashes. In 1967, the Labour Government of Harold Wilson was blown off course when it had to devalue the pound against the dollar. In 1976, the IMF was called into bail-out a country close to financial collapse. In 1992, the UK was forced out of the European exchange rate mechanism as the cost of shadowing the deutschemark became too high.
Each crisis had one thing in common. It blew apart an economic consensus. In the 1960s, we thought we had to maintain sterling’s role in the world, in the 1970s we thought we could only manage the economy by appeasing the unions, and in the 1990s we believed we had to link our monetary policy to Germany’s, whatever the damage inflicted on our economy.
In each case, the consensus was wrong. It took a sterling crisis to change it. But once it changed, the country could start to recover.
And now? The consensus is that the government must keep spending, and the Bank of England must keep on printing money, for the country to recover. An endless succession of economist keep telling us that we can’t the deficit too quickly, and that if ‘quantitative easing’ isn’t working, that just shows we need more of it.
It’s nonsense, just as pandering to the unions was in the 1970s, and tying the pound to the deutschemark was in the 1990s. Only a sterling crisis will force the UK top change course. Bring it on.
First Greece, now Britain. As the markets wait to see whether the Germans and the French will bail-out the weakest of the euro zone countries, currency traders are already turning their guns onto the next country with a massive fiscal deficit, a huge trade gap, and no clear plan for bringing its finances under control.
A full-scale sterling crisis is now a real possibility. That, however, is to be welcomed. There is a collapse of confidence in the pound every ten or twenty years. It happened in the 1960s, the 70’s, the 90s, and its happening again now. In each case, it was the catalyst for a break with a failed economic consensus. As it was then, so it can be now. Only one thing will cure the UK of its addiction to piling up more debts, printing money, and believing that it can simply spend its way of its problems, with hardly any pain – and that’s a full-scale rout in the currency markets.
Nobody can have failed to notice the way that sterling has dropped in value over the past two years. From a high of more than $2 to the pound, it has plunged back through $1.50, re-visiting the lows it visited in the immediate aftermath of the credit crunch. Against the euro area – with which the bulk of British trade is conducted – the decline has been just as dramatic. When the single currency was launched, a pound bought you around 1.7 euros. Now it is 1.1, and parity may well be not far away. As anyone who has gone abroad in the past year will know, our money is not worth much any more.
It isn’t about to recover any time soon. The index of wagers against the pound by hedge funds and other speculators is at a decade high. Investors are betting big the pound is going to fall a lot further.
The reasons for that are perfectly straightforward. The UK has one of the largest budget deficits in the developed world: at more than 12% of GDP, it is as big as the Greek deficit, and wider than the Portuguese or Spanish. The recession has been as deep here as anywhere and the recovery pitiful.
More seriously, the British show no willingness to tackle their problems. The Irish are getting to grips with their deficit. The Greeks are being forced to get their spending under control. The UK has been propped up by the prospect of a change of government in a May election. But with the polls narrowing, that no longer looks like the certainty it once was. And even if the Conservative Party does manage to win the election, it is far from clear that David Cameron’s government will have the kind of public support needed to slash 10% to 15% from public spending.
Increasingly, the UK looks like it might be the Lehman Brothers of the rolling sovereign debt crisis. It isn’t small enough to be easily rescued, like Greece. Nor is it too big to fail like Japan and the US. It is precisely the right size for the markets to make an example of it.
It’s sometimes argued the UK can’t have a sterling crisis, because we have our own floating currency, and our own central bank. The markets may well push sterling down, but since Britain doesn’t target any particular rate, it doesn’t matter very much. Indeed, the more sterling falls, the sooner an export-led recovery can get started.
Dream on. If you think the markets can’t punish you, you are living on fantasy island.
The UK is critically dependent on foreign money. We don’t begin to save enough to finance our massive budget deficit. Of the outstanding stock of government debt, £200 billion is held overseas, and that’s even after the Bank of England started buying all the gilts it could get its hands on. You can’t just print money to fund the deficit in perpetuity, nor can it be bought by British investors, because we don’t save enough. It has to be funded abroad – but no one will want to buy gilts in a fast depreciating currency.
