Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Gold Long-term Outlook for Massive Parabolic Run to $5,000 - 4th May 15
Silver Bear Market Downside Momentum Easing - 4th May 15
Silver and NASDAQ – Long, Medium and Short Trends - 4th May 15
Let's Make Silver Shine Even Brighter Than Gold - 4th May 15
Six Silver Questions and Perspectives - 4th May 15
Stock Market Last Hurrah? - 4th May 15 - Andre_Gratian
Stocks – Bulls, Bears, And Pigs : Which Are You? - 4th May 15
The Energy Complex: Very Interesting Chartology - 4th May 15
U.S. Long Bond, an Historic Trading Opportunity? - 4th May 15
This Financial “Seismograph” Signals A Monetary Earthquake - 4th May 15
Nate Silver UK General Election Forecast 2015 as Wrong as 2010? - 4th May 15
U.S. GDP Sucking Spoilt Milk From A Bloated Dead Sow - 3rd May 15
Stocks, Gold and Oil Markets Chopsville - 3rd May 15
UK Election 2015 Forecast - The Most Probable Outcome is... - 3rd May 15
Kate Gives Birth to Coalition Government - 2nd May 15
Stock Market Correction Time? - 2nd May 15
Gold And Silver - Thieving Bankers Operate In Open; Public Have Eyes Wide Shut - 2nd May 15
U.S.A. Caught In Enormous Policy Vise - ZIRP & QE Destructive Influence - 2nd May 15
Crude Oil Price Bear Market Is Over - 2nd May 15
Gold and Silver Bear Squeeze Comes and Goes - 2nd May 15
UK Election Forecast 2015 - Who Will Win? - 1st May 15
Gold Developments Say New Mine Supply Is Peaking - 1st May 15
Emerging Mexican Silver - 1st May 15
Investigating The U.S. GDP Deflator: Wildly Differing Results Depending on Your Choice - 1st May 15
JP Morgan Cornering Silver Bullion Market? - 1st May 15
Baltimore Riots Whose Fault? - 1st May 15
Monetary And Economic Insights From Incrementum’s Advisory Board - 1st May 15
Your Best Stock Investment in the "Cloud" Is Right Here - 1st May 15
Stock Market Kondratieff Waves and the Greater Depression 2013- 2020 update - 1st May 15
How One Chart Is Changing My Outlook on Crude Oil Prices - 1st May 15
The Real Reason Why Obama Wants to Lift Sanctions on Iran - 30th Apr 15
Gold and the New U.S. and UK Recession - ZIRP to Continue - 30th Apr 15
Uranium Price Is About to Rocket - 30th Apr 15
Immigration Crisis Drives a Deep Wedge Between E.U. States - 30th Apr 15
Labour Leads in Nick Clegg's Sheffield Hallam Seat, Latest Ashcroft Opinion Poll - 30th Apr 15
Is the Fed about to Ignite the Stock Market Sell in May and Go Away Trade? - 30th Apr 15
Bill Gross on Pimco Hiring Bernanke and Fed Interest Rate Hike 2015 - 30th Apr 15
The European Stock Markets Trend Is Up. We're In. Are You? - 29th Apr 15
Putin: Czar Of Natural Gas, Crude Oil, Uranium & GOLD - 29th Apr 15
BEA Reports Weak U.S. 1st Quarter 2015 GDP Growth at 0.25% - 29th Apr 15
Why Labour Cannot Win Sheffield Hallam and other Lib-Dem / Conservative Key Marginal Seats - 29th Apr 15
Stocks, Bonds and Real Estate Financial Hurricanes Headed Our Way - No Where to Hide! - 28th Apr 15
Bitcoin Price Counterintuitive Signs - 28th Apr 15
Stock Market Valuations - Maybe I am Crazy - 28th Apr 15
Gold Price Rises, Silver Surges – Physical Demand and Greece, Ukraine, Russia Risks - 28th Apr 15
The Insurance "Game" Has Changed – and Investors Can Profit - 28th Apr 15
Prelude to a Japanese Revival - 28th Apr 15
Why You Could Make ANOTHER 100% in China Stock Market Starting Now - 28th Apr 15
CIA Prefab State Terror for Human Bondage - 28th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The War on Cash!

The British Pound Gets Pounded

Currencies / British Pound Feb 19, 2013 - 04:35 PM GMT

By: Peter_Schiff

Currencies

As the global currency war intensifies, the majority of attention has been paid to the 17% fall of the Japanese yen against the U.S. dollar over the past few months. The implosion has given cover to the sad performance of another once mighty currency: the British pound sterling. But in many ways the travails of the pound is far more instructive to those pondering the fate of the U.S. currency.


Japan has a unique economic and demographic profile which makes it a poor stalking horse. Newly elected Prime Minister Shinzo Abe and the Bank of Japan have clearly and forcefully committed Japan to a policy of inflation at any cost. Even in a world of serial money printers their plans stand out as exceptional. Britain, on the other hand, is charting a more conventional course to the same destination.

