Sep 24 2009
The collapsing pound – second round
Last year I wrote a lot about the big devaluation of the pound. Its value was slashed by around one fifth. Over this year it has something of a respite, but I have always felt it remained vulnerable, given the monetary and budgetary policy we are following. In recent days we have witnessed another slide.
The Governor and the Bank gave sterling a downwards push. Their Report explained why the pound had fallen in the past, without saying this was bad or suggesting that they would try to stop more of the same. The Governor terrorrised the currency markets wiith his threat to cut short term rates to the banks even more, and with his enthusiasm for more money printing.
Apparently the Bank is going to invite in more economists to tell them how well or badly QE is going, and to explain the pound. I have not yet had an invitation! So I will give them the answer here. The pound is falling because they are printing lots of them and do not seem to care about the value of the currency. The government’s finances do not encourage much confidence.
You don’t see so much of the fall if you look at the dollar. The US is almost as brutal with its currency as the UK is with the pound. If you look at the changes below you will see what is happening. The figures compare the pound’s level last friday morning with the level today:
Hong Kong Dollar 12.8 = £1 now 12.57 = £1
Norwegian krone 9.66 = £1 now 9.34 = £1
Swiss franc 1.7 = £1 now 1.66 = £1
Rand 12.22 =£1 now 11.98 = £1
24 Responses to “The collapsing pound – second round”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
A few years ago the pound used to be worth around 5 Brazilian reais. Yesterday it was 2.94. Am I correct in thinking that Britain is therefore now half as competitive as then?
John, you were one year higher than me at KC, we used to catch the 23, 23a or 27 bus down into Canterbury clutching silly boaters. Your blog is excellent stuff, I refer all my language students to it for your well-written summaries of what´s going on.
reply: Thanks for the kind words. Yes, the fall of the pound has been big, and does make us all poorer.
Having been in Switzerland and then Italy for the past two weeks, I can assure you that you would feel the effects of devaluation of Sterling in these Countries too.
I well remember a certain Mr Harold Wilson saying the pound in your pocket is still worth a pound.
He was right, it was, until you either purchased imported goods or had a holiday abroad, then the difference struck home, and the spin became unstuck.
Many people are only now just beginning to realise how much sterling has sunk, when you purchase a cup of coffee, or want a Hotel room abroad.
For those of us who have to import raw materials (not available here) it has been evident for a long time that Sterling is falling, and falling fast in value against much of the worlds currency.
Not much news in the press though during the last 12 months,
because the spin says it makes exports cheaper and is good news. But sadly much of our manufacturing has now gone.
This means future inflation and makes it more likely interest rates will have to be jacked up to attract buyers of UK debt. The Conservatives should state that they believe monetary policy should have the objective of maintaining the purchasing power – of international commodities – of the currency. As long as governments see manipulating the currency as a policy instrument, long term investment prospects in the UK will be damaged. It is interesting to look at the shift in public opinion in Iceland – decidely anti-EU and anti-Euro pre-crisis, but now a majority favour membership of the Euro as they see the risks of a small currency at a time of loose monetary policy and failed bank regulation. Public opinion could move very quickly in the UK if savers and investors start to feel that the £ is not a safe haven for investment and if the threat of inflation returns.
Chris H Reply:
September 24th, 2009 at 3:58 pm
Perhaps that is exactly what the politicians and money-men have wanted all along? Herd the sheeple into the euro?
Stuart Fairney Reply:
September 24th, 2009 at 7:29 pm
Realistically in economic terms there’s no chance, euro entry rules require a 3% or lower budgetary deficit as compared to GDP, the UK’s is around 12%
Now assuming it’s a wholly political currency (and it is) and the Eurocrats ‘relax’ the rules for us, then that would just about finish off the Euro in terms of credibility and value and some of the PIGS (Portugal, Italy, Greece, Spain) may have to leave anyway. So I fancy not.
Richard Reply:
September 25th, 2009 at 7:06 am
I dont agree. It is quite clear the criteria will be fudged or simply ignored if the political prize is big enough. e.g. it is an express condition of the Euro that there will be no bail-outs of indebted countries. It has now been acknowledged (most recently by the German finance minister) that in fact, of course, no Euro country would be allowed to fail on its debts.
Stuart Fairney Reply:
September 25th, 2009 at 9:01 am
Richard, I was perhaps unclear. It is possible that the rules maybe relaxed, but I think that taking on the UK economy would put further pressure on a currency that already represents Spain, Italy etc.
Now as for the German, he is implicitly saying to the more reckless leaders “spend, spend, spend, we will share some of the devaluation/inflation pain with you” a more dangerous statement I cannot imagine. Indeed, given that there is now this clear pressure, there maybe something of a race developing to be ‘first to the handout’ so to speak. As more countries are bailed out, the Euro becomes increasingly worth less and sane countries might say ‘NO MORE’ and bail out again. I certainly would.