And the UK has a massive trade deficit. We import most of our manufactured goods and much of our food as well. Even the oil is running out: for the last five years, Britain has been a net importer of oil and gas. If sterling falls too far, the cost of everything we import will soar, creating a big spike in inflation. Again, you could just ignore it. But your run the risk the rest of the world will just stop accepting your money. At a certain point, the Bank of England would be forced to jack up interest rates to defend the pound, pushing the economy back into deep recession.
Britain has a long history of sterling crashes. In 1967, the Labour Government of Harold Wilson was blown off course when it had to devalue the pound against the dollar. In 1976, the IMF was called into bail-out a country close to financial collapse. In 1992, the UK was forced out of the European exchange rate mechanism as the cost of shadowing the deutschemark became too high.
Each crisis had one thing in common. It blew apart an economic consensus. In the 1960s, we thought we had to maintain sterling’s role in the world, in the 1970s we thought we could only manage the economy by appeasing the unions, and in the 1990s we believed we had to link our monetary policy to Germany’s, whatever the damage inflicted on our economy.
In each case, the consensus was wrong. It took a sterling crisis to change it. But once it changed, the country could start to recover.
And now? The consensus is that the government must keep spending, and the Bank of England must keep on printing money, for the country to recover. An endless succession of economist keep telling us that we can’t the deficit too quickly, and that if ‘quantitative easing’ isn’t working, that just shows we need more of it.
It’s nonsense, just as pandering to the unions was in the 1970s, and tying the pound to the deutschemark was in the 1990s. Only a sterling crisis will force the UK top change course. Bring it on.
Monday, 5 October 2009
Devaluation?. Blessing or Curse?
In my Money Week column this week, I've been examing the devaluation of sterling. Lots of people seem to think that is part of policy mix that will eventually lead to the recovery of the UK economy. I diagree, as I explain in this piece.
How low can the pound sink?
At the start of this decade, a pound bought 1.70 euros. At the start of this week, it would buy only 1.08. Parity with the euro, an outcome that would have looked unimaginable when the single currency was launched, now looks inevitable at some point in the next few months.
Right now, British economic policy is to welcome that. The government looks on with benign neglect. The Governor of the Bank of England, Mervyn King, even appears to be talking the currency down. Devaluation is seen as part of the policy mix, along with printing money, that will eventually lead to recovery.
That is playing with fire – and it is the UK economy that is likely to be burned. In reality, it is a sterling crisis that remains the most likely catalyst for turning a nasty recession into a full-blown crisis. The benefits of devaluation have been massively over-sold. And if confidence in sterling collapses completely, as it well might, then the government and the Bank will have no choice but to step in and defend the currency with interest rate hikes that will plunge the economy into depression.
The markets have certainly latched onto sterling as the new whipping boy of the trading floors. Its weakness against the dollar has been masked, to a degree, by the fragility of the American currency, but it is against the euro, the currency in which most of Britain’s trade is carried out, that reveals how friendless sterling has become. It has been falling steadily against the single currency for most of this year. After recovering slightly from the all-time low of 1.02 at the height of the financial crisis, it has resumed its decline. Parity with the euro now looks a certain bet.
In many ways, that is a rational response to the dismal economic outlook the UK now faces. Whilst France and Germany were badly hit by the crisis, their economies are starting to recover. Their public sector deficits, while serious, are nothing like as bad as the UK’s. Their economies weren’t anything like so dependent on the bubbles in property and financial service. And the European Central Bank has proved a far sturdier defender of monetary stability than the Bank of England. It is little surprise that investors are selling sterling.
More surprising is the tacit encouragement from the Bank of England. In a newspaper interview last week, King described the fall in the value of the pound as ‘helpful’. Not surprisingly, currency traders, who still fret about the cost of finding themselves on the wrong side of a fight with a central bank, took note, and gave the pound another shove downwards.
In fairness, King was only expressing the mainstream view among policy-makers and the economic establishment. A cheaper pound, so it is said, will revive manufacturing and kick-start a more general rebalancing of the British economy.
That is nonsense – and dangerous nonsense as well.
Comparisons are regularly made with the early 1990s, when Britain’s humiliating ejection from the European exchange-rate mechanism, and the big fall in the pound that followed, helped trigger the long upswing of the 1990s.
But the comparison is bonkers. The pound then had been fixed at too high a rate against the German deutschemark. The UK had a structurally reformed economy held back by an over-valued currency. That certainly isn’t true now. There is no reason to suppose the pound was over-valued a year ago. And as for the fundamentals of our economy, let’s not even go there. This looks much more like an old-fashioned sterling collapse, of the sort the UK witnessed repeatedly throughout the 1960s and the 1970s. And they never heralded any sort of revival – they were part of the problem.
To imagine that a developed, service based economy such as the UK can devalue its way out of trouble is nonsensical. Britain is barely a manufacturing economy anymore, and certainly not one that can compete with Eastern European or Asian factories on price. It is an exporter of high-value, intellectual property: financial services, insurance, legal advice, media and science. What manufactured goods it does export are high-tech and design-intensive. They aren’t being sold on price: if they were, there wouldn’t be any orders at all. All you do when you devalue the currency is reduce the income of those sectors to the extent they price their work in sterling. That makes the country poorer, not richer. Too imagine that Britain is suddenly going to become a low-cost manufacturing centre implies a savage reduction in living standards – and that presumably isn’t what the advocates of devaluation want.
In the meantime, the government and the Bank of England should be keeping a far closer eye on sterling. If there is a serious collapse of confidence in the UK, and if the International Monetary Fund does have to bail the country out, it will be the currency markets that pull the trigger.
Britain is critically depended on foreign capital. It is running a trade deficit of £6.5 billion a month, close to record levels. There is no sign of it closing despite the massive fall in the value of the pound.
Worse, the UK is critically dependent on foreigners to finance its yawning budget deficit. Savings are so low that there is no way the British can buy £200 billion of government debt a year – even before the crisis, foreigners accounted for a third of all gilt sales. Whilst the Bank buys up gilts with freshly minted money, that might not matter. When it stops, as it must soon, then there won’t be many buyers for all the debt in a depreciating currency.
The big risk remains a sudden collapse of confidence in sterling. If that happens, the Bank would have to hike interest rates sharply to defend the currency. And the government would have to slash spending immediately to restore faith in the markets. Either would turn a recession into a full-blown depression. Both together would be a catastrophe.
In truth, talk of a lower pound being part of the solution is fanciful. Just like printing money, it is part of a strategy of debauching the currency. It is part of the problem – and if it gets out of hand, could yet provoke a real crisis.
How low can the pound sink?
At the start of this decade, a pound bought 1.70 euros. At the start of this week, it would buy only 1.08. Parity with the euro, an outcome that would have looked unimaginable when the single currency was launched, now looks inevitable at some point in the next few months.
Right now, British economic policy is to welcome that. The government looks on with benign neglect. The Governor of the Bank of England, Mervyn King, even appears to be talking the currency down. Devaluation is seen as part of the policy mix, along with printing money, that will eventually lead to recovery.
That is playing with fire – and it is the UK economy that is likely to be burned. In reality, it is a sterling crisis that remains the most likely catalyst for turning a nasty recession into a full-blown crisis. The benefits of devaluation have been massively over-sold. And if confidence in sterling collapses completely, as it well might, then the government and the Bank will have no choice but to step in and defend the currency with interest rate hikes that will plunge the economy into depression.
The markets have certainly latched onto sterling as the new whipping boy of the trading floors. Its weakness against the dollar has been masked, to a degree, by the fragility of the American currency, but it is against the euro, the currency in which most of Britain’s trade is carried out, that reveals how friendless sterling has become. It has been falling steadily against the single currency for most of this year. After recovering slightly from the all-time low of 1.02 at the height of the financial crisis, it has resumed its decline. Parity with the euro now looks a certain bet.
In many ways, that is a rational response to the dismal economic outlook the UK now faces. Whilst France and Germany were badly hit by the crisis, their economies are starting to recover. Their public sector deficits, while serious, are nothing like as bad as the UK’s. Their economies weren’t anything like so dependent on the bubbles in property and financial service. And the European Central Bank has proved a far sturdier defender of monetary stability than the Bank of England. It is little surprise that investors are selling sterling.
More surprising is the tacit encouragement from the Bank of England. In a newspaper interview last week, King described the fall in the value of the pound as ‘helpful’. Not surprisingly, currency traders, who still fret about the cost of finding themselves on the wrong side of a fight with a central bank, took note, and gave the pound another shove downwards.
In fairness, King was only expressing the mainstream view among policy-makers and the economic establishment. A cheaper pound, so it is said, will revive manufacturing and kick-start a more general rebalancing of the British economy.
That is nonsense – and dangerous nonsense as well.
Comparisons are regularly made with the early 1990s, when Britain’s humiliating ejection from the European exchange-rate mechanism, and the big fall in the pound that followed, helped trigger the long upswing of the 1990s.
But the comparison is bonkers. The pound then had been fixed at too high a rate against the German deutschemark. The UK had a structurally reformed economy held back by an over-valued currency. That certainly isn’t true now. There is no reason to suppose the pound was over-valued a year ago. And as for the fundamentals of our economy, let’s not even go there. This looks much more like an old-fashioned sterling collapse, of the sort the UK witnessed repeatedly throughout the 1960s and the 1970s. And they never heralded any sort of revival – they were part of the problem.
To imagine that a developed, service based economy such as the UK can devalue its way out of trouble is nonsensical. Britain is barely a manufacturing economy anymore, and certainly not one that can compete with Eastern European or Asian factories on price. It is an exporter of high-value, intellectual property: financial services, insurance, legal advice, media and science. What manufactured goods it does export are high-tech and design-intensive. They aren’t being sold on price: if they were, there wouldn’t be any orders at all. All you do when you devalue the currency is reduce the income of those sectors to the extent they price their work in sterling. That makes the country poorer, not richer. Too imagine that Britain is suddenly going to become a low-cost manufacturing centre implies a savage reduction in living standards – and that presumably isn’t what the advocates of devaluation want.
In the meantime, the government and the Bank of England should be keeping a far closer eye on sterling. If there is a serious collapse of confidence in the UK, and if the International Monetary Fund does have to bail the country out, it will be the currency markets that pull the trigger.
Britain is critically depended on foreign capital. It is running a trade deficit of £6.5 billion a month, close to record levels. There is no sign of it closing despite the massive fall in the value of the pound.
Worse, the UK is critically dependent on foreigners to finance its yawning budget deficit. Savings are so low that there is no way the British can buy £200 billion of government debt a year – even before the crisis, foreigners accounted for a third of all gilt sales. Whilst the Bank buys up gilts with freshly minted money, that might not matter. When it stops, as it must soon, then there won’t be many buyers for all the debt in a depreciating currency.
The big risk remains a sudden collapse of confidence in sterling. If that happens, the Bank would have to hike interest rates sharply to defend the currency. And the government would have to slash spending immediately to restore faith in the markets. Either would turn a recession into a full-blown depression. Both together would be a catastrophe.
In truth, talk of a lower pound being part of the solution is fanciful. Just like printing money, it is part of a strategy of debauching the currency. It is part of the problem – and if it gets out of hand, could yet provoke a real crisis.
Wednesday, 12 November 2008
The Flight From Sterling
Te flight from sterling is accelerating, with the pound down to new lows against the dollar, and record lows against the euro. Now there are signs of a sell-off in the gilts market as well. The idea that the UK government is going to be able to painlessly raise £100 billion in borrowing to spend its way out of recession is laughable. The bond and currency markets will expose that, particularly with Gordon Brown intent on making his fiscal irresponsibility into a virtue. It's always a sterling crisis that is the undoing of a Labour Government. This one doesn't look like being any different.
Thursday, 24 July 2008
The British Recession Gets Worse
The Irish Independent has picked up my Bloomberg column this morning about the recession that is looming for the UK. The news today is, of course, even worse, with a 3.6% drop in retail sales, the worst monthly figure since 1992. The point is that the economic news keeps surprising us on the downside. So long as that is true, the outlook is grim. And, as I keep saying, we haven't seen the attack on sterling yet, which is where it really get nasty. But I think we can be sure that the turning point hasn't been reached until there is a significant devaluation of the currency.
Subscribe to:
Posts (Atom)
Posts