The UK government, under conservative Prime Minister David Cameron and Chancellor of the Exchequer George Osborne, has succeeded in bringing marginal discipline to their budgetary imbalances. From 2009 to 2012, British government expenditures rose a total of just 1.6%, which was far below the official pace of inflation. (In contrast, U.S. federal spending grew by 7.9% over that time period). Since 2009 the British have kept their debt-to-GDP ratio lower than America's and have cut into that metric at a faster rate. But while the British are conservative when compared to their American cousins, they are hardly austere when compared to Germany (which continues to have a nearly balanced budget and extremely low debt to GDP). Paul Krugman blames Britain's lackluster economic performance on their misguided experiment with austerity.

The monetary side of the equation also puts the UK within the spectrum of its peers. Ever since the Great Recession began in 2008 the Bank of England, led by outgoing Governor Mervyn King, has been far more stimulative than the European Central Bankers in Frankfort (but not quite as much as the Federal Reserve or the Bank of Japan). In contrast to the permanent and ongoing bond-buying quantitative easing programs underway in the U.S. and Japan, the Bank of England has engaged in such measures only selectively.

Given the relatively moderate approach pursued by the British, the poor performance of their currency may be hard to fathom. The deciding factor may be that the Pound Sterling is not nearly as vital to investors, or as integrated into the global economy, as the U.S. dollar or the euro. The greenback, being the world's reserve currency, has always benefited from demand that is independent of its economic fundamentals. The euro benefits from the size of the euro zone and the legacy of German banking discipline. The pound enjoys no such privileges and as a result foreign central banks do not feel as pressured to prop it up. As a result, over the past few years the pound has been... pounded. Since July 2010, the currency is down 26.7% against the U.S. dollar, and in recent months it has started falling faster than all other developed currencies except for the Abe-pummeled yen. Since October 1, 2012 the pound has fallen by 4% against the dollar and 8% against the euro.

The pound's health is made more suspect by the extreme challenges faced by the Bank of England as it tries to stimulate the most admittedly inflation prone economy among the major Western nations. Unlike the Federal Reserve, which is tasked by statute to combat both inflation and unemployment, the BofE has only a single mandate: to keep inflation contained. On that score it has been failing habitually. Inflation in the UK has been north of its 2% target for the past five years (the current official rate is 2.7%). In its most recent inflation projections, Mr. King admitted that it will stay that way for years to come, and that it may exceed 3% this year and next. With its currency weakening and inflation accelerating, the mandate of the BofE would clearly indicate that the time has come for monetary tightening.

However, like all central bankers, Mr. King, and his successor, the Canadian Mark Carney, will not be bound by such triflings as statutory mandates and past promises. In his press conference last week, Mr. King spoke of "looking past" current inflation figures to a time when he expects inflation will moderate. When the choice is between inflation and the political pain of economic contraction, bankers (at least those who don't speak German) will choose inflation every time.

While the American media has poked fun at the Bank of England's backtracking, they somehow do not understand that the Federal Reserve would be doing the same if not for the advantages given to us by the dollar's reserve status. Our ability to monetize the vast majority of the annual government deficit while exporting our inflation through half trillion dollar trade deficits and the overseas sale of hundreds of billions of Treasury bonds annually means that we do not yet face the pressures bearing down on the Bank of England.

For now at least Cameron is sticking to his guns and making the politically difficult case to voters that today's hard choices will yield benefits down the road. This puts all the pressure on the Bank of England to satisfy the calls for stimulus. The Federal Reserve is fortunate in that the Obama Administration shares none of Cameron's fiscal determination.

But already the Fed has done plenty of backing off from its prior promises. Just a few months ago Ben Bernanke announced specific inflation and unemployment triggers that would apparently put monetary policy on automatic pilot. But just last week, Fed Vice Chairman Janet Yellen announced that those goalposts (6.5% unemployment and 2.5% inflation) should not be considered "triggers" but as thresholds past which the Fed "may consider" tightening. When U.S. prices start to rise in earnest, look for the denials and rationalizations to come in torrents. The Fed will never acknowledge high inflation no matter what the data, nor will it ever take any steps to combat it. The simple reason is that it will be unable to do so without bringing on the economic contraction that is so terrifying to the British.

However, as British inflation accelerates, the pressure on the Bank of England to change course will intensify. As monetary stimulus continues to take its toll on the pound, price pressures will mount, even as the economy continues to stagnate. In other words, it is charting a course to stagflation. Perversely, this will put even more pressure on the BofE to ease. However, more cheap money will not stimulate the economy but merely cripple it further by fueling the inflationary fire.

At some point the British will have to admit that stimulus doesn't work. To break the inflationary spiral and rescue the ailing pound, the BofE will be forced to aggressively raise rates, at which point the British government will have no choice but to slash spending more deeply than would have been the case had they taken their medicine sooner. However, if the BofE refuses to tighten even in the face of much higher official inflation, the pound may deteriorate further and the UK might be left with the embarrassing choice of adopting the euro.

As far as the United States is concerned, the U.K. is the canary in the coal mine. What they are going through now, and what they may be about to go through, we will surely experience in the years ahead. The only difference is that the leeway afforded to us by our special status simply gives us more rope to hang ourselves. When the noose finally tightens, the fall will be that much more painful.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

And be sure to order a copy of Peter Schiff's recently released NY Times Best Seller, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country.

Regards,
Peter Schiff

Euro Pacific Capital
http://www.europac.net/

Peter Schiff Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014