You would hope that someone in the European central bank might see this. But then Major and Lamont didn’t see the market juggernaught coming to destroy them* so there is perhaps no reason to suppose anyone would learn the lesson. Who the hell are these people?
(*unlike certain clever investors like your humble servant who wiped out his student loan on Black Wednesday. Not on the scale of Soros granted, but the same idea).
Explains why inflation remains “stubbornly high”.
This could easily hit lending rather than encourage it. There is already movement out of Sterling assets thanks to rotten interest rates, while nobody will want to lend out in a currency that is being actively devalued. Mervyn King needs to get a grip.
Make your own misery chart for your next holiday destination. These are interbank rates not tourist. Buy now while you can still afford to go on holiday!
Well, you are one of the people who kept us out of the euro. You should be pleased that a UK government has made full use of the freedom to devalue our currency that you wanted them to have.
This will go on happening until some crisis destroys the arguments of those who wish to stay out of the euro. Then we will join, maybe at a very disadvantageous time.
reply: we would have destroyed the Euro if sterling had gone in
Alan Reply:
September 24th, 2009 at 7:25 pm
An interesting reason for not having joined the euro, which I have not heard before.
It is probably true that if we had joined the euro then some would have blamed the banking crisis on the euro, and used that as a reason to attack the euro and perhaps destroy it. But what would have been sauce for the goose can now serve as sauce for the gander: those who argued to retain sterling have to accept that their policy has resulted in the loss of value of our currency. I am reminded of Alistair Campbell’s observation after the Hutton enquiry – “if the enquiry had found as many faults in the government as it has found in the BBC there would have been resignations by now”. Similarly, if we had joined the euro and the crisis had occurred those who advocated joining the euro would have been blamed; in the event those who advocated staying with sterling should in all fairness accept a measure of blame.
In reality I am aware of the lack of logic in this argument. I don’t believe the banking crisis was caused by us retaining sterling, and I appreciate that the fall in sterling is supporting industry and hence employment. But I am retired and my savings have been damaged by the fall in sterling, and that would have been avoided if we had been in the euro. I am surely allowed the occasional sarcastic comment about those who advocated the superiority of sterling.
Reply: I do not recall arguing that sterling would necessarily go up against the Euro. I set out 100 arguments for keeping the pound in Just Say No. They boiled down to the fact that our economy was n ot like Germany’s so there would be too much strain if we joined, and to the fact that you cannot have control of your own destiny if you share a currency. Democracy does allow your government to do things badly! At least we can change it when we’ve had enough of it.
Alan Reply:
September 25th, 2009 at 1:37 pm
I agree you never implied that sterling would rise against the euro, but many who oppose us joining the euro have not made it clear that one consequence is that our currency can fall compared to the euro. The freedom to allow that to happen is one of the reasons for keeping sterling; it’s not just some accident. It benefits some people, but not all of us.
The crisis is providing an excellent test of whether or not one currency can be used by disparate economies. When I thought we should join I will admit it never occurred to me that it might have to survive a crisis as bad as this one. If it does survive you will have to withdraw your argument that having the UK and Germany in the euro would put too much strain on the system. Those countries are far more similar than other nations in the euro. If some countries do have to drop out, I will still be able to argue that the UK and Germany are sufficiently similar and can both flourish within the euro. But for your argument to be convincing you badly need the euro to fail now.
I think most people who oppose the UK joining the euro are convinced by the sovereignty argument. I won’t discuss that at length here, just point out that you lose some sovereignty if your currency loses value; in the sense that you lose some of the ability to act independently. The UK does not have complete control over its own financial affairs anyway. All we are debating is whether it is advantageous or disadvantageous to use the common EU currency. I think the advantages are obvious and most of the disadvantages illusionary. We can gain sovereignty by having a stable currency, even if we have to share control over it.
Stuart Fairney Reply:
September 24th, 2009 at 7:31 pm
Yep, damn JR and his thumping parliamentary majorities since 1997…no wait
Sally C. Reply:
September 24th, 2009 at 7:39 pm
Imagine how much worse our housing bubble would have been if we had joined the euro when Ireland did. In fact, you don’t have to imagine – just look at Ireland, where the housing boom has turned to dust and unemployment is forcing another generation to look abroad for work. I believe one of the reasons the B of E kept interest rates too low here was because some UK businesses were complaining that their European competitors were able to borrow money much more cheaply due to Euro interest rates being so low. Why were Euro interest rates so low? Because the ECB had to ensure the success of the Euro and the easiest way to do that was to run an incredibly lax monetary policy. This led to the housing bubbles in Spain and Ireland. It also forced European banks to search for yield and where did that search end? – in the purchase of supposedly AAA rated American mortgage backed securities now known as toxic assets. Joining the Euro was a disaster for Ireland ( although they would never admit it) and would have been a disaster for us.
Alan Reply:
September 25th, 2009 at 1:54 pm
The UK banks also bought toxic assets, so that was not caused by being in the euro. The difference is in the consequencies: if we had been in the euro those who had saved would have had their savings protected, whereas we have had our savings devalued by the fall in sterling. Those who borrowed unwisely would be forced to repay their loans in full, in the UK if you borrowed unwisely (or wisely) you can repay in devalued currency. So we have discouraged savers and encouraged reckless borrowers. We have lowered the wages of everyone paid in sterling, making inefficient industries viable, and have concealed this from the majority of the population who don’t understand economics. The country is poorer, the people are poorer, but we conceal this from ourselves, until of course we go abroad and discover everyone else has large houses, new cars, etc. then we complain that they must have some unfair advantage. They don’t; they just have a stable currency that means that inefficient industries and unskilled workers are not kept working. Ireland will actually be better off if its more skilled people go abroad to earn more and its inefficient companies are put out of business. It will feel more painful but will actually be more effective. In 20 years time the pound will be worth less than the euro – well, actually it will have been abolished as its continuing fall makes it less and less acceptable.
The reason for the higher interest rate on sterling is to compensate for the greater risk of holding it. It has nothing to do with the government deciding what rate is suitable for our economy. Don’t imagine that we control our interest rates.
Sally C. Reply:
September 28th, 2009 at 11:03 am
I think you are being too pessimistic about sterling. If the Conservatives act to reduce the size of our budget deficit and gradually raise interest rates, sterling will rebound. No matter how attractive the euro might seem at the moment, it is far better for us to be in a position to sort out our own mess with both interest rates and currency devaluation/ revaluation at our disposal. Clearly this government has made a complete hash of things but they won’t be around much longer. We just have to hope that the Conservatives will take the necessary action to turn things around by 1) cutting public expenditure and facing down the inevitable public sector outcry and 2) gradually raising interest rates. This action will shore up the pound and should help beleaguered savers.
Good points, well made as usual – but can I suggest you don’t use the HKD as an example next time. It’s extremely tightly linked to the USD so the move in HKD/GBP will be almost exactly the same as that in USD/GBP.
Mervyn King has apparently told the BBC that RBS and HBOS were “within hours of going under” on October 7th/8th last year. “Two of our major banks which had had difficulty in obtaining funding could raise money only for one week then only for one day, and then on that Monday and Tuesday it was not possible even for those two banks really to be confident they could get to the end of the day,” he said.
I wonder what happened to the Bank of England as lender of last resort? Wouldn’t it have been possible for the BoE to lend enough to keep them solvent, without nationalising, if the issue was really liquidity?
Reply: Of course! These were both banks that the Regulators said were solvent. It is a disgrace that the Bank starved the money markets and got them into this position.
I first visited Switzerland as a teenager in 1972, when £1 was worth around 10 CHF if I recall correctly. Just a few years later it was down to 6 CHF when I returned. (On both visits, Sterling suffered some sort of crisis and over the few weeks of my visits it was possible to observe the pound slipping in value day-by-day, just as it is today.) In 2004 I worked in Geneva, and my pound received a measly 2.2 CHF. And now we will be lucky to get 1.7 CHF. The policy of “benign neglect” of our currency has been going on for almost 40 years, or so it would appear. Perhaps the authorities don’t know what to do, even when the times are good? However, we pay Mervyn King and his colleagues a large amount of money to “manage” Sterling, and I for one think they have made a complete hash of it over my lifetime. If they really have no faith or pride in our currency, then they should simply resign and hand over the reins to people who do believe in the pound’s future.
alan jutson Reply:
September 25th, 2009 at 9:29 am
Steve
Think I got something like 1.54CH about 3 weeks ago.
4 day 2nd class pass on the Swiss Railways still good value though, and they run to the second.
Go anywhere, any distance for equiv £133.00 per person for 4 people for the 4 days.
Not aware as to how this compares with similar in the UK.
alan jutson Reply:
September 25th, 2009 at 10:35 am
Apologies, just found paperwork after a search 1.643Ch to the Pound
The economy is so sick that UK is not eligible to join the Euro, so you people can stop worrying about it.
The great thing about the pound being so low is that we economic refugees living in the Euro zone can come over and do lots of shopping, as I did in August. Fabulous. Like some third world country. Every day the pound sank more.
If it keeps up we will be back for more at Christmas .
alan jutson Reply:
September 25th, 2009 at 1:35 pm
Our Sally
Yes, and by comparison to us here, your properties are also rising in value (against the pound) over there too.
Makes it more difficult for us to join you.
Shame that some of you only have pensions in Sterling though.
I am currently on a Baroness Kinnoch Fact Finding Mission to Saudi Arabia. 10 days ago, the rate was 6.2 to the GBP. Today it is 5.9